Mar
13
2025
Are Student Loans Tax Deductible? What You Should Know About the Student Loan Interest Deduction

How the Student Loan Interest Deduction Works & Who Qualifies

By | Budgeting & Goals, Fresh Out of School, Student Loans, student_loan | No Comments

If you paid interest on your qualified student loans in the previous tax year, you might be eligible for the student loan tax deduction, which allows borrowers to deduct up to $2,500 in interest paid.

Here are some important things to know about the student loan interest deduction and whether you qualify.

Key Points

•   Borrowers can deduct up to $2,500 in student loan interest annually.

•   Eligibility requires being legally obligated to pay interest on a qualified student loan and not filing as married separately.

•   Income limits for full deduction are based on a borrower’s modified adjusted gross income (MAGI), and MAGI limits are typically changed annually.

•   Form 1098-E reports student loan interest a borrower paid over the year and is required for claiming the student loan interest deduction.

•   Other education-related tax benefits include 529 Plans, the American Opportunity Tax Credit, and the Lifetime Learning Credit.

How the Student Loan Tax Deduction Works

With the student loan tax deduction, a borrower can deduct a certain amount of interest they paid on their student loans during the prior tax year.

The interest applies to qualified student loans that were used for tuition and fees; room and board; coursework-related fees like books, supplies, and equipment, and other necessary expenses such as transportation.

So how much student loan interest can you deduct? If you qualify for the full deduction, you can deduct student loan interest up to $2,500 or the total amount of interest you paid on your student loans, whichever is lower. (You don’t need to itemize in order to get the deduction.)

Who Qualifies for the Student Loan Interest Deduction?

To be eligible to deduct student loan interest, individuals must meet the following requirements:

•   You paid interest on a qualified student loan (a loan for you, your spouse, or a dependent) during the tax year.

•   Your modified adjusted gross income (MAGI) is less than a specified amount that is set annually.

•   Your filing status is anything except married filing separately.

•   Neither you nor your spouse can be claimed as a dependent on someone else’s return.

•   You are legally required to pay the interest on a student loan.

The student loans in question can be federal or private student loans, as well as refinanced student loans.

What Are the Income Requirements for Student Loan Tax Deduction?

The income requirements for the student loan tax deduction depend on your MAGI and your tax-filing status. The eligible MAGI ranges are typically recalculated annually.

For tax year 2024 (filing in 2025), the student loan interest deduction is worth up to $2,500 for a single filer, head of household, or qualifying widow/widower with a MAGI of $80,000 or less.

For those who exceed a MAGI of $80,000, the deduction begins to phase out. Once their MAGI reaches $95,000 or more, they are no longer able to claim the deduction.

For married couples filing jointly, the phaseout begins with a MAGI of more than $165,000, and eligibility ends at $195,000.

If you have questions about your eligibility, consider consulting a tax professional to make sure you can take advantage of the deduction.

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Other Tax Deductions for Students

In addition to the student loan interest rate deduction, there are other tax breaks that may be available to you if you’re a student, or you’re saving for college or paying for certain education expenses for yourself, a spouse, or a dependent. Here are three other tax benefits to consider:

529 Plans

A 529 college savings plan is a tax-advantaged plan that allows you to save for qualified education expenses — like tuition, lab fees, and textbooks — for yourself or your children. In 2024, you could contribute up to $18,000 per year without triggering gift taxes (the amount you can contribute in 2025 is $19,000), and other family members can contribute to the fund, as well.

Savings can be invested and grow tax free inside the account. And while the federal government doesn’t offer any tax deductions, some states provide tax benefits like deductions from state income tax. Withdrawals must be used to cover qualified expenses; otherwise you will face income taxes and a 10% penalty.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) helps offset $2,500 in qualified education expenses per student per year for the first four years of higher education. Unlike a tax deduction, tax credits reduce your tax bill on a dollar-for-dollar basis. And if the credit brings your taxes to zero, 40% of whatever remains of the credit amount can be refunded to you, up to $1,000.

To be eligible for the AOTC, you must be getting a degree or another form of recognized education credential. And at the beginning of the tax year, you must be enrolled in school at least half time for one academic period, and you cannot have finished your first four years of higher education at the beginning of the tax year.

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) helps pick up where the AOTC leaves off. While the AOTC only lasts for four years, the LLC helps offset the expense of graduate school and other continuing educational opportunities. The credit can help pay for undergraduate and graduate programs, as well as professional degree courses that help you improve your job skills. The credit is worth $2,000 per tax return, and there is no limit to the number of years you can claim it. Unlike the AOTC, it is not a refundable tax credit.

To be eligible, you, a dependent or someone else must pay qualified education expenses for higher education or pay for the expenses of an eligible student and an eligible educational institution. The eligible student must be yourself, your spouse or a dependent that you have listed on your tax return.

Recommended: Can You Deduct Your Child’s Tuition from Taxes?

Look for Form 1098-E

If you’re wondering how to get the student loan interest deduction, keep an eye out for Form 1098-E, which you will need to file with your tax return. It will be sent out by your loan servicer or lender if you paid at least $600 in interest on your student loans for the tax year in question.

On Form 1098-E, your loan provider reports information on the interest you paid on your student loans throughout the year. The form goes out to student loan borrowers when the tax year ends, typically by mid-February. You can also check for the form on your loan servicer’s website and download a copy.

Note that you won’t receive this student loan tax form if you paid less than $600 in interest on your loan during the tax year.

Calculating Your Student Loan Interest Deduction

To figure out how much of a student loan interest deduction you can claim, start with your MAGI. If your MAGI is in the range to qualify for the full deduction, you’ll be eligible for $2,500 or the amount you paid in interest on your student loans during the tax year, whichever amount is less. (As you are calculating your MAGI, if you’re wondering, do student loans count as income, no, they do not.)

However, if your MAGI falls into the range where student interest deduction is reduced (which is more than $80,000 for single filers and $165,000 for joint filers in 2024), you can generally follow the instructions on the student loan interest deduction worksheet in Schedule 1 of Form 1040 to figure out the amount of your deduction when filing your federal income taxes. Then you can enter the calculated interest amount on Schedule 1 of the 1040 under “Adjustments to Income.”

One thing to note: For loans made before September 1, 2024, loan origination fees and/or capitalized interest may not be included in the amount of interest Form 1098-E says you paid. In this case, Box 2 on the form will be checked. If that applies to you, to calculate the full value of the interest deduction, start with the amount of interest the form says you paid, and then add any interest you paid on qualified origination fees and capitalized interest. Just make sure these amounts don’t add up to more than the total you paid on your student loan principal.

You can consult IRS Publication 970 for more information about how to do this, or consult a tax professional.

Common Mistakes to Avoid

Taking the student loan interest deduction can be somewhat complicated because there are a number of requirements involved. These are some common mistakes to watch out for.

•   Misreporting your income. Be sure to calculate your modified adjusted gross income (MAGI) correctly. It’s critical to use the right MAGI when determining if you are eligible for the student loan interest deduction and how much you can claim.

•   Deducting too much. The deduction is capped at $2,500 a year, no matter how much you paid in interest.

•   Deducting interest paid by someone else. If another person made some of your student loan payments for you — your parents, say — you cannot deduct the interest they paid. You can only deduct the interest you paid.

•   Failing to take the deduction. If you are eligible for the student loan interest deduction, be sure to take it. It can sometimes be easy to overlook this deduction in the hustle to get your tax information together.

Strategies to Reduce Student Loan Payments and Interest

Tax credits and deductions are one way to help cover some of the cost of school. Finding ways to lower your student loan payments is another cost-saving measure. Here are a few potential ways to do that.

•   Put money toward student loans by making additional payments to pay down your principal. Doing this may help reduce the amount of interest you owe over the life of the loan. Just make sure your loan does not have any prepayment penalties.

•   Make interest-only payments while you’re still in school on loans for which interest accrues, such as unsubsidized federal loans.

•   Find out if your loan provider offers discounts if you set up automatic payment. Federal Direct Loan holders may be eligible for a 0.25% discount when they sign up for automatic payments, for example.

•   Consider refinancing student loans. When you refinance, you replace your current student loan with a new loan that ideally has a lower interest rate or more favorable terms.

While there are advantages of refinancing student loans, such as possibly lowering your monthly payments, there are disadvantages as well. One major caveat: If you refinance federal loans, they are no longer eligible for federal benefits or protections. Also, you may pay more interest over the life of the loan if you refinance with an extended term. Weigh the options to decide if refinancing is right for you.

The Takeaway

Qualified student loan borrowers can take a student loan interest deduction of up to $2,500 annually. This applies to federal and private student loans as well as refinanced student loans.

You should get a form 1098-E from your loan servicer if you paid at least $600 in interest on your qualified student loans. Before you file for the deduction, make sure you qualify for it, and then figure out whether you are eligible for a full or partial deduction, based on your MAGI.

Whether you qualify for the student loan interest deduction or not, there are a number of ways to lower your monthly student loan payments, including putting additional payments toward your loan principal, signing up for automatic payments, and refinancing your student loans.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

How much student loan interest can I deduct?

The amount of student loan interest you can deduct is the lesser of up to $2,500 annually or the amount of interest you paid on your student loans. However, to qualify for the full deduction in 2024, you must have a MAGI of $80,000 or less if you are a single filer, or $165,000 or less if you are filing jointly. You will be eligible for a partial deduction if your MAGI is less than $95,000 for single filers and less than $195,000 for joint filers. Keep in mind that the MAGI limits typically change yearly.

Do I need to itemize my deductions to claim the student loan interest deduction?

No, you do not need to itemize your deduction to claim the student loan interest deduction. The deduction is considered an adjustment to your income, according to the IRS, so there is no need to itemize. You can simply report the amount on Form 1040 when you file your taxes, and include a copy of your Form 1098-E, which shows the student loan interest you paid for the tax year.

Can parents deduct student loan interest if they pay for their child’s loans?

Parents who pay for their child’s student loans can deduct student loan interest only if they are legally obligated to repay the loan — meaning that the loan is in their name or they are a cosigner of the loan. However, if the loan is in the child’s name only, parents cannot take the deduction, even if they paid for their child’s loans. The rules can be confusing, so parents may want to consult a tax professional.

What happens if I refinance my student loans?

Refinanced student loans are eligible for the student loan tax deduction as long as the refinanced loan was used for qualified education expenses and your MAGI falls within the set limits.

Are private student loans eligible for the student loan interest deduction?

Yes, private student loans are eligible for the student loan tax deduction, as are federal loans and refinanced loans. As long as you paid interest on a qualified student loan, your MAGI is less than the specified limit for the year, your filing status is anything except married and filing separately, and you (or your spouse if applicable) can’t be claimed as a dependent on someone else’s return, you are eligible for the deduction as a private student loan borrower.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Mar
13
2025
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Investing in the Pharmaceutical Industry

By | Growing Wealth, invest, Investing | Comments Off on Investing in the Pharmaceutical Industry

With some $1.6 trillion in global sales, the pharmaceutical industry is a steadily growing sector, thanks to the rise of personalized medicine, increases in chronic diseases, and an aging population worldwide. As such, investing in the pharmaceutical industry offers investors a range of potential opportunities.

But, as with any sector, pharmaceutical stocks come with specific risks — intense competition, lengthy drug approval processes, potential drug failures, and more. Investors would be wise to research each company before they buy stock.

Key Points

•   The pharmaceutical industry, both in the U.S. and globally, is large and varied.

•   The pharmaceutical market in the U.S. alone is predicted to grow at a CAGR of 5.72% between 2025 and 2030.

•   Despite opportunities for investors, there are numerous risks in this sector, including intense competition and long approvals for drug treatments.

•   Owing to the highly scientific and technical nature of pharmaceuticals, investors must do their due diligence when investing in any stock.

An Intro to the Pharmaceutical Industry

Pharmaceutical companies research, develop, make, and sell medications, including preventive medicines, treatments, and vaccines. Two segments of therapeutics make up the industry: pharmaceuticals and biologics.

It’s also important to know the difference between pharmaceutical stocks and biotech stocks, whether you’re investing online or through a traditional brokerage.

Pharmaceutical drugs are typically made from synthetic or plant-based chemicals.

Patents and Exclusivity

When drugs are first approved, they generally have a patent or market exclusivity, meaning that only the pharma company that developed them can manufacture and sell the drugs.

Once the patent or exclusivity ends, other companies can create generic forms of the drug and begin to compete with the pharma company. The generic drugs are chemical copies of the original drug but sell at lower prices, making it hard for the original pharma company to compete. This can lead to its stock losing value.

Understanding Biologics

Biologics are products such as vaccines, gene therapies, and medications for blood disorders, that are large, protein-based molecules made out of living cells. Biologics are more complex to manufacture, which is one reason they’re more expensive.

They also have tighter restrictions on distribution than pharmaceuticals do. These factors make it more challenging for companies to enter this space and for competitors to succeed. If competitors do create a similar product, it is called a biosimilar.

Unlike generics, biosimilars aren’t interchangeable, so biologics don’t have the same stock drop-off that pharmaceuticals do.

It takes about 10 years and an average of $1.3 billion to $2.8 billion to bring a new drug to market, but in special circumstances, the FDA can expedite approval.

Recommended: Stock Market Basics

Why Invest in Pharmaceuticals?

With pharmaceuticals, whether investors are looking for high growth potential, long-term value, or stable dividends, they can find a pharma stock that will fit the bill.

Factors Impacting Industry Growth

The population of older adults is growing. About 10,000 Americans turn 65 every day, according to the AARP. And by 2030, the country will have more residents 65 and older than children, the Census Bureau has projected. This means more people are likely to need health care and pharmaceutical treatments, which in turn is expected to help pharma stocks grow.

U.S. health spending is projected to reach nearly $6.8 trillion by 2030, according to the Centers for Medicare & Medicaid Services.

Pharmaceutical stocks don’t always follow the same trends as other stocks because demand is inelastic: i.e., people need medication no matter what is going on in the market. This doesn’t mean that pharma stocks always perform better than the broader market, simply that this sector doesn’t move in sync with other stocks. Thus, investing in pharmaceutical stocks may provide some diversification.

This means that some pharmaceutical companies may see steady revenue, even when the rest of the stock market is down. Larger companies have fairly consistent income streams, while smaller companies that show promise get funding from investors and sometimes get acquired by larger companies.

A few other reasons pharmaceutical stocks look promising as a long-term investment:

•   The health care sector is expanding in countries outside the United States.

•   The government has been spending more on health care research.

•   New types of therapies, such as gene therapy, are getting more sophisticated. Some of these are very expensive.

How to Choose Pharmaceutical Stocks

Billions of dollars are invested in medical research and drugs each year. But not every company becomes a success. As with any stocks, investors will want to research pharma stocks before buying. Here are a few key factors to look at when evaluating stocks.

Growth Prospects

By looking at a company’s earnings and revenue, one can see how much it’s been growing and whether growth is slowing down. Investors can also analyze each company’s pipeline to learn which drugs are close to being approved.

Pharma companies have to go through certain steps to develop, test, and get drugs approved. They often make pipelines available to the public, so investors can see which drugs are in the early stages of development, preclinical testing, going through clinical trials in humans, or getting FDA approval or other necessary regulatory approvals.

Drugs may get approval for treatment of certain diseases or for specific demographics, but the makers can then apply for approval for additional uses. If they get the expanded approval, this can lead to growth for the company.

Investors can follow different pharmaceutical companies to see when they have the potential to grow and become successful. If a pharma company has patents that are close to expiring, for instance, this may slow down growth, as competitors can create generic forms of the same drugs.

The process companies go through to develop and bring drugs to market is generally as follows:

•   Drug discovery: During this phase, drugs and the diseases they can potentially treat are discovered and developed.

•   Preclinical trials: Potential drugs get tested in test tubes or on live animals at this early phase.

•   Clinical trials: Small human trials help determine a safe dosage and how humans react to it. Then, groups of 100 or more people test the drug to discover short-term side effects and optimal dosage. Finally, groups of hundreds or thousands of people test the drug to determine efficacy and safety.

   When drugs reach the clinical trial stage, this could be a good time for investors to keep an eye on them. If a drug makes it through trials, the company has potential for significant growth. But if the drug fails during testing, the stock is unlikely to do well.

•   Regulatory approval: In the United States, the Food and Drug Administration’s Center for Drug Evaluation and Research assesses and approves new drugs. In the E.U., approval is completed by the European Medicines Agency.

Types of FDA Application

There are different types of pharmaceutical FDA applications, some of which give companies more potential for stock growth than others. The application types are:

•   Investigational new drug application: This is the first application step that companies must go through.

•   New drug application: This is an application to market and sell a new drug. Companies filing this application have the most potential for stock growth because they are introducing a new product to market.

•   Abbreviated new drug application: Companies developing a generic form of an existing drug go through this application.

•   Therapeutic biologics application: This is required under the PHS Act for biologics.

•   Over-the-counter drug application: This is for companies looking to sell over-the-counter drugs, which are categorized as being safe to distribute without a prescription.

Dividends

Not all pharmaceutical companies pay dividends, but some of them do provide consistent payouts to investors. Dividends provide a stream of income, or can be reinvested.

Qualitative and Quantitative Metrics

The same rules apply to pharmaceutical stocks as to any other stock when it comes to evaluation. Investors should look at a company’s valuation, revenues, growth, leadership team, product pipeline, and other key metrics to decide whether to invest. Stock valuation ratios, such as price-to-earnings ratio and price-to-earnings-growth ratio, are very useful when comparing different stocks within the same industry.

However, some pharmaceutical companies are not yet profitable if they are in the drug development and trial phases. In this case, investors can look at the rate of cash burn: how much money the company is spending each quarter to develop a drug. It’s very expensive to develop a drug, so if a company is burning through cash and doesn’t have much left to work with, this might not bode well for the stock.

Another useful metric to look at is the price-to-sales ratio. This compares a company’s sales to the price of its stock. If the company doesn’t have sales yet, investors can make predictions about what those sales figures might look like.

Trends and Developments

Over time, trends in the types of diseases being targeted and the types of therapies being developed change. Investors can look into stocks in popular areas of treatment to find stocks with growth potential.

For instance, many drugs are in development to treat breast cancer and non-small-cell lung cancer. Treatments that are bringing in significant revenue globally include oncologics, antidiabetics, respiratory therapies, and autoimmune disease drugs.

Additional lucrative treatment areas include antibiotics, anticoagulants, pain, and mental health drugs.

Risks of Investing in Pharmaceutical Stocks

As with any type of investment, pharma stocks come with some risks. Some of the main risks to be aware of are:

•   Clinical failure: Many drugs don’t make it through the phases of clinical trials. If a drug has made it to the final stage, it’s more likely to succeed, but even at this phase, drugs can fail.

•   Inability to obtain approval: Just because a drug does well in trials doesn’t mean it will be approved by regulatory agencies.

•   Difficulties getting reimbursement and pricing drugs: Health insurance companies, government programs, or individuals must cover the cost of drugs, and companies aren’t always able to secure the money they need. Sometimes, companies are pressured to lower the price of drugs to make them more accessible, and this can result in financial struggles for the company.

•   Industry competition: As mentioned, when patents run out, pharma companies may struggle to keep up with competitors that develop cheaper generic versions of drugs. In addition, during the drug development phase, it’s not uncommon for multiple companies to be working on medications to treat the same illness. If one company can make it to trials or get approval first, this can put them way ahead of the competition, especially if it results in patent exclusivity.

•   Litigation and liability: In the pharmaceutical industry, lawsuits are common. Drugs can also be recalled from the market if they’re found to be unsafe.

The Takeaway

If you’re looking to start investing in the pharmaceutical industry, you might consider buying pharmaceutical ETFs. Or, you could do your due diligence and choose individual stocks, aiming for stable dividends or growth potential. Before investing, it helps to familiarize yourself with the pharmaceutical industry to better understand how to choose pharma investments, and also ensure you understand the potential risks of investing in pharmaceutical stocks.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Mar
12
2025
Presentation Of Chart With Pieces Of Doughnut

How to Buy Stocks: Step-by-Step Guide

By | Growing Wealth, invest, Investing, Terminology | Comments Off on How to Buy Stocks: Step-by-Step Guide

A stock is a share of ownership in a company, and theoretically anyone can buy stock in a publicly traded company assuming they have access to an investment account and can afford the share price. (Shares of private companies are not available on public stock exchanges.)

In addition to buying shares of stock directly, it’s also possible to own stock via pooled investments, such as mutual funds or exchange-traded funds (ETFs). Investors who can’t afford a full share of stock in some of the higher-priced companies can invest in a product known as fractional shares.

Because stocks represent a class of assets unto themselves, they are also referred to as equities.

Key Points

•   Generally speaking, any investor can buy or sell a stock via a public exchange.

•   Private companies may also issue shares of stock, but these are not available on public stock exchanges.

•   To buy a stock, an investor needs a brokerage account or a retirement account.

•   It’s possible to buy stocks via pooled investments like mutual funds and ETFs, or to invest in a fraction of a share of stock.

•   Stocks are also known as equities.

How to Buy Stocks in 5 Steps

Here are step-by-step instructions for becoming a stock investor, including what to know about how to buy shares in a company.

Step One: Think About What You Want to Buy

To begin, investors may want to decide whether they’re interested in buying shares of individual stocks or shares of a fund, such as an exchange-traded fund (ETF).

Individual Stocks

As noted, a stock represents a share of ownership in a publicly traded company. These days, most investors buy stocks online. Many companies offer both common and preferred stock.

•   Preferred stock does not come with voting rights, but these shares typically pay dividends, a form of profit sharing that can provide steady income to investors.

•   Common stock comes with voting rights. These shares can be more volatile, but may provide higher returns — and common stock only pays dividends after preferred stock dividends are paid.

Stocks can provide a return on investment in two ways. The first is through price appreciation, which is the value of a stock increasing over time. The second is through dividend payments to shareholders, if applicable.

Ideally, shareholders are able to reap the benefit of a company’s wealth building over time. However, it’s very difficult to predict which stocks will be successful (because it’s hard to predict which businesses will be profitable in the future).

For this reason, individual stock returns can be volatile — although individual stocks also provide the potential for higher rewards. That’s why it’s often said that individual stocks are “high risk, high reward.”

Recommended: Stock Market Basics for Beginners

Fractional Shares

As the name suggests, fractional shares of stock offer investors the chance to buy a percentage of a share of stock, rather than owning a full share. Previously, fractional shares were available only to institutional investors, but now retail investors can enjoy partial stock ownership assuming their brokerage offers these shares.

Like owning a full share, owning a fractional share allows investors to realize the same gains, losses, and even dividend payments (proportional to the fractional ownership amount).

One reason to buy fractional shares is to manage cost. Some shares of certain companies can be expensive. A share of Company A worth $1,000 might be available as a fractional share for $250 (a 0.25% share).

Funds

A fund, whether an ETF or a type of mutual fund, can be thought of as a bundle of investments. Often, these funds invest in equities, but they can also hold bonds, real estate holdings, or some combination of all. For example, it’s possible to buy a mutual fund or ETF that holds the stocks of the top 500 companies in the U.S. (or even thousands of stocks across the globe).

An important thing to understand here is that investing in a fund allows you to invest in a fund’s underlying holdings. If a fund is invested in 500 stocks, for example, the fund is absolutely an investment in the stock market.

An investment in an ETF or mutual fund that invests in a wide range of stocks is generally considered less risky than owning an individual stock. That’s because it’s more likely that a few companies might underperform — not hundreds (although there are no guarantees).

Owning an equity ETF or mutual fund is still considered to be risky, as investors are still very much involved in the stock market.

That said, broad, diversified mutual funds and ETFs can provide an easy way to gain exposure to the stock market (and other markets, as well). In investing, diversification means buying different investments as protection in the event that one fails.

With the purchase of just one share of some funds, it’s possible to invest across the entire U.S. or even the world in a diversified way. Depending on where investors choose to open their accounts, they may have access to ETFs or mutual funds or both.

Step Two: Determine What Type of Account to Open

One big decision is whether to open an account that is specific for retirement, or a general investing account, i.e., a brokerage account.

•   A brokerage account allows investors to buy and sell various securities. But again, this term may be used as a catchall for general investment accounts, which are usually taxable accounts. Investment and brokerage accounts can be used for any (legal) purpose, and there are no limitations for use (unlike with retirement accounts).

There are several differences between a brokerage account and a retirement account, with one fundamental difference being the tax treatment of assets in these accounts.

•   Retirement accounts receive special tax treatment, and are often called tax-advantaged accounts. Tax-deferred accounts typically defer taxes on investment gains until retirement. After-tax accounts allow contributions funds where the tax has been paid; then qualified withdrawals are tax free in retirement.

This unique tax treatment is why so many IRS rules surround the use of retirement accounts, including contribution limits and income limits.

To keep it simple, investors may want to open a non-retirement brokerage or investment account, especially if they’re already covered by a retirement plan through work. For a retirement account, investors could open a Roth IRA, Traditional IRA, or a SEP IRA, or Solo 401(k), if they’re self-employed.

If investors opt to go the retirement route, they may want to check with a certified tax professional to ensure they qualify.

Step Three: Decide Where to Open an Account

When it comes to deciding where to open an account, new investors have plenty of options.

Before diving into them all, it’s helpful to remember that minimizing fees is the name of the game. Why? When calculating potential returns on investment, account holders must subtract any investing-related fees from potential investment earnings. Even small fees can mean that investments have to work that much harder just to break even.

Here are some options an investor might consider:

•   A low-cost brokerage: One option is to open an account at a low-cost or discount brokerage. Depending on the firm, there may be account and trading fees (although the lowest-cost brokerages have largely eliminated these in order to be competitive with the new financial tech companies).

•   An online trading platform: Another popular option is to use an online trading platform, where investors can buy shares of stocks and ETFs right from an app. It’s also possible to buy fractional shares, which are partial shares of a stock.

•   Robo advisor platforms. These newer services offer automated investment portfolios that typically consist of low-cost equity and fixed-income ETFs. Robo advisor platforms don’t offer advice, but can help investors manage a portfolio over time.

•   A full-service brokerage firm: The third option for buying shares is to use a full-service brokerage firm. These firms tend to offer expanded services, such as a designated advisor, broker, or wealth management advisor. Naturally, these services tend to come with associated costs, which means it might not be right for an investor who wants to buy just their first few shares.

Once an investor has made a decision, the share-buying process can be relatively seamless. Most accounts can be opened entirely online.

During the application process, investors will need to provide information like their Social Security number, dates of birth, and address. Additionally, it may be required for investors to answer some questions about their current financial situation.

Step Four: Fund Your Account With Cash

The next step in buying shares is to fund the account with cash. Depending on the institution, investors may be able to set up a link to an existing checking or savings account.

Setting up an electronic funds transfer (EFT) with a current bank account will likely be the fastest way to fund the account. If an investor is unable to set up an EFT or other automatic link to their checking account, it may be possible to mail a physical check directly to the investment institution.

Another funding option is to sign up for an automated monthly transfer. In this way, money is invested regularly (without the need to remember to do so).

It may take a few days for any cash transfer to be complete.

Step Five: Place a Trade

Assuming an investor is logged into their new account (and it’s already funded with cash), it’s possible to navigate to the area of the dashboard that says either buy, sell, or trade.

Here, investors can indicate what they would like to buy and specify how many shares, using the ticker symbol (a short abbreviation for each stock or fund name).

If buying a stock or an ETF, investors also need to indicate the order type. Both stocks and ETFs trade on an exchange, like the New York Stock Exchange or the Nasdaq. On these exchanges, prices fluctuate throughout the day. Mutual funds do not trade on an open exchange and their value is calculated once per day.

There are many different types of orders. During that first share purchase, new investors may want to stick to the basics: either a market order or a limit order.

•   A market order will go through as soon as possible. The order can fill quickly, but it may not be instantaneous. Therefore, the price could change slightly from the original quote. If an investor places a market order, they may want to have a slight cash cushion to protect from any erratic changes in price. If placing a market order while the market is closed, the order is typically filled at the market’s open, at whatever the prevailing price per share is at that time.

•   A limit order, however, focuses on pricing precision. With a buy limit order or a sell limit order, investors name the parameters for the order. For example, an investor could say that they only want to purchase a stock if it falls below $70 per share. Therefore, the order is placed if the stock falls below $70 per share. This means it’s possible a limit order won’t get filled (if it doesn’t reach the investor’s pre-selected price parameters).

A limit order may be more appealing to a trader, while a long-term investor may gravitate toward a market order. The benefit of a market order is that it allows an investor to get started right away.
Another step is to review during this process is the actual share order. Once the trade is then executed, voila — the investor now officially owns the share (or shares).

The Takeaway

These days, it’s relatively easy to get started as a stock investor. You can buy shares of company stock directly on a stock exchange. It’s also possible to invest in many shares of stock at once via a mutual fund or ETF (or a robo advisor platform, which provides a low-cost automated investment portfolio).

A more recent innovation is the emergence of fractional shares, which enable investors to buy a percentage of a single share of stock.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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12
2025
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How to Calculate Return on Equity

By | Growing Wealth, invest, Investing | Comments Off on How to Calculate Return on Equity

Deciding whether to invest in a company requires some due diligence. One key measure of company performance is its return on equity (ROE).

The return on equity formula is fairly simple: investors can divide a company’s net income by average shareholder equity. Shareholder equity is arrived at by subtracting a company’s debt from its assets.

Thus, ROE can be considered a measure of performance as well as a company’s return on its net assets. As such it can be viewed as a measure of profitability and how efficiently a company generates a profit (assuming it does).

Key Points

•   Knowing a company’s return on equity, or ROE, can give investors insight into company performance.

•   Return on equity can be determined by dividing a company’s net income by average shareholder equity for a certain time period, assuming both are positive.

•   ROE is a ratio expressed as a percentage.

•   To calculate shareholder equity, subtract a company’s debt, including dividends, from its assets.

•   ROE can help investors assess not only a company’s performance, but how efficiently it generates profits.

The Return on Equity Formula

The formula for return on equity is a fairly straightforward calculation that can provide a key comparative metric to investors. Here it is:

Return on Equity = Net Income/Average Shareholder Equity

The ROE ratio helps to determine how well a particular company is managing shareholder investment. The higher the number, the more efficiently the company’s management is likely generating growth from the money invested.

Investors can then compare the result for one company to the ratio of another company, and so forth.

How to Use the ROE Formula

Before you buy stocks online or through a traditional brokerage, using the ROE formula can be helpful. Calculating return on equity requires two pieces of information: net income and shareholder equity.

•   The difference between a company’s net revenue and its total expenses, including interest and taxes, is its net income.

•   Shareholder equity is typically found on a company’s balance sheet, and for the purposes of calculating the ROE it’s generally the average of the shareholder equity at the beginning and end of the period being analyzed.

Publicly traded companies are legally required to distribute income statements in their annual financial reports to shareholders where this information can be found. Net income, also called “net earnings” or the company’s “bottom line,” is a figure that’s included on a company’s income statement, also called a P&L statement or profit and loss statement.

Understanding Net Income

Net income is calculated by taking the amount of a company’s sales and then subtracting what’s called the “cost of goods sold” from the figure.

Cost of goods sold, in turn, is calculated by determining the direct costs of making products, which includes the cost of materials used and direct labor costs. It does not include indirect costs, such as marketing.

Subtract the costs of goods sold from the sales total — and then also subtract operating expenses, administrative expenses, taxes, depreciation, and so forth. What’s left is a company’s net income.

Understanding Shareholder Equity

This information can be found on a company’s balance sheet, and the formula for shareholders’ equity is as follows: total assets minus total liabilities = SE. In other words, it’s what a company owns minus what it owes.

As another way to look at this, if all of a company’s assets (buildings, equipment, investments, and so forth) were liquidated into cash and all debts were paid off, what remained would be shareholder equity.

How to Use Return on Equity Ratios to Invest

How can you make use of ROE ratios when investing? If a company has $5 million in net income, with shareholder equity of $25 million, then return on equity can be calculated in this way: $5,000,000/$25,000,000 = 20%.

An investor can then use this ratio to compare stock in one company versus those available from another company in the same industry or sector.

When calculating the ROE ratio, an investor gains visibility into a moment in time. Investors may choose to do that before buying or selling shares — or they may track the performance of a stock over a period of time.

Insights When Using Return on Equity

In general, when ROE rises, it means the company is generating profit without needing as much capital. It demonstrates that the company is efficiently using the capital invested in the business by shareholders. When the ratio goes down, it is generally a sign of a problem.

This, however, is not universally true. There are times when return on equity artificially goes up. This can happen if a company buys back shares of its own stock or if the company has a significant amount of debt. So, although ROE is a key metric for investors to use when deciding if a particular stock is a worthwhile investment for them, it’s not a stand-alone metric.

Here are a few additional factors to consider. Because some industries as a whole typically have higher ROE ratios than others, comparisons between companies are more meaningful when done between two companies of the same industry.

Plus, in general, the more risks taken in investment choices, the higher the potential for return, as well as for loss. So, some investors with a higher tolerance for risk may choose to buy shares of stock in companies that don’t look as desirable if they have reason to believe that there is enough potential for significant financial rewards.

What Else to Consider with ROE

When buying shares of stock, an investor is buying ownership shares of the company. So, when the company does well, the stockholders typically benefit. When all goes south, the stockholders usually lose out.

This means that, when an investor knows a reasonable amount of information about the company and the industry it’s in, as well as its financial structure, better investment choices can typically be made. Other factors that influence the investor during the decision-making process include the economy, customer profiles of a business, and more.

To glean these types of insights, investors often look at financial reports, in addition to return on equity, when choosing how and where to invest.

Experienced investors will often take their time reviewing documents of companies that interest them, such as the financial reports that the Securities and Exchange Commission (SEC) requires public companies to file. Many of these need to be filed quarterly, and they can provide insights into companies’ financial performance.

Here is an overview of important information that can be found in the different types of financial documents:

•   Income statement: This document provides an overview of a company’s revenue (cash coming in), expenses of significance (cash going out), and the bottom line (the difference between what’s coming in and what’s going out). Consider what trends exist.

•   Balance sheet: Look at the company’s debt (how much they owe). Is the amount going up or down? In what ways? Consider what can be learned about the company’s financial performance from this review.

•   Cash flow statement: What did the company actually get paid in a particular quarter? This is different from what’s owed (accounts receivable) and instead focuses on when the cash arrives to the company. Does the company have steady cash flow?

Investors typically look at a company’s after-tax income (its “earnings”), which can be found in quarterly and annual financial statements. In addition to looking at the company’s current earnings, it can make sense to review its history to see how much earnings have fluctuated and whether there’s a pattern to these fluctuations. Overall, good earnings indicate a company is profitable and may be a good investment to consider.

Another figure to consider reviewing is a company’s operating margins (also known as its “return on sales”). This indicates how much a company actually makes for each dollar of its sales. This calculation involves taking the company’s operating profit and dividing it by net sales. Higher margins are typically better and may indicate good financial management.

Now, here are other financial ratios to consider, besides the return on equity ratio:

•   Price-to-earnings ratio: This allows investors to compare stock prices between companies offering shares. To calculate this ratio, take the market price of a share of stock and divide that number by the amount of earnings that a company is paying per share. This ratio allows investors to see how many years a company may need to generate enough value for a stock buy-back.

•   Price-to-sales ratio: This can be a good metric to use when reviewing a company that hasn’t made much of a profit yet — or one that’s made no profit at all, so far. To calculate this, take the value of the company’s outstanding stock in dollars and divide that number by the company’s revenue. The resulting figure, ideally, should be as close to one as possible. If the number is even lower, this is an outstanding sign.

•   Earnings per share: This metric helps investors to know how much money they might receive if the company liquidates. So, if this number is consistently going up, this may entice more people to buy shares because this at least suggests they’d get more for their investment dollars if liquidation happened.

Earnings per share can be calculated by taking the company’s net income and subtracting a certain type of dividends (preferred stock), and then taking that figure and dividing it by the number of outstanding common stock shares. Preferred stocks don’t have voting rights attached to them like common stocks do, but they receive a preferential status when earnings are paid out.

•   Debt-to-equity: Investors use this metric to try to determine the degree that a company is using debt to pay for its operations. To calculate this figure, take the company’s total liabilities and then divide that number by the total shareholder equity. A high ratio indicates that the company is borrowing to a significant degree.

•   Debt-to-asset ratio: Investors may decide to compare debts to assets of a company — and then compare the resulting ratio with other similar companies to determine how significant a debt load a company has. It may be wise to calculate this within the context of a particular industry.

What Is a Good Rate of Return?

First, consider that, when cash is kept under the mattress at home, the rate of return is zero percent. And, when factoring in inflation, this means the person is actually losing money over time. Keeping money in a checking account can amount to virtually the same thing.

There is no guaranteed return on investment in stocks. That’s because of variations in the market, varying degrees of risk taken by investors, and so forth. There are, however, historical precedents that indicate how stock ownership over the long haul can often allow the investor to weather economic fluctuations for an ultimately positive result. And, when looking at the average annual return of the stock market since 1926, that number has been about 9%, although it’s closer to 6% or 7% when inflation is factored in.

Another relevant topic is risk tolerance. This is the amount of risk that a particular investor is comfortable taking when choosing securities — here’s a quiz to help investors determine their risk tolerance. By knowing your risk tolerance, you’ll have a better idea of the amount of risk you’re comfortable with, and the potential range of investing returns that you might expect from the investments you pick.

Things to consider when determining how much risk to take include:

•   Financial factors: How much could you afford to lose without it having a negative impact on your financial security? When people are young, they typically have much more time to recover from a big market loss, so they may decide it’s okay to be more aggressive.

   People closer to retirement age, though, may decide to be more protective of their assets. It’s important to review current financial obligations, from mortgage payments to college tuition, to make an informed decision, as well.

•   Emotional risk: Some people feel energized when taking risks while others feel stressed. A person’s emotional responses to risk taking can play a key role in their risk tolerance when investing.

The Takeaway

By knowing how to calculate return on equity, investors can have a comparative metric to turn to that can help them evaluate and compare different companies.

To use return on equity effectively, however, you’ll need to know where to find the relevant numbers and what to look out for. Also remember the ROE isn’t the only metric to consider — you’ll also want to take into consideration information found in financial documents, other financial ratios, your own risk tolerance, and more.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Mar
12
2025
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How to Find a Financial Advisor

By | Growing Wealth, invest, Investing | Comments Off on How to Find a Financial Advisor

Deciding you’re ready to consult with a financial advisor is an important step in reaching your financial goals — but finding the right professional starts with a clear-eyed look at what your needs are and what you can afford.

Generally, an advisor will examine a client’s total financial picture, from debt to savings and investments. They can discuss financial objectives (whether retirement, saving for college, or another goal), and help create a plan to attain those goals. Different advisors offer various qualifications, and their cost structures vary as well.

Some professionals simply offer guidance or a basic plan, often for a flat fee; others may completely manage a client’s portfolio — while others may offer services such as tax and estate planning. A robo advisor, which is a low-cost automated investment portfolio is also an option if your needs are not complex.

Key Points

•   The first step in finding a financial advisor is knowing what you need and what you can afford.

•   A financial advisor can provide a range of services, from creating a basic financial plan to managing your entire portfolio — or coordinating insurances and tax or estate planning.

•   If you’re looking for a low-cost investment plan, you may want to consider a robo advisor, which is an automated portfolio managed by a sophisticated algorithm.

•   Some advisors charge a flat fee, some charge a commission, some use a hybrid model — or charge by the hour. Be sure to understand the cost structure before working with any professional.

Benefits of Using a Financial Advisor

Financial advisors can help their clients create a financial plan that guides people through various stages of life and helps them make progress toward their goals. Typically, advisors meet or communicate regularly with clients, and the plan has some degree of personalization.

Plus, advisors can help their clients stay the course, saving and investing for the long term. Creating a financial plan is a key step, but then it’s crucial to stick with the plan. This isn’t always easy when, for example, the market is volatile and emotions are triggered. But that’s when an experienced advisor may come in handy; they can provide perspective and help clients stay focused.

Some financial advisors help clients to become more financial savvy. Some may make trades for their clients, while many monitor investments made to help ensure that a client’s portfolio is on track. Some help with tax issues as well, e.g. whether to use a strategy like tax-loss harvesting, and more complex financial matters like estate planning.

Some may make trades for their clients, and monitor investments to help ensure that a client’s portfolio is on track.

Some help with tax issues as well, e.g. whether to use a strategy like tax-loss harvesting, and more complex financial matters like estate planning.

Sometimes making a list of requirements can be helpful when trying to find a financial advisor, whether you’re investing online or through a traditional brokerage.

Under some circumstances you may even want to consider hiring a wealth advisor.

Seeking an Advisor

The next step in finding an advisor is to obtain some recommendations. To get a list of advisors to consider:

Friends and Family Recommendations

•   Ask friends and family if they’ve used or are using an advisor. If so, what services are they receiving? How happy are they? Are there any concerns about any of the advisors they’re using? Ideally you want to take recs from people in similar circumstances to your own.

•   Do the same with business colleagues, or people who belong to the same organizations that you do.

By looking at the websites of these advisors, do they seem like a potential match?

Industry Associations

Another option when seeking an advisor is to consult industry associations and trade groups, and to look for advisors with these credentials.

•   The National Association of Personal Financial Advisors website (NAPFA focuses on fee-only financial planners).

•   Financial Planning Association (FPA). Advisors in this network are Certified Financial Planners® (CFPs) and the FPA site lets you search by location, area of specialty, how they’re paid, and any asset minimums they may require.

•   Garrett Planning Network. All advisors in this network charge an hourly rate.

Finding the Right Fit

Just as you wouldn’t buy the first car you test-drove, or the first pair of shoes you tried on, you don’t have to commit to working with the first financial planner you talk to. Many advisors offer a free consultation so you can find out more about them.

While the selection process does take a little extra time, it’s worth investing that time for your future financial security.

Questions to Consider

Some people may find that the same names keep cropping up when asking for recommendations and exploring online resources. Thus, it may make sense to create a short list of financial advisors and explore those options in more depth.

Questions to ask those advisors can include:

•   What specific services do you offer?

•   What processes do you use to create a plan for me?

•   What qualifications and credentials do you have?

•   How often would we meet or otherwise communicate?

•   What is your overall investment philosophy?

•   What is your fee structure?

If you’re a beginning investor, it can help to ask about the financial advisor’s experience in getting new people started with planning and investing in a basic portfolio.

Fiduciary Rules

Another key question: Is the financial advisor a fiduciary? If so, the advisor must work in the best interests of a client and either disclose conflicts of interest or avoid them. If an advisor is not a fiduciary, he or she is required only to make recommendations that are considered suitable.

The so-called fiduciary standard, most recently re-issued as a ruling in 2024 from the Department of Labor, is embroiled in legal challenges. But it’s important to know, as you look for a financial advisor, that this important set of protections exists. Even if the law itself is in limbo, many advisors embrace a similar SEC “best interest” standard and its protections for investors — i.e., advisors must avoid conflicts of interest and place a client’s interests first.

Advisors who follow a fee-based or hourly payment structure are, by definition, fiduciaries. Those who get paid a commission when clients make certain investments may or may not be a fiduciary because they earn a commission when selling an investment or insurance product or other service.

This is why it’s important to always inquire about an advisor’s fee structure and compensation.

Common Financial Advisor Charges

Financial advisors’ fees can be structured in a number of ways, and what you pay for a financial advisor depends on a number of factors. In general, financial advisors are either paid a flat fee (such as a retainer or a fee-for-services), commissions on products and investments they sell you (such as insurances and/or mutual funds), or a hybrid.

Retainer

Some advisors charge a retainer, typically due monthly, quarterly, or annually. The fees can range significantly; annually, the low end may be around $2,000 to $3,000, with the high end running into the five figures or more, depending on the services provided. Investors can ask an advisor to explain what services they get for paying the retainer.

Commission

In this scenario, advisors get paid a commission based on the products (investments, insurances) they sell to clients. Some advisors may receive a percentage of the assets of a client before the investments are made. Others can be paid by a financial institution after the transaction has occurred, while others may charge clients each time that a stock is bought or sold.

Percentage of Assets Under Management (AUM)

Similar to a retainer, some advisors charge a percentage of the assets being managed. Generally speaking, paying 1% annually is reasonable under this structure when including both the fees of a financial advisor and any investment fees. When considering an advisor who charges these fees, it can make sense to ask for a breakdown and the reasoning behind the fee structure.

Planning Fees

This could be an upfront fee for a financial plan or for ongoing advice. There can also be a subscription-based fee structure, similar to a retainer. Fees for these services vary widely, so be sure to ask what your all-in costs would be when working with any advisor.

Hourly Fees

This would involve a straight hourly fee for services provided. For example, setting up your retirement portfolio might cost $X, while setting up a 529 college savings plan for your kids might cost $Y.

Robo Advising vs Financial Advisors

It may also make sense to consider an online robo-advisor, also known as an automated investing platform. This is an algorithm-driven digital platform that provides clients with basic financial guidance in the form of pre-set portfolio options, similar to a prix fixe menu at a restaurant.

How a Robo Advisor Works

A robo advisor is not like a human advisor; it’s more like a high-tech investment manager.

First, the investor responds to a questionnaire by inputting their goals and time horizon. Typical questions may also include risk tolerance. (Here’s a helpful risk tolerance quiz.) Based on the investor’s preferences, the technology on the backend comes up with a recommended portfolio option (e.g. a portfolio that’s more aggressive or more conservative).

What a Robo Advisor Portfolio Might Cost

Because most automated portfolios consist of low-cost index or exchange-traded funds (ETFs), these services are considered cost efficient compared with using a human advisor. Also, you’re not paying for hands-on advice or personal planning.

Robo portfolios often involve an annual fee, perhaps 0.25% to 1% of the account balance. In some instances, a robo advisor may charge a small monthly dollar amount for lower balances, e.g. $4 per month, instead of a percentage. Remember, these costs are in addition to the fees for the underlying funds in your portfolio.

Considerations for Using a Robo Advisor

Automated investing platforms may not be the right choice for people who need personalized advice for complex financial situations, such as tax and estate planning. It also wouldn’t fit the needs of investors who simply prefer to sit down with a human advisor.

Similar to human advisors, different robo advisor programs offer different services. So if the idea of robo advising sounds appealing, it can help to check more than one option.

Free Financial Advice

Some financial companies offer complimentary financial advice for their customers. In some cases this feature is only offered if your account balance is high enough.

Some employers that provide a company retirement plan may also offer free financial seminars. These are typically educational in nature.

Topics discussed can include how to:

•   Set and reach financial goals, based on the current financial landscape.

•   Create a budget and practice good spending habits.

•   Leverage debt strategically by balancing repayment of debt with saving for long-term goals.

•   Build an emergency fund and save for the future.

•   Create an investment strategy that dovetails with personal risk tolerance and goals.

And remember, even though an advisory service might be touted as ‘no cost’, remember that different investment products always come with a fee, such as an expense ratio.

The Takeaway

Deciding to work with a financial advisor is an important step toward taking control of your financial future. Finding the right person, however, takes time and diligence. Financial advisors can come with a range of qualifications and specialties. The services they offer and the fees they charge also vary.

Fortunately, there are a number of organizations that can help you do a search for someone who is the right fit. And you can also consider taking a more tech-driven route and using a robo-advisor.

Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.


Open an automated investing account and start investing for your future with as little as $50.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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