How Are Fiduciary Financial Advisors Are Compensated

Financial professionals are compensated in several different ways: Fee-only, Fee-based, Assets under management, Hourly, and Commissions.

Financial Topics Archives | Page 671 of 808

Apr

2023

What Is a Fiduciary Financial Advisor?

By Amanda Holden | Growing Wealth, invest, Investing | Comments Off

Fiduciary financial advisors are professionals who have a legal obligation to manage assets or give retirement advice with their client’s best interest in mind.

Among the guidelines fiduciary financial advisors need to abide by are avoiding conflicts of interest, being transparent (about fees and investments choices), acting in good faith, and being as accurate as possible.

Financial advisors aren’t the only professionals who can have fiduciary responsibilities. Lawyers, bankers, board members, accountants and executors can all be considered fiduciaries.

Fiduciary financial advisors cannot recommend investments or products simply because they would pay them bigger commissions. They can be held civilly responsible if they give advice that isn’t in the best interest of their clients.

What Is a Fiduciary?

A fiduciary is someone who manages property or money on behalf of someone else. “When you are named a fiduciary, you are required by law to manage the person’s money and property for their benefit, not yours,” according to the Consumer Financial Protection Bureau (CFPB), a government watchdog agency.

The CFPB provides an example of this, along with the requirements of being a fiduciary:

“For example, a friend of yours may name you her fiduciary through a power of attorney (POA). This means that you are responsible for her finances if she becomes sick or injured.”

As a fiduciary, your four basic duties are to act only in your friend’s best interest, manage her money and property carefully, keep her money and property separate from your own, and keep good records. Basically, you are to do your very best to manage her finances honestly.

In this sense, a person who is named as a fiduciary may not have any particular financial planning expertise. Therefore, they may still choose to hire out the actual work of managing the money to a financial expert. In doing this, they are exercising fiduciary responsibility.

What Is the Fiduciary Responsibility in Financial Planning?

Someone who acts with fiduciary responsibility will act in the customer’s best interest.

There is no universal standard for fiduciary responsibility because there are multiple agencies that act as regulatory bodies in the financial services industry.

The U.S. Department of Labor (DOL) is one, and the Securities and Exchange Commission (SEC) is another. Additionally, the organizations offering certifications, like the board of Certified Financial Professionals (CFPs), may provide their own guidance on fiduciary responsibility and code of conduct.

In 2016, the Labor Department issued what was called the “fiduciary rule,” requiring that any advisors offering retirement advice must act in their clients’ best interest. The rule was widely challenged from within the industry and subsequently overturned in the courts in 2018.

While there has been subsequent discussion about the DOL restoring the fiduciary rule, as of early 2023 there are no plans to do so. Rather, investors interested in working with financial fiduciaries are encouraged to inquire directly with various professionals, as there are still some guidelines in effect.

Broker-Dealer Fiduciary Obligations

In June of 2019, the SEC passed its own version of the fiduciary rule, called Regulation Best Interest (RBI). It says that all broker-dealers (which includes brokers) must act in the best interest of the retail customer when making recommendations, without placing their financial interest ahead of the customer’s.

According to the SEC, broker-dealers must adhere to the following obligations:

Disclosure Obligation: provide certain required disclosure before or at the time of the recommendation, about the recommendation and the relationship between you and your retail customer;

Care Obligation: exercise reasonable diligence, care, and skill in making the recommendation;

Conflict of Interest Obligation: establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest; and

Compliance Obligation: establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.

Not everyone is convinced that the new RBI standards do enough to protect the consumer. Additionally, the new RBI rules may have actually weakened the need for some Registered Investment Advisors to work in a fiduciary capacity.

Questions to Ask a Fiduciary Financial Advisor

Because the rules of fiduciary responsibility remain somewhat up for interpretation, the waters remain a bit murky for some retail customers, and the responsibility for finding a fiduciary requires effort on the consumer’s part.

Ask questions, carefully consider investment recommendations, and challenge possible conflicts of interest. It is good to be in the habit of asking the person you intend to work with whether they’ll be acting with fiduciary responsibility. Do not hesitate to ask them outright, “Are you a fiduciary?”

Then, ask them to clarify what fiduciary responsibility means to them, their title, and the institution that they represent. Also, consider how they are being compensated, i.e. what does the financial advisor charge? Much, although not all, can be sussed out via the compensation model.

The Fiduciary Versus Suitability Standard

Previously, broker-dealers may have adhered to what is called the “suitability rule,” as opposed to a fiduciary rule. Although broker-dealers are now technically held to a fiduciary standard, it’s an important word to know, just in case you work with someone who does not fall under the SEC’s regulatory purview. Suitability is not the same fiduciary responsibility.

The rule by the Financial Industry Regulatory Authority (FINRA), a non-governmental regulatory organization, requires that a firm or associated person have “a reasonable basis to believe” that a financial or investment recommendation is suitable for the customer.

The firm needs to make this determination based on the customer’s “investment profile,” which can include age, other investments, financial situation and needs, taxes, liquidity and risk tolerance, among other factors.

How to Find a Fiduciary Financial Advisor

Finding a financial professional that assumes fiduciary responsibility is a great start.

That said, there is more to finding a trusted financial advisor than simply adhering to fiduciary standards. Being a fiduciary doesn’t guarantee that a financial professional offers the right service for you, or even that they’re someone that you’ll want to work with.

For example, a doctor may have a license to practice, but not a good bedside manner. Or, you may need a dermatologist, so making an appointment with a pediatrician won’t do.

Here are a handful of the services offered in the financial help space, along with their respective adherence to fiduciary guidelines.

Registered Investment Advisors (RIAs)

Generally, RIAs manage investment portfolios on behalf of customers. They may or may not offer other services, such as comprehensive financial planning.

Previously, all RIAs were held to a fiduciary standard. Counterintuitively, this may have changed with the new RBI standards, which may have loosened standards for RIAs.

Brokers

Brokers, such as a stock broker, are professionals who buy and sell securities on behalf of clients. Typically, a broker works on some form of commission from the sale of securities.

Before the RBI, brokers were not held to a fiduciary standard. They are now held to the new standards, though it remains to be seen exactly how this will shake out within the industry.

Certified Financial Planners (CFPs)

CFP^® may offer more holistic financial services, such as financial planning, budgeting, and personalized investment advice. Not all financial planners are CFPs — you may want to ask about the credentials of the professional you want to work with.

The CFP Board “supports a uniform fiduciary standard of conduct for all personalized investment advice. This fiduciary standard of conduct should put the interests of the client first, and should include both a duty of care and a duty of loyalty.”

Again, it is important to seek out the professional that will best serve your needs.

If a financial professional suggests a product or strategy, do not be afraid to ask questions.

How Are Fiduciary Financial Advisors Compensated?

Financial professionals are compensated in several different ways:

Fee-only

In this case, you would pay a financial professional, such as a CFP^®, a fee to sit down and discuss a financial plan or roadmap. This could be a one-time meeting, or meetings could take place at regular intervals (such as quarterly or annually). If a financial planner is fee-only, then they will not receive any additional commissions on products being sold.

Fee-based

An advisor who is fee-based may charge a fee and collect commissions. This fee could be a one-time or annual fee, or it could be measured as a percentage of assets under management. For example, an investment advisor could charge a 1% annual fee.

Assets under management

Similarly, some investment advisors and planners who manage an investment portfolio may charge a percentage on top of assets that are being managed.

Hourly

Some financial professionals may charge by the hour. This may be more common for financial coaching and planning than wealth management.

Commissions

Commissions typically come in the form of payments to the financial professional, from the company that creates the product. Commissions are common on insurance products, like annuities and life insurance, and some actively managed mutual funds.

It is possible that a financial professional be compensated in multiple ways. Be sure to ask.

A popular choice for those just getting started is a fee-only fiduciary financial planner. To find a fee-only fiduciary financial planner, you may want to check a database like XY Planning.

The Takeaway

Fiduciary financial advisors are professionals who are legally obligated to invest money or give retirement advice that’s in the best interest of their clients.

Among the requirements fiduciary financial advisors need to abide by are minimizing conflicts of interest and being transparent about how they are compensated. Acting in good faith and giving accurate financial advice are also guidelines that fiduciaries are supposed to follow.

Investors looking for trusted help should try to find a fiduciary financial advisor. Some robo-advisors and online investing platforms offer access to a financial planner who can answer questions for investors.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here). Also, members can access complimentary financial advice from a professional.

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.

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Apr

2023

What Is a Good 401(k) Expense Ratio?

By David Wolinsky | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A 401(k) plan doesn’t have an expense ratio, per se, but the overall cost of the plan includes the expense ratios of the funds in an investor’s account, as well as other charges like plan administration fees and the like.

So what is a good 401(k) expense ratio? Ideally, the lower the fees for the plan the better, including the expense ratios of the investments in the account, because fees can lower portfolio growth substantially over time.

While investors don’t have control over the basic costs of their 401(k) plan, they can opt to choose investments with lower expense ratios, e.g. under 0.50% if possible.

What Are Reasonable Fees for a 401(k)?

To determine the amount you’re paying for a 401(k) plan, divide the total plan cost (usually available on your 401(k) statement) by your total investment.

Expense ratios can vary among plans for a variety of reasons, including how the 401(k) account is managed, the administrative fees, the record-keeping costs, and so on. While investors don’t have any say over the built-in costs of the 401(k) plan — that’s set by the plan administrator and/or your employer — investors can manage their own investment costs.

Choosing Lower-Cost Funds

In passively managed funds (where a portfolio mirrors a market index like the S&P 500), the expense ratio is typically lower as compared to actively managed funds, which might charge between 0.5% and 1.0% or more. Actively managed funds have a fund manager who employs different buying and selling strategies. Generally, this is because more work is being done on the manager’s part in an active strategy vs. a passive strategy.

Note that active investing can refer to individual investors, but the philosophy of making trades to exceed market returns also drives actively managed funds.

Passive strategies generally have expense ratios under 0.50%. Exchange-traded funds (ETFs) usually follow a passive strategy and can have expense ratios under 0.25%.

Why Fees Matter

Over time, just one or even half a percentage point could potentially make an impact on a retirement account. That impact could in turn mean the difference between retiring when planned, vs. working a few more years until the overall investment grows. A lower expense ratio could help an investor maximize their 401(k).

For example, a well-known Government Accountability Office analysis from 2006 found that someone who invests $20,000 every year for 20 years in a 401(k) plan that costs 1.5% per year to operate is likely to end up with 17% less than someone whose plan costs just 0.50%. The analysis concluded that after 20 years, that half a percentage point meant the difference of more than $10,000. Similar studies on the impact of fees have found similar results.

Until relatively recently 401(k) expense ratio information wasn’t public, and even now it can be somewhat difficult to locate.

How to Reduce Your Expense Ratio

Before an investor can attempt to reduce their expense ratio, they need to be familiar with what it is.

Until relatively recently 401(k) expense ratio information was not public, and even now it can be somewhat difficult to locate. In 2007, the Securities and Exchange Commission (SEC) approved an amendment requiring the disclosure of these fees and expenses in mutual fund performance and sales materials.

Today, there are a few ways to get the information — and take action:

• Read the fine print. Look closely at 401(k) participant fee disclosure notices, which participants should receive at least annually with any plan. Or look for the current information in a funder’s prospectus on their website. Building on the 2007 amendment, the DOL introduced a rule in 2012 to improve transparency around the fees and expenses to workers in 401(k) retirement plans.

• Ask outright. Investors seeking more information might also choose to call their fund’s client services number directly to get the most up-to-date information on plan costs. Investors who work with a financial advisor can also ask their advisor for this information, as well as their opinions on these expenses.

◦ Evaluate your funds. It can also be helpful to look at the funds being offered by an employer, provider, or broker to see if there is a similar fund that comes with lower expenses. Investors may be able to find the investments they want at a cheaper price, even within their current 401(k) plan.

For investors whose 401(k) plan is not through a current full-time employer — a common situation when people change jobs — they may want to consider a rollover IRA in order to pay lower fees and gain access to a wider array of investments.

The Takeaway

There’s no magic number that indicates a 401(k) expense ratio is too high or just right, and all plans are different. But if you take into account the cost of your investments in addition to the plan itself, you shouldn’t be paying much more than about 1.0% to 1.50%, all in.

Under federal law, employers have a fiduciary duty to offer reasonably priced options and to monitor the quality of the 401(k) plan they offer. The more an investor knows about their current plan, the better equipped they are to make compelling arguments for how to improve their plan.

If you’re thinking about investing for retirement, or doing a rollover of an old 401(k), you may want to consider all your options. It’s easy to get started with SoFi invest. You can invest in stocks, exchange-traded funds (ETFs), open an IRA or do a rollover, and more. SoFi doesn’t charge commission, but other fees apply (full fee disclosure here), and members can access complimentary financial advice from a professional.

Easily manage your retirement savings with a SoFi IRA.

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Apr

2023

How Are Employee Stock Options and RSUs Different?

By Amanda Holden | Building Your Career, Growing Wealth, invest, Investing | Comments Off

Employee stock options (ESOs) and restricted stock units (RSUs) are two different types of equity compensation. An employee stock option gives an employee the option to buy company stock at a certain price, by a certain date. By contrast, an RSU is the promise that on a future date the employee will receive actual company stock.

Sometimes, employees get a choice between ESOs and RSUs. Understanding how each stock plan works, how they differ — particularly when it comes to vesting schedules and taxes — can help you make a decision that best aligns with your financial goals.

What Are Employee Stock Options (ESOs)?

Employee stock options (ESOs) give an employee the right to purchase their company’s stock at a set price — called the exercise, grant, or strike price — by a certain date, assuming certain terms are met, usually according to a vesting schedule.

If the employee doesn’t exercise their options within that period, they expire.

Companies may offer stock options to employees as part of a compensation plan, in addition to salary, 401(k) matching funds, and other benefits. ESOs are considered an incentive to help the company succeed, so that (ideally) the stock options are worth more when the employee chooses to exercise them.

In an ideal scenario, exercising stock options allows an employee to purchase shares of their company’s stock at an exercise price lower than the current market price — and realize a profit.

Note that while some of the terminology used with regard to employee stock options may sound similar to standard stock options, don’t get the two confused. Options are derivatives traded based on the value of underlying securities, e.g. stocks, bonds, ETFs.

How do ESOs Work?

Generally, ESOs operate in four stages — starting with the grant date and ending with the exercise date, i.e. actually buying the stock.

1. The grant date

This is the official start date of an ESO contract. You receive information about how many shares you’ll be issued, the strike price (or exercise price) for those shares, the vesting schedule, and any requirements that must be met along the way.

2. The cliff

If a compensation package includes ESOs, they’re generally not available on day one. Contracts often include requirements that must be met first, such as working full time for at least a year.

Those 12 months when you are not yet eligible to exercise your employee stock options is called the cliff. If you remain an employee past the cliff date, you get to level up to the vesting period.

Some companies include a 12-month cliff to incentivize employees to stay at least a year. Other companies may have a vesting schedule.

3. The vest

The vesting period is when you start to take ownership of your options and the right to exercise them. Vesting can either happen all at once or take place after a cliff (as noted above), or gradually over several years, depending on your company’s plan.

One common vesting schedule is a one-year cliff followed by a four-year vest. On this timeline, you’re 0% vested the first year (meaning you aren’t eligible for any options), 25% vested at the two-year mark (you can exercise up to 25% of the total options granted), and so on until you own 100% of your options. At that point, you’re considered fully vested.

4. The exercise

This is when you pull the financial trigger and actually purchase some or all of your vested shares.

ESO’s Expiration Date

While the expiration date of stock options isn’t always front and center, it’s important to bear in mind. The strike price you’re given as part of your options package expires on a certain date if you don’t exercise your shares.

One common timeline is 10 years from grant date to expiration date, but specific terms will be in the contract, and it’s important to vet the timing of your ESOs — as part of your career as well as your tax and your long-term financial plan. Again, if you let your stock options expire, you lose the right to buy shares at that price.

Pros and Cons of Employee Stock Options (ESOs)

If you land a job with the right company and stay until you’re fully vested, exercising your employee stock options could potentially lead to gains.

For example, if your strike price is $30 per share, and at the time of vesting the stock is trading at $100 or more per share, you’re getting a great deal on shares.

On the other hand, if your strike price is $30 per share and the company is trading at $10 per share, you might be better off not exercising your employee stock options until the price goes up (when and if it does; there are no guarantees).

That’s why ESOs are considered a form of employee incentive: You may work harder to help the company grow, if you know your efforts could translate to a bigger stock price.

Tax Implications of Employee Stock Options

Given that stock options can generate gains, it’s important to know how they are taxed so you can plan accordingly.

Generally speaking, employers offer two types of stock options: nonqualified stock options (NSOs or NQSOs) and incentive stock options (ISOs).

Nonqualified Stock Options

NSOs are the most common and often the type offered to the general workforce. NSOs have a less favorable tax treatment, because they’re subject to ordinary income tax on the difference between the exercise price and the market price at the time you exercise your options and purchase the stock.

NSOs are then taxed again at the capital gains rate when you sell the shares.

Your individual circumstances, tax filing status, and the terms of your stock options may also play into how you’re taxed, so you may want to consult a professional.

Incentive Stock Options

ISOs are “qualified,” meaning you don’t pay any taxes when you exercise the options — unless you’re subject to the alternative minimum tax (AMT).

You will owe taxes, however, if you sell them at a profit later on. (If you don’t sell, and if the stocks gain or lose value, those are considered unrealized gains and losses.) Any money you make when you sell your shares later would be subject to capital gains tax. If you hold your shares less than a year, the short-term capital gains tax rate equals your ordinary income tax rate, which could be up to 37% for the highest tax bracket.

For assets held longer than a year, the long-term rate is lower: 0%, 15%, or 20%, depending on your taxable income and filing status.

What Are Restricted Stock Units (RSUs)?

Restricted stock units, or RSUs, simply grant employees a certain number of shares stock by a certain date. When employees are granted RSUs, the company holds onto the shares until they’re fully vested.

The company determines the vesting criteria — it can be a time period of several years, a key revenue milestone, and/or personal performance goals. Like ESOs, RSUs can vest gradually or all at once. When the employee gets their shares, they own them outright; employees don’t have to buy RSUs.

How Do Restricted Stock Units (RSUs) Work?

RSUs are priced based on the fair market value of the stock on the day they vest, or the settlement date. The company stocks you receive from your company will be worth just as much as they would be if you purchased them on your own that same day.

If the stock is worth $40 per share, and you have 100 shares, you would get $4,000 worth of shares (assuming you’re fully vested and have met other terms).

Again, the main difference between stock options and restricted stock units is that you don’t have to purchase RSUs.

As long as the company’s common stock holds value, so do your RSUs. Upon vesting, you can either keep your RSUs in the form of actual shares, or sell them immediately to take the cash equivalent. Either way, the RSUs you receive will be taxed as income.

And, of course, if you later sell your shares you may realize a gain or a loss and there will be tax implications accordingly.

Pros and Cons of Restricted Stock Units (RSUs)

One good thing about RSUs, similar to ESOs, is the incentive to stay with the company for a longer period of time. If your company grows during your vesting period, you could see a substantial windfall when your settlement date rolls around.

But even if the stock falls to a penny per share, the shares still awarded to you on your settlement date. Since you don’t have to pay for them, it’s still money in your pocket.

In fact, you may only lose out on money with RSUs if you leave the company and have to forfeit any units that aren’t already vested, or if the company goes out of business.

Tax Implications of RSUs

When your RSU shares or cash equivalent are automatically delivered to you on your settlement date(s), they’re considered ordinary income and are taxed accordingly. In fact, your RSU distributions are actually added to your W-2.

For some people, the additional RSU income may bump them up a tax bracket (or two). In those cases, if you’ve been withholding at a lower tax bracket before your vesting period, you could owe the IRS more money.

As with ESOs, if you sell your shares at a later date and make a profit, you’ll be subject to capital gains taxes.

	ESOs	RSUs
Definition	An employee can buy company stock at a set price at a certain date in the future.	An employee receives stock at a date in the future (does not have to purchase them).
Pricing	The strike price is set when ESOs are offered to an employee, and they pay that price when they exercise their shares.	The share price is based on the fair market value of the stock on the day the shares vest, and employees get the full-value shares.
Tax implications	The difference between the strike price and the stock’s value on exercise is considered earned income and added to your W-2, where it’s taxed as income. If you sell your shares later at a profit, you may also be subject to capital gains tax.	RSU shares (or cash equivalent) are considered ordinary income as soon as they are vested, and are taxed accordingly. If you sell the shares later, capital gains tax rules would apply.

The Takeaway

Employee stock options (ESOs) and restricted stock units (RSUs) are two different types of equity or share-based compensation, and they each have their pros and cons.

An employee stock option gives an employee the option to buy company stock at a certain price, by a certain date. An RSU is the promise that on a future date the employee will receive actual company stock (without having to purchase the shares).

Because these types of compensation are often considered incentives, they’re designed to encourage employees to stay with the company for a certain amount of time. As such, employees often don’t get their options (in the case of ESOs) or the actual shares (in the case of RSUs) until certain terms are met. There may be a vesting schedule or company benchmarks or other terms.

Having the option to own stock in your employer company has the potential to provide attractive financial benefits, especially if you believe in the company and its future. This belief in a company’s growth potential is what may drive investors to buy a company’s stock, even if they don’t work there.

If you’re interested in owning and trading stock, it’s easy when you set up an Active Invest account with SoFi Invest®. Members can trade stocks and ETFs.

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.

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Apr

2023

Ways to Be a Frugal Traveler

By Maureen Shelly | Budgeting & Goals, money | No Comments

If you love to travel, chances are, you have your eyes open for good deals. Wouldn’t you like to get a hefty discount off the usual airfare rates? Sure. An upgrade from a standard hotel room to a junior suite with a terrace? But of course! And clever hacks that help your dollars go further whether you’re sipping a cocktail, signing up for a surfing class, or shopping? Yes, yes, and yes.

Being a frugal traveler can deliver those perks and pad your bank account. With a little research and knowledge of some insider tips and tricks, you can have a great experience on vacation and cut costs, too.

Want to be a more frugal traveler? To snag some bargains on your next trip, try these smart tactics.

Time Your Trip Right

One of the first steps in becoming a frugal traveler is picking a place where you want to go and can also afford to go. The good news is that no location is necessarily off-limits, as long as you can be flexible on the timing of your vacation.

While you’re not likely to get a great deal on a hotel on Cape Cod for Fourth of July weekend or a cheap flight to the Caribbean over Christmas, you may be able to score a sweet deal if you decide to go to either of those places during what is referred to as “shoulder season.”

The term “shoulder season” is used by professional travelers and agents around the world to denote the time in between busy seasons in any given destination.

It may be viewed as a less desirable time to visit by some travelers, but to the seasoned voyager, it’s often seen as the ideal time to go. Not only may you find better deals on flights, accommodations, and more, but you can also avoid the intense crowds you may encounter during the high season.

Take Mexico as an example. According to Frommer’s, Mexico’s high season begins around December 20, peaks over New Year’s, then winds down at the end in April.

If you plan a visit during this time, you can expect to pay a premium on just about everything, from your plane ticket to those tacos al pastor, as you’re competing with other travelers for space.

If you opt to visit just prior to this, say in November, or just after, in May or June, you will likely be able to find better deals. Since there will be fewer people around, you might be able to take excursions with smaller groups, get restaurant reservations at highly sought-after spots, and even luck out with a free room upgrade at your hotel.

Find Flight Deals

One of the most expensive parts about traveling is the actual act of travel itself. While driving can sometimes be a cheaper mode of transportation, it might not be an option depending on the destination you have in mind.

But there are still ways you can save. Here are a couple of travel hacks that may help you get better deals on airfare.

Use the big travel sites. Sites like Expedia, Booking.com, and Kayak search multiple airlines for the best deals and can often offer you clever ways to lower your costs. For instance, they can tell you whether prices for your itinerary are likely to rise or fall in the near future. They can show you how much you can save if you are flexible with your dates or are willing to fly out of a nearby airport rather than your closest possible hub. For instance, if you’re Paris-bound from the New York City area, you might get a better deal departing from Newark, NJ, vs. JFK airport in the city itself.

What’s more, these sites sometimes offer clever hacks, such as flying outbound on one airline and back on another to save you cash. They can also keep you posted on new deals that become available on your route if you’re not ready to buy right away.

Sign up for email alerts. Some good news for busy travelers: There are other sources for flight pricing alerts beyond the big travel sites. For instance, if you are willing to subscribe to an email newsletter, you might try Next Vacay. It’s a website where users can input their destination, then simply wait for the site to send them daily emails with flight deals. You may also want to check out Skyscanner, which allows users to set alerts for price drops so you can strike when the iron is hot.

Some of these services will send you deals for both your destination and others in case you need a little inspiration. You may also want to download a few travel apps that will send you price alerts as well.

Work that airline credit card. If you have a preferred airline or airline network, you can earn points or miles with an airline credit card that can be applied to the cost of flights or help you snag upgrades.

Book at the right time. There used to be a rule that Tuesdays were the best (cheapest) day to go flight shopping, but a recent Google Flights study found that you won’t really save much that way, maybe just 1.9%.

However, you are likely to get a nice price if you purchase your ticket well in advance of your travel date (around three months for domestic travel and often six to 10 months for international) or else be spontaneous and book your flights last minute. And it is true that you are likely to save if your flights are on a midweek date or a Saturday; that can shave the price versus heading off on vacay on a Friday, along with everyone else.

Score Deals on Accommodations

Ready to save on hotel costs on your next vacation? Try these smart tactics:

• Hotels base prices on supply and demand, so when there is less demand (say, in shoulder season), prices tend to fall. Beyond the season, you can also try looking into checking in and out on less popular days.

If you can check in at a vacation destination on a Monday and out on a Friday, for instance, you may be able to save, since mid-week pricing can be cheaper than weekends.

• Even if you’re booking at a travel site, it’s also a good idea to frequently check the website of any hotel you’re interested in staying at. There, they may announce different deals and sales. At the very least, you may be able to spot a free room upgrade or free breakfast.

• It can also be wise to sign up for a travel credit card. These can help you earn points to apply to future travel and offer perks at your favorite hotel chain.

Entertain Yourself on a Frugal Vacation

While you’re traveling, you’re likely going to want to participate in activities. And you can likely find ways to save on those also.

In a new place, try googling a few free walking tours, which can give you a wonderful sense of a place without having to spend a dime (though it may be polite to tip your tour guide afterwards).

For cheap or discounted tickets to local attractions, consider checking out sites like Groupon, Airbnb Experiences, Meetup, and local tourism boards.

You may also want to ask your hotel front desk at check-in for tips on things to do and see. Hotels often have partnerships with area attractions and may be able to provide you with a discount.

For restaurants, it can be a bit harder to save, but if there’s one fancy place you’ve simply been dying to try, you can often save a fair amount by going for lunch rather than dinner.

Set a Travel Budget

Establishing a budget, and then starting to save for your vacation, can be a key part of the frugal traveler planning process. That’s because your budget can help determine not only where you can go, but what you can do while you are there.

A travel budget can help you to narrow down your choices and also make sure that you are able to enjoy your trip without having to worry that you are spending more than you can afford.

Below are some categories you may want to include in your budget:

Transportation costs: When budgeting for a trip, you’ll want to decide if you’re going to fly, drive, or take the train. For driving (perhaps you’re going to be touring some national parks), consider costs like gas and wear and tear on your car. If you don’t have a vehicle you can use, look for ways to save on renting a car, such as not picking it up at the airport but at a nearby location. You’ll need to account for taxes, insurance, and other related expenses. For flying, you’ll want to be sure to include ticket price, baggage fees, airport parking, and destination car rental or taxi.

Lodging: Accommodation costs can seem clear, but you’ll want to be sure to ask about any resort fees and taxes so you can add it to your budget.

Food: It can be a good idea to come up with a cost for breakfast, lunch, and dinner (including tips) for everyone you’re traveling with. If your hotel offers free breakfasts, you can put that cost towards another meal. Or maybe you’re renting an apartment and can cook while traveling. You’ll still need a grocery budget.

Activities: You’ll want to have a budget for daily activities and entertainment for each participant in your group. Many museums, for instance, can have steep entrance fees, so you may want to search ahead to see what likely costs are. If you’re planning a special outing, like a Jeep tour to see cave paintings in the Southwest, don’t forget to allow for a tip for the driver.

Extras: You never know when an emergency, a fun activity, or an unplanned happy hour will arise. Adding a buffer to your vacation budget can help you prepare for these extra expenses. You might also want to budget for travel insurance or see if your credit card travel insurance offers good coverage.

Once you add up all the costs, you can start saving up for your vacation. You could even create a secondary savings account titled “travel fund” so you’ll be even more excited to save.

The Takeaway

Vacations can be costly, especially if you’re traveling with a family. But with a little bit of research and advance planning, you may be able to significantly reduce the price of your next trip.

Simple frugal traveler tricks, like traveling off-peak, signing up for travel newsletters, booking your flight around two months ahead, and pre-scouting free and discounted local activities, can help you reduce costs without having to skimp on fun.

You can also make traveling more affordable by setting a budget, saving up for your trip in advance, and staying as close as possible to your spending plan while you are away.

SoFi Travel has teamed up with Expedia to bring even more to your one-stop finance app, helping you book reservations — for flights, hotels, car rentals, and more — all in one place. SoFi Members also have exclusive access to premium savings, with 10% or more off on select hotels. Plus, earn unlimited 3%** cash back rewards when you book with your SoFi Unlimited 2% Credit Card through SoFi Travel.

SoFi, your one-stop shop for travel.

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You must agree to SoFi’s privacy consent agreement.
You must book the travel on SoFi’s Travel Portal reached directly through a link on the SoFi website or mobile application. Travel booked directly on Expedia's website or app, or any other site operated or powered by Expedia is not eligible.
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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

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Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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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SOCC0323049

Apr

2023

Guide to Understanding and Tracking Robo-Advisor Returns

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

Robo-advisors — which provide algorithm-generated portfolios to help individuals manage their money — can deliver a range of returns for investors, just like any investment. The fact that these platforms are automated doesn’t mean they provide predictable returns.

Robo-advisors are only automated in the sense that they use sophisticated technology to manage basic portfolios, typically composed of exchange-traded funds (ETFs) or other low-cost investments.

The underlying funds in a robo portfolio are the same or similar to those that regular investors can purchase on their own, thus investors still need to consider the impact of gains and losses, taxes, and fees when thinking about returns.

How Robo-Advisors Help Investors

A robo-advisor is an automated, algorithm-based service that typically offers investors a questionnaire to assess their risk tolerance, time horizon, and investment goals. Based on the investor’s inputs, the automated platform suggests a portfolio that, ideally, matches the investor’s goals and preferences.

Robo-advisor algorithms typically employ some of the principles of modern portfolio theory (MPT) and other quantitative techniques that establish and manage a range of pre-set portfolio options. Investors generally have a choice between more aggressive or more conservative portfolio allocations, but they typically cannot alter the makeup of an automated portfolio (unless that’s a feature specifically offered by a certain platform).

The algorithms used by robo-advisors are often updated to reflect changes in the market, and most rebalance on a regular cadence (e.g. annually) to maintain the desired asset allocation.

Robo Advisor Tools

Robo-advisors may also offer tools to help investors make decisions about their finances. These can include portfolio analysis tools, risk tolerance assessment tools, and educational resources. Investors can use these tools to monitor their portfolios and make informed decisions.

Robo-advisors typically charge an advisory fee for their services, usually a percentage of the total portfolio value. However, the fees are generally much lower than those traditional financial advisors charge.

The goal of robo-advisors is to provide a low-cost and convenient investing option to a wide range of customers, including those who may not have the resources or desire to work with a human, financial advisor.

💡 Recommended: What Is Automated Investing?

Evaluating Robo-Advisor Performance

Evaluating the performance of a robo-advisor is critical for investors interested in using them to build wealth. Although some robo services claim to have proprietary algorithms based on investment theories developed by Nobel Prize-winning economists, these formulas simply inform the technology on the backend; they don’t guarantee a certain return or performance.

An investor should evaluate robo-advisor performance by considering its historic returns and other key metrics. By assessing the following metrics, investors can better understand the robo-advisor’s performance and how it aligns with their investment goals:

• Cost: The annual cost to invest with a certain robo advisor is one of the most important factors influencing returns that investors can control.

Robo advisors are generally lower cost than, say, working with a live financial advisor. But automated services charge annual advisory fees, in addition to the expense ratios of the investments in the portfolio. Because fees eat into returns over time, it’s always important to know what the costs are up front.

• Returns: It may be useful to compare the rate of return of a robo-advisor’s portfolios to those of relevant benchmarks. For instance, investors can look at the returns of their robo-advisor portfolio versus the S&P 500 Index returns. If the robo-advisor performs better than the S&P 500, it may indicate a well-run robo-advisor.

However, past performance is not predictive of future results, but it can provide a general idea of how the robo-advisor’s investments have performed over time.

• Diversification: Evaluate the diversification of the robo-advisor’s portfolios within and across different asset classes. Portfolio diversification can help manage risk by spreading investments across different types of securities.

• Rebalancing: Investigate how often and how the robo-advisor’s portfolios are rebalanced and how frequently the underlying investments are reviewed.

• Customer Service: Check if the robo-advisor provides access to a human advisor or customer support, as this can be an important factor if you need help or have questions.

What Is the Average Robo-Advisor Return?

The average return for a robo-advisor portfolio can vary depending on several factors, such as the portfolio’s specific investments (i.e. its allocation), the robo-advisor’s investment strategy, and overall market conditions.

In general, robo-advisors tend to invest in low-cost index funds and ETFs, which often track the broader market. Therefore, a robo-advisor portfolio’s returns may be similar to a mix of comparable index funds minus any advisory fees charged by the robo-advisor, plus the fees of the underlying funds.

Nonetheless, returns can vary widely depending on the robo-advisor and the portfolio. For example, as of December 31, 2022, the 5-year annualized trailing return for robo-advisors with portfolios with a 60/40 allocation ranged from 2.84% to 5.12%, according to The Robo Report by Condor Capital.

Robo-Advisor Returns

Below are the returns of some robo-advisors compiled by Condor Capital’s The Robo Report. The returns shown in the table are of portfolios with a 60% stock and 40% bond asset allocation, after fees, as of December 31, 2022. All returns for periods longer than one year are annualized.

Robo-Advisor	5-Year trailing returns
Acorns	3.04%
Ally Invest	3.29%
Axos Invest	4.18%
Betterment	3.24%
Charles Schwab	3.15%
E*Trade Core	3.47%
Ellevest	3.75%
Fidelity Go	4.49%
Merrill Edge Guided Investing	3.99%
Personal Capital	4.04%
SoFi	4.13%
Vanguard P.A.S.	4.06%
Wealthfront (Risk 4.0)	5.12%
Zacks Advantage	4.76%
Source: The Robo Report by Condor Capital Wealth Management, as of 12/31/22

Understanding Robo-Advisor Fees

Understanding the different kinds of investment fees associated with robo-advisors, and how they compare to other investment options is critical for investors.

Investment fees are often expressed as a tiny percentage, e.g. 0.25% or 0.50%. But over time fees eat into a portfolio’s returns, making it harder for investors to build wealth. Analyzing robo-advisor expenses will help investors to determine if the robo-advisor is a cost-effective solution for their investment needs.

Note that all investment costs should be spelled out clearly for the investor.

• Advisory Fees: This is the fee charged by the robo-advisor for managing the investor’s portfolio. It is typically a percentage of a portfolio’s assets under management and many robo-advisors charge less than 0.50%. Some robo-advisors offer fee-free options to their clients.

• Expense Ratios: An expense ratio is the fee charged by the underlying funds in the portfolio, such as ETFs. It is expressed as a percentage, ranging from 0.05% to 0.50% or more. Some robo-advisors include low-cost ETFs with expense ratios under 0.10%.

• Account Minimums: Some robo-advisors may have minimum account balance requirements. A minimum account balance means investors must deposit a certain amount to open an account, which can be a headwind to opening an account if the investor starts with a small amount of capital.

• Commissions: Some robo-advisors charge a commission when buying or selling securities, while others do not.

• Other Fees: Some robo-advisors may charge additional fees for services such as tax-loss harvesting or closing an account.

Pros and Cons of Robo-Advisors

Robo-advisors are often appealing to many investors because of their hands-off nature. However, as with any financial product or service, there are pros and cons to using a robo-advisor.

Pros and Cons of Robo-Advisors
Pros	Cons
Relatively low cost	Limited personalization
Convenient, and easy to use	Limited or no access to personal advice
Diversification	Fewer investment options
Automatic rebalancing	Minimum balance requirements can limit access to certain features

The pros of using robo-advisors include the following:

• Low cost: Robo-advisors typically have lower fees than traditional financial advisors, making them an attractive option for people who want to invest but avoid paying high fees. Some robo-advisors charge as little as 0.25% of assets under management, while traditional financial advisors may charge 1% or more. This can make a significant difference over time, especially for people with smaller portfolios.

• Convenience: Robo-advisors are available 24/7 and can be accessed from anywhere with an internet connection, which makes it easy for people to manage their investments. This convenience can be especially beneficial for people with limited time to manage their investments.

• Diversification: Robo-advisors use algorithms to create diversified portfolios with a mix of different index funds and ETFs in various asset classes, which can help investors reduce risk and improve returns.

The cons of using robo-advisors include the following:

• Limited personalization: Robo-advisors use algorithms to create portfolios, which may not take into account an individual’s unique financial situation or goals. A lack of personalization can be a problem for people with complex financial situations or who have specific investment goals that a robo-advisor may be unable to accommodate.

• Insufficient access to human advice: Investors may prefer to speak with a human advisor for financial advice and guidance. While some robo-advisors provide access to a financial advisor to help investors, these services can be limited or dependent on a minimum balance. As such they may not meet the needs of some users.

• Fewer investment options: Some robo-advisors may have limited investment options compared to traditional financial advisors or a self-directed brokerage account. For instance, robo-advisors tend to invest in ETFs rather than individual stocks. If an investor wants to put money into a specific stock or asset, they may want to open a self-directed brokerage account in addition to a robo-advisor portfolio.

Want to start investing?

Our robo-advisor service can offer a portfolio to suit
your needs and risk level – with no SoFi advisory fees!

Can Investors Lose Money With Robo-Advisors?

As with any investment, investors can lose their money with robo-advisors.

There are some precautions that investors can consider when weighing different robo-advisors. The industry is still growing, and computer-generated financial advice may not meet all their needs. In addition, face-to-face meetings can help consumers better understand their financial profile and investment risks.

Also, if a robo-advisor shuts down, consumers may be forced to sell or accept a possibly unrelated replacement service.

Why Do People Use Robo-Advisors?

People use robo-advisors because they are often cheaper than traditional financial advisors, provide a more objective approach to financial decision-making, and offer greater convenience when managing investments.

Investors who are comfortable with the underlying technology that these services use may appreciate having certain investment chores automated for them.

For example, some robo-advisors will automatically rebalance the portfolio according to the investors’ risk tolerance, and investment goals. This ease of rebalancing can help investors maintain their desired risk level and ensure that their portfolio stays aligned with their investment goals.

Additionally, some robo-advisors use automated tax-loss harvesting to help investors minimize their tax liability. Tax-loss harvesting is a technique that involves selling investments that have lost value to offset capital gains from other investments, which can help reduce the amount of taxes you owe. SoFi does not offer automated tax-loss harvesting.

Investing With SoFi

Robo-advisors are a relatively new type of investment service that use algorithms and technology to create and manage portfolios for investors. In recent years, robo-advisors have become increasingly popular as more and more people look for low-cost, convenient ways to invest their money. This has lowered the barrier to entry for many individuals, including younger people, to start investing.

If you’re interested in using a robo-advisor to help you build your portfolio, SoFi can help. With SoFi Invest® automated investing, we recommend a portfolio of exchange-traded funds (ETFs) for you based on your goals and risk tolerance. We’ll rebalance your investments regularly, so your money is always invested how you want it to be. And SoFi doesn’t charge an advisory fee.

See why SoFi is this year’s top-ranked robo advisor.

FAQ

Do robo-advisors work?

Robo-advisors can be effective tools to help people manage their money and achieve their financial goals. Robo-advisors are generally cheaper and more convenient than traditional human financial advisors. However, it is important to research each robo-advisor to insure it is the best fit for your needs, and that you’re comfortable with what a robo platform can and cannot do.

What are the differences between a robo-advisor and a financial advisor?

Robo-advisors are usually less expensive than financial advisors. Robo-advisors typically have lower advisory fees and minimum deposit requirements, while financial advisors often require a minimum deposit and charge a percentage of the assets they manage. Another difference is that robo-advisors provide automated and algorithm-based advice, while financial advisors provide personalized advice and guidance tailored to individual needs and goals.

Are robo-advisors good for retirees?

Robo-advisors can be a good option for some retirees because they can provide a low-cost, automated way to manage investments. However, if a retiree wants more personalized advice or help with tax and estate planning, there may be better options than a robo-advisor.

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.

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.
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.

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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOIN0423020

What Is a Fiduciary Financial Advisor?

What Is a Fiduciary?

What Is the Fiduciary Responsibility in Financial Planning?

Broker-Dealer Fiduciary Obligations

Questions to Ask a Fiduciary Financial Advisor

The Fiduciary Versus Suitability Standard

How to Find a Fiduciary Financial Advisor

Registered Investment Advisors (RIAs)

Brokers

Certified Financial Planners (CFPs)

How Are Fiduciary Financial Advisors Compensated?

Fee-only

Fee-based

Assets under management

Hourly

Commissions

The Takeaway

What Is a Good 401(k) Expense Ratio?

What Are Reasonable Fees for a 401(k)?

Choosing Lower-Cost Funds

Why Fees Matter

How to Reduce Your Expense Ratio

The Takeaway

How Are Employee Stock Options and RSUs Different?

What Are Employee Stock Options (ESOs)?

How do ESOs Work?

1. The grant date

2. The cliff

3. The vest

4. The exercise

ESO’s Expiration Date

Pros and Cons of Employee Stock Options (ESOs)

Tax Implications of Employee Stock Options

Nonqualified Stock Options

Incentive Stock Options

What Are Restricted Stock Units (RSUs)?

How Do Restricted Stock Units (RSUs) Work?

Pros and Cons of Restricted Stock Units (RSUs)

Tax Implications of RSUs

The Takeaway

Ways to Be a Frugal Traveler

Time Your Trip Right

Find Flight Deals

Get up to $300 when you bank with SoFi.

Score Deals on Accommodations

Entertain Yourself on a Frugal Vacation

Set a Travel Budget

The Takeaway

Guide to Understanding and Tracking Robo-Advisor Returns

How Robo-Advisors Help Investors

Robo Advisor Tools

Evaluating Robo-Advisor Performance

What Is the Average Robo-Advisor Return?

Robo-Advisor Returns

Understanding Robo-Advisor Fees

Pros and Cons of Robo-Advisors

The pros of using robo-advisors include the following:

The cons of using robo-advisors include the following:

Want to start investing?

Our robo-advisor service can offer a portfolio to suityour needs and risk level – with no SoFi advisory fees!

Can Investors Lose Money With Robo-Advisors?

Why Do People Use Robo-Advisors?

Investing With SoFi

FAQ

Do robo-advisors work?

What are the differences between a robo-advisor and a financial advisor?

Are robo-advisors good for retirees?

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