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I just started college and after calculating the cost for my degree I calculated that I have $50,000 that I wont need until after college. I think that the best think for me to do with that money is to invest. A close family friend of mine recommended his financial adviser. I talked to the adviser and he said some very convincing things and said that his fee would be 1% per year. The advisor in question had these abbreviations next to his name CFP, ChFC, CLU and it said that he was fiduciary. I assume those mean that he has certain certifications.

On the other hand based on my online research it seems like I can just buy $50,000 worth of Vanguard 500 Index Fund Investor Shares or Vanguard Total Stock Market ETF and let it sit until I need the money and thereby pay much less in fees.

Alternatively, I could invest less in those funds and save money for an IRA. In that case based on what I read online I will be able to save money on taxes. In the long run, what is the difference between the value of an IRA, Index Fund, and Vanguard Total Stock Market?

I don't really know that much about investing so that is why I am considering the financial adviser but I would hate to have to pay ~$500 per year if I could invest myself and save that money.

What factors would you recommend considering in order to help me decide?

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    Since your horizon is only until you graduate college I wouldn't put it all in VTI, I'd probably put half or so with the rest in something much less sexy but guaranteed, a CD or something. I'd probably skip the advisor.
    – quid
    Commented Mar 24, 2016 at 16:30
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    Note that money being in an IRA is orthogonal to what the investment is. You can have CDs in an IRA or not, and can have ETFs in an IRA or not. I wish someone had told me to put money in an IRA right out of college, since you can only put $5,500 into one per year, and they are amazing. I would definitely recommend just investing in a diversified portfolio of ETFs ($5,500 a year of which should be in an IRA, either Roth or traditional), and skipping the advisor. I would also recommend not investing the whole amount, though, yes.
    – neminem
    Commented Mar 24, 2016 at 16:49
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    Assuming you don't plan to withdraw the money immediately after college, invest in the Vanguard — or use a robo-investing service (slightly higher fees but less work for you). The majority of people don't need a full-time financial planner, especially not just for investment advice. (A CFP can do much more than manage investments.) If you want some other type of financial advice, then seek out a financial planner with an hourly cost structure and spend 1-2 hours with him/her. That should cost a lot less than $500.
    – Mark E. Haase
    Commented Mar 25, 2016 at 15:11
  • Would you recommend that I look into Schwab Intelligent Portfolios?
    – HanMah
    Commented Mar 25, 2016 at 15:20
  • I'd suggest that instead of putting everything in an index fund, you should put a good part of it in what's called a stable value fund. (Such as T. Rowe Price's Spectrum Income.) That way, if the market crashes while you're in college, and you face an unexpected expense, you won't have to sell at a great loss.
    – jamesqf
    Commented Mar 25, 2016 at 17:11

5 Answers 5

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Couple of clarifications to start off:

  • Index funds and ETF's are essentially the same investments. ETF's allow you to trade during the day but also make you reinvest your dividends manually instead of doing it for you. Compare VTI and VTSAX, for example. Basically the same returns with very slight differences in how they are run. Because they are so similar it doesn't matter which you choose.

  • Either index funds and ETF's can be purchased through a regular taxable brokerage account or through an IRA or Roth IRA. The decision of what fund to use and whether to use a brokerage or IRA are separate.

  • Whole market index funds will get you exposure to US equity but consider also diversifying into international equity, bonds, real estate (REITS), and emerging markets. Any broker can give you advice on that score or you can get free advice from, for example, Future Advisor.

Now the advice:

For most people in your situation, you current tax rate is currently very low. This makes a Roth IRA a very reasonable idea. You can contribute $5,500 for 2015 if you do it before April 15 and you can contribute $5,500 for 2016. Repeat each year. You won't be able to get all your money into a Roth, but anything you can do now will save you money on taxes in the long run. You put after-tax money in a Roth IRA and then you don't pay taxes on it or the gains when you take it out. You can use Roth IRA funds for college, for a first home, or for retirement.

A traditional IRA is not recommended in your case. That would save you money on taxes this year, when presumably your taxes are already low.

Since you won't be able to put all your money in the IRA, you can put the rest in a regular taxable brokerage account (if you don't just want to put it in a savings account). You can buy the same types of things as you have in your IRA.

Note that if your stocks (in your regular brokerage account) go up over the course of a year and your income is low enough to be in the 10 or 15% tax bracket and you have held the stock for at least a year, you should sell before the end of the year to lock in your gains and pay taxes on them at the capital gains rate of 0%. This will prevent you from paying a higher rate on those gains later. Conversely, if you lose money in a year, don't sell. You can sell and lock in losses during years when your taxes are high (presumably, after college) to reduce your tax burden in those years (this is called "tax loss harvesting").

Sounds like crazy contortions but the name of the game is (legally) avoiding taxes. This is at least as important to your overall wealth as the decision of which funds to buy.

Ok now the financial advisor. It's up to you. You can make your own financial decisions and save the money but it requires you putting in the effort to be educated. For many of us, this education is fun. Also consider that if you use a regular broker, like Fidelity, you can call up and they have people who (for free) will give you advice very similar to what you will get from the advisor you referred to. High priced financial advisors make more sense when you have a lot of money and complicated finances. Based on your question, you don't strike me as having those. To me, 1% sounds like a lot to pay for a simple situation like yours.

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  • So if I understand the tax game that you are suggestion it works as such; 1: I put x amount of money in a roth ira and pay taxes on it. 2: If I earn under the 10% tax bracket and my roth ira earns money I should sell it to avoid taxes. Wouldn't I have to pay the penalty for withdrawing early? Why would I risk paying taxes if the whole point of this is that I pay taxes before?
    – HanMah
    Commented Mar 24, 2016 at 23:21
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    I have to object to one of the significant parts of this. A Roth IRA (or any sort) is only permitted if the OP has earned income. A full time student may not have anything considered earned income. It's possible he/she does, of course, but that's a glaring hole in this answer IMO.
    – Joe
    Commented Mar 25, 2016 at 14:13
  • I don't have income. What is the minimum that I have to earn to be eligible?
    – HanMah
    Commented Mar 25, 2016 at 15:17
  • @Joe, very good point. You can only contribute as much as you have earned in that year.
    – farnsy
    Commented Mar 25, 2016 at 21:31
  • @HanMah I'm sorry if I wasn't clear. Once your money is in the Roth (if you can get it in there) you don't do any further tax games with it. The strategic timing of selling assets is in your taxable brokerage account. Sell (and rebuy) if you have positive gains and a low tax bracket. Sell (and rebuy) if you have negative gains and a high tax bracket.
    – farnsy
    Commented Mar 25, 2016 at 21:32
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Exactly what you do with the money depends on various personal choices you'll have to make for yourself. Investing your money in Vanguard index funds such as the ones you mentioned is certainly one smart move. However, I think you're quite right to be suspicious of an advisor with a 1% fee. In many cases, such advisors are not worth their costs. The thing to remember is that, typically with that type of fee structure, you always pay the costs, even if the advisor turns out to be wrong and your money doesn't grow.

One thing to check is whether the advisor you mentioned is paid only by the fees he charges (a "fee-only financial planner') , or whether he also makes money via the sales of financial products. Some advisors earn money by selling you financial products (such as mutual funds), which can create a conflict of interest. You can read about fee-only financial advisors and choosing a financial advisor on Investopedia.

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  • He is fee only.
    – HanMah
    Commented Mar 24, 2016 at 23:11
  • CFPs have a sworn fiduciary duty: they must represent your interests only and cannot receive compensation for steering you into specific investment products.
    – Mark E. Haase
    Commented Mar 25, 2016 at 15:08
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Two things to consider:

When it comes to advice, don't be "Penny wise and Pound foolish". It is an ongoing debate whether active management vs passive indexes are a better choice, and I am sure others can give good arguments for both sides. I look at it as you are paying for advice. If your adviser will teach you about investing and serve your interests, having his advise will probably prevent you from making some dumb mistakes. A few mistakes (such as jumping in/out of markets based on fear/speculation) can eliminate any savings in fees. However, if you feel confident that you have the resources and can make good decisions, why pay for advise you don't need?

EDIT

In this case, my opinion is that you don't need a complex plan at this time. The money you would spend on financial advise would not be the best use of the funds.

That said, to your main question, I would delay making any long-term decisions with these funds until you know you are done with your education and on an established career path. This period of your life can be very volatile, and you may find yourself halfway through college and wanting to change majors or start a different path. Give yourself the option to do that by deferring long-term investment decisions until you have more stability.

For that reason, I would avoid focusing on retirement savings. As others point out, you are limited in how much you can contribute per year. If you want to start, ROTH is your best bet, but if you put it in don't pull it out. That is a bad habit to get into. Personal finance is as much about developing habits as it is doing math...

A low-turnover index fund may be appropriate, but you don't want to end up where you want to buy a house or start a business and your investment has just lost 10%...

I would keep at least half in a liquid, safe account until after graduation. Any debt you incur because you tied up this money will eliminate any investment gains (if any).

Good Luck!

EDITED to clarify retirement savings

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  • "If your adviser will teach you about investing"do advisors 'teach' any more than most tax guys? Or do they invest and report back? A world of difference, in my opinion.
    – JTP - Apologise to Monica ♦
    Commented Mar 24, 2016 at 22:35
  • JoeTaxpayer raised a good point. Would asking an advisor to help me understand more about investing so that I can, in the future, not use him be a reasonable thing to ask?
    – HanMah
    Commented Mar 24, 2016 at 23:10
  • @HanMah my opinion is that if you do not understand the investments and decisions your adviser is recommending, they need to teach you why. Never go along with any advise that you don't understand. You need to direct your finances, anyone else dealing with your money should be there to serve you. Run away fast if you smell anything different. This is why they are called 'investment advisers'. JoeTaxpayer has a good point, especially when you have a large estate. You are also hiring a manager so you don't have to print every check and make every call.
    – jkuz
    Commented Mar 25, 2016 at 13:42
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    Similar to my comment on the other answer: A full time college student may not have any earned income, so discussions of Roth (or any) IRA are remiss without discussing that.
    – Joe
    Commented Mar 25, 2016 at 14:15
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    For what it's worth, I did learn a considerable amount from my one-time flat-fee consultation with a financial advisor -- they gave me an investment strategy I had some confidence in, to replace my ad-hoc guesses. Admittedly I have the luxury of having my employee pay for that service as a benefit, but I haven't felt a need to check back with them in about a decade... Though I'm starting to think it's time to recheck and adjust a bit.
    – keshlam
    Commented Mar 26, 2016 at 16:22
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Though @mehassee mentioned it in a comment, I would like to emphasize the point that the financial planner (CFP) you talked to said that he was a fiduciary. A fiduciary has an obligation to act in your best interests. According to uslegal.com, "When one person does agree to act for another in a fiduciary relationship, the law forbids the fiduciary from acting in any manner adverse or contrary to the interests of the client, or from acting for his own benefit in relation to the subject matter". So, any of these Stack Exchange community members may or may not have your best interest at heart, but the financial advisor you talked to is obligated to.

You have to decide for yourself, is it worth 1% of your investment to have someone legally obligated to have your best financial interest in mind, versus, for example, someone who might steer you to an overpriced insurance product in the guise of an investment, just so they can make a buck off of you? Or versus wandering the internet trying to make sense of conflicting advice? In my opinion, a fiduciary (registered CFP) is probably the best person to answer your questions.

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If you use a financial planner not only should they be a fiduciary but you should just pay them an hourly rate once a year instead of a percentage unless the percentage is cheaper at this time.

To find a good one, go to the National Association of Personal Financial Advisers website, NAPFA.org. Another good resource is Garrett Planning Network: GarrettPlanningNetwork.com.

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