management style

This article is an excerpt from the Shortform book guide to "A Random Walk Down Wall Street" by Burton G. Malkiel. Shortform has the world's best summaries and analyses of books you should be reading.

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What are the different types of financial advisors? Which types are more effective?

According to economist Burton Malkiel, there are four main types of financial advisors: investment advisors, standard advisors, automated advisors, and hybrid services. Understanding the different types of financial advisors and what services they offer can help you make the right choice.

Learn about the different types of financial advisors below.

The 4 Types of Financial Advisors

Rather than play the stock market yourself, you might choose to pay a professional to play for you. Below we’ll look at the four types of financial advisors, according to economist Burton Malkiel.

Malkiel’s years of studying actively managed mutual funds have yielded two key insights: One, that fund managers’ past performance has little bearing on future performance, and two, actively managed funds rarely beat the average market return for long.

In short, if you index the majority of your savings and (perhaps) hold a little back to speculate with, there’s no need to invest in an actively managed fund. If you decide to anyway, make sure you choose one with a low expense ratio and a low turnover rate. The higher the expense ratio, the more of your returns you’re giving to the manager; and the higher the turnover rate, the more you’re handing over in capital gains taxes.

Here are the four different types of financial advisors:

Investment Advisors

As of 2018, investors have the option of choosing a standard (living, breathing) advisor, an automated advisor, or a hybrid service. However, like actively managed funds, investment advisors are typically an unnecessary expense. If you follow Malkiel’s precepts, you should be able to build and rebalance your portfolio on your own.

Standard Advisors

Standard advisors typically charge a fee of either 1% of your total assets or $1,000–$1,500, whichever is higher. Some advisors also earn commissions on selling particular products—often high-expense-ratio and actively managed funds. 

If you decide to hire an investment advisor, make sure it’s a “fee only” advisor that won’t direct you into high-cost products.

Automated Advisors

Automated investment services offer a low-cost alternative to human advisors (automated services’ fees are typically a quarter of 1% of the investor’s total assets). Automated advisors develop a profile of the investor through an online interview that includes questions about the investor’s tolerance for risk and investment goals. The advisor then develops a risk score and a portfolio that matches that level of risk.

To keep costs down, automated advisors typically invest in index funds via ETFs, and rebalances are handled automatically. Automated advisors can engage in TLH automatically as well.

Hybrid Services

A number of financial services firms, including Vanguard and Charles Schwab, offer investment advising that combines the ease of automation with the personal touch of a human advisor. 

These services can be costly, however. Vanguard’s hybrid service, which allows clients to speak directly to an advisor by phone or video chat, has a minimum investment of $50,000 and charges a fee of .30 of 1% of the investor’s assets. Schwab’s “Intelligent Portfolio” service, meanwhile, ushers users into Schwab’s own high-expense-ratio funds in lieu of charging a fee.

The above explanation of the different types of financial advisors will help you make the right choice when it comes to professional portfolio management.

Types of Financial Advisors: 4 You Should Know

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Elizabeth Shaw

Elizabeth graduated from Newcastle University with a degree in English Literature. Growing up, she enjoyed reading fairy tales, Beatrix Potter stories, and The Wind in the Willows. As of today, her all-time favorite book is Wuthering Heights, with Jane Eyre as a close second. Elizabeth has branched out to non-fiction since graduating and particularly enjoys books relating to mindfulness, self-improvement, history, and philosophy.

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