invest Archives

Jun

2025

What Is Interest Rate Risk?

By Kelly Boyer Sagert | Growing Wealth, invest, Investing | Comments Off

Interest rate risk refers to the possibility that a fixed-income asset, such as a bond, could rise or fall in value owing to changing interest rates. Interest rate risk also has implications for businesses.

When interest rates rise, bond values on the secondary market tend to fall, and vice versa: When interest rates decline, bond values tend to rise. A bond’s duration, or maturity, comes into play as well. Bonds with longer durations (i.e., more time to maturity) are more susceptible to interest rate risk.

Interest rate risk also applies to securities such as CDs (which may have floating rates), as well as loans with variable rates. These instruments can have an impact on consumers, as well as companies, who might see their debt payments increase on variable-rate loans, for example.

Key Points

• Interest rate risk usually refers to the impact of interest rate changes on bond values.

• When interest rates rise, bond values tend to fall, and when interest rates drop, bond values rise.

• Longer duration bonds — those with more time to maturity — are more vulnerable to interest rates changes.

• Interest rate risk can also impact stocks indirectly, when a company’s cash flow or performance is impacted by changes in borrowing costs and investment returns.

• Investors with fixed-income investments may seek ways to mitigate interest rate risk.

How Does a Bond Work?

Bonds are a type of loan, with the bond issuer effectively borrowing money from the investor. The issuer could be the federal government, a state or local government, or a company.

In return for the loan, the investor is promised that they will be repaid the full amount of the bond (the principal) — plus a predetermined amount of interest (the coupon rate) — on a specific date.

Traditionally, most bonds have paid a fixed rate, although there are some with a variable or “floating” interest rate.
Bonds come with an expiration or “maturity” date, when the value of the bond must be paid back in full to the investor, plus interest.

While there’s no such thing as a safe investment, investors typically consider bonds to be lower-risk than stocks and some other investments.

Buying and Selling Bonds

An investor can sell a bond before it reaches its full maturity. If the bond issuer is doing well and the bond is in high demand, the investor could sell it on the secondary market and see a capital gain. If not, the sale might be made at a loss.

Because interest rates impact a bond’s value, the risk here is that rising rates could make a bond’s current rate less attractive. By the same token, if interest rates drop, and an investor is holding bonds with a higher rate, the value of those bonds will rise.

Interest Rate Risk and Timing

In other words, when investors buy fixed-rate bonds, they’re taking the risk that the interest rate may go up after they’ve already made their purchase.

If interest rates do increase, then new bonds are issued with higher rates, which means that existing bonds with lower returns are in lower demand, lowering the bonds’ value.

In general, longer-term bonds are more sensitive to interest rate risk than those with shorter terms. The higher interest rates rise after the bond was purchased, the more of an impact that can have on the investor’s return on investment.

Examples of Interest Rate Risk

The Office of Investor Education and Advocacy of the U.S. Securities and Exchange Commission (SEC) offers two contrasting examples to illustrate this concept.

In the first example, they assume that a Treasury bond has a 3% interest rate. A year later, interest rates drop to 2%. But investors who bought their bonds at 3% continue to receive that interest rate, making it a more valuable investment than new bonds paying just 2%.

If that bond is sold before it reaches its maturity date, the price would likely be higher than it was in the previous year. The bond’s yield to maturity, though, will be down for investors purchasing it at the higher price.

In the second example, instead of rates going down from the original 3%, rates go up to 4%. In that scenario, investors looking to sell their bonds would be competing with new bonds that offer a 4% rate. So the price of the bond that pays 3% may well fall, with the yield going up.

How Interest Rates Can Impact Stocks

Stocks can also be subject to interest rate risk, in that rate changes can impact a company’s bottom line via potentially higher borrowing costs, and expected return on investments (including CDs, which can have a variable rate).

While the impact of interest rates on stocks is indirect, interest rate risk is nonetheless a concern for equity investors as well.

Interest Rate Risk Management

One way to handle investment risk is with diversification. This means building a diversified portfolio that includes a variety of different asset classes, such as stocks, mutual funds, real estate or other asset classes.

Diversified investment portfolios may offer some risk insulation so that if one area takes a financial hit, possible growth in another area could balance out that risk.

Interest Rate Risk and High-Yield Bonds

There are pros and cons to high-yield bonds. These types of bonds — corporate bonds that were issued by companies looking to raise capital, or by “fallen angel” companies whose credit rating has dropped—might sound attractive to investors because the notion of receiving a relatively high rate of interest is appealing. But along with the high yield is the potential for a higher degree of risk.

Bonds receive ratings on their creditworthiness, with S&P Global Ratings and Moody’s serving as two of the main credit-rating agencies. Bonds with quality ratings are less likely to go into default. When a bond goes into default, interest is less likely to be paid on time, if at all, and investors may also lose their initial investment.

Bonds with high ratings include U.S. Treasury bonds and notes issued by the federal government, and those issued by large companies considered to be stable.

Bonds with lower ratings tend to need to offer higher coupon rates to entice investors. In other words, they often need to offer high-yield bonds.

When deciding whether to include high-yield bonds in their portfolio, investors may want to consider the pros and cons of doing so.

Pros of High-Yield Bonds

• Consistent yields. Bonds typically come with an agreed-upon and consistent yield, which makes the amount owed to the investor predictable as long as the company doesn’t go into default (and many don’t).

• Priority payment if the company fails. If assets of a failed company are liquidated, bondholders would be first in line for payouts, ahead of stockholders.

• Possible price appreciation. If the credit rating of the company issuing the bond improves, it’s possible that the bond’s price will go up.

• Potentially less sensitive to interest rate changes. When this is the case, it may be because high-yield bonds tend to have shorter terms than investment-grade bonds, which may be why they often have less sensitivity to fluctuations in interest rates.

Cons of High-Yield Bonds

• Higher default rates. Because of the higher risk involved, more of these bonds default. When this happens, the investor can lose all funds, including the original principal they invested.

• Harder to sell. There can be lower demand for this type of bonds, which can make it harder to sell them at a desired price (or at all).

• Possible price depreciation. If a company’s credit rating drops further, then the price can further depreciate.

• Sensitivity to interest rate changes. All bonds, including high-yield ones, are subject to interest rate risk.

The Takeaway

Bonds are a popular investment choice because they are less volatile than stocks, but they are not without risks. Interest rate risk is the potential for a bond value to drop as market interest rate rises (the opposite is also true). High-yield bonds are just as susceptible to interest rate risk as corporate or municipal bonds.

Investors can work to mitigate that risk through portfolio diversification and careful selection of bonds.

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FAQ

Why do bond prices fall when interest rates are rising?

Bond prices typically fall on secondary markets when interest rates rise because newer-issued bonds are more attractive and see higher demand.

Why are longer-maturity bonds more sensitive to interest rate risk?

When a bond has a longer maturity, i.e., five years or more, interest rates are likely to fluctuate more over that extended period. This can impact a bond’s value over time.

Is there interest rate risk if you hold onto a bond until maturity?

Yes. If an investor purchases a bond at a certain rate, and they only redeem the bond at maturity, they are locked into the interest rate of the bond. If interest rates rise, for example, the investor is losing out on potentially higher rates. If interest rates decline, however, that could spell good news for the investor.

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

SOIN-Q225-087

Jun

2025

What Are Convertible Bonds?

By Colin Dodds | Financial Independence, Growing Wealth, invest, Investing, Terminology | Comments Off

Convertible bonds are a type of corporate debt security that provide fixed-income payments like a bond, but can be converted to common shares of stock. As such, they’re often referred to as “hybrid securities.”

Most convertible bonds give investors a choice. They can hold the bond until maturity, or convert it to stock at certain times during the life of the bond. This structure protects investors if the price of the stock falls below the level when the convertible bond was issued, because the investor can choose to simply hold onto the bond and collect the interest.

Key Points

• Convertible bonds are known as hybrid securities because they offer investors some fixed-income features as well as equity features.

• Convertible bonds offer fixed-income payments, as well as the potential to be converted to a pre-set number of common stock shares in the company.

• The investor can obtain shares based on the conversion ratio, which is determined at the time of purchase.

• The conversion price per share is also built into the bond contract.

• There’s no obligation to convert these securities. When the bond matures, the investor can either take their principal, or convert it to the corresponding shares.

How Do Convertible Bonds Work?

Companies will often choose to issue convertible bonds to raise capital in order to not alienate their existing shareholders. That’s because shareholders may be uneasy when a company issues new shares, as it can drive down the price of existing shares, often through a process called stock dilution.

Convertible bonds are also attractive to issue for companies because the coupon — or interest payment — tends to be lower than for regular bonds. This can be helpful for companies who are looking to borrow money more cheaply.

What Are the Conversion Ratio and Price?

Every convertible bond has its own conversion ratio. For instance, a bond with a conversion ratio of 3:1 ratio would allow the holder of one bond to convert that security into three shares of the company’s common stock.

Every convertible bond also comes with its own conversion share price, which is set when the conversion ratio is decided. That information can be found in the bond indenture of convertible bonds.

Convertible bonds can come with a wide range of terms. For instance, with mandatory convertible bonds, investors must convert these bonds at a pre-set price conversion ratio.

There are also reverse convertible bonds, which give the company — not the investor or bondholder — the choice of when to convert the bond to equity shares, or to keep the bond in place until maturity.

But it also allows the investor to convert the bond to stock in the case where they’d make money by converting the bond to shares of stock when the share price is higher than the value of the bond, plus the remaining interest payments.

In general, these options are not available when investing online.

How Big Is the Convertible Bond Market?

As of 2024, the size of the U.S. convertible bond market was estimated to be about $270 to $280 billion. Securities have been issued by hundreds of companies. But note that these numbers are miniscule compared to the U.S. equity market, which has trillions in value and thousands of stocks.

The total size of the convertible bond market does expand and contract, though, often with the cycling of the economy. In 2024, the total convertible bond issuance reached nearly $88 billion, versus $55 billion in 2023, and $29 billion in 2022. This may reflect the higher interest-rate environment, and companies’ desire to minimize debt payments.

Recommended: How Does the Bond Market Work?

Reasons to Invest in Convertible Bonds

Why have investors turned to convertible bonds? One reason is that convertible bonds can offer a degree of downside protection from the bond component during stock volatility. The companies behind convertibles are obligated to pay back the principal and interest.

Meanwhile, these securities can also offer attractive upside, since if the stock market looks like it’ll be rising, investors have the option to convert their bonds into shares. Traditionally, when stocks win big, convertibles can deliver solid returns and outpace the yields offered by the broader bond market.

For example, in 2024, the U.S. convertibles market returned 11.4%, outpacing the performance of all major fixed-income indices. And over the 10-year period ending December 31, 2024, convertible bonds have delivered a higher yield than equities, according to data by Bloomberg.

Recommended: Stock Market Basics

Downsides of Convertible Bonds

One of the biggest disadvantages of convertible bonds is that they usually come with a lower interest payment than what the company would offer on an ordinary bond. As noted, the chance to save on debt service is a big reason that companies issue convertibles. So, for investors who are primarily interested in income, convertibles may not be the best fit.

There are also risks. Different companies issue convertible debt for different reasons, and they’re not always optimal for investors. Under certain conditions, convertible financing can lead to “death spiral financing.”

What Is Death Spiral Debt?

The death spiral is when convertible bonds drive the creation of an increasing number of shares of stock, which drives down the price of all the shares on the market. The death spiral tends to occur when a convertible bond allows investors to convert to a specific value paid in shares, rather than a fixed number of shares.

This can happen when a bond’s face value is lower than the convertible value in shares. That can lead to a mass conversion to stock, followed by quick sales, which drives the price down further.

Those sales, along with the dilution of the share price can, in turn, cause more bondholders to convert, given that the lower share price will grant them yet more shares at conversion.

How to Invest in Convertible Bonds

Most convertibles are sold through private placements to institutional investors, so retail or individual investors may find it difficult to buy them.

But individual investors who want to jump into the convertibles market can turn to a host of mutual funds and exchange-traded funds (ETFs) to choose from. But because convertibles, as hybrid securities, are each so individual when it comes to their pricing, yields, structure and terms, each manager approaches them differently. And it can pay to research the fund closely before investing.

For investors, one major advantage of professionally managed convertible bonds funds is that the managers of those funds know how to optimize features like embedded options, which many investors could overlook. Managers of larger funds can also trade in the convertible markets at lower costs and influence the structure and price of new deals to their advantage.

The Takeaway

Convertible bonds are debt securities that can be converted to common stock shares. These hybrid securities offer interest payments, along with the chance to convert bonds into shares of common stock.

While convertible bonds are complex instruments that may not be suitable for all investors, they can offer diversification, particularly during volatile periods in the equity market. Investors can gain exposure to convertible bonds by putting money into mutual funds or ETFs that specialize in them.

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

FAQ

Why would an investor choose convertible bonds?

Convertible bonds offer downside protection for an investor’s principal, and also offer the potential to see equity gains as well.

What is the difference between a corporate bond and a convertible bond?

The main difference is that a corporate bond pays a fixed rate of interest that’s typically higher than a convertible bond coupon. But a regular corporate bond doesn’t offer access to an equity upside the way a convertible bond can.

Can a convertible bond be converted into cash?

Yes. First, in some cases a convertible bond may offer the option to convert to cash value rather than a pre-set number of company shares. Then, there is always the option to redeem the bond at maturity for its cash value.

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

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Jun

2025

Preferred Stock vs. Common Stock

By Ashley Kilroy | Growing Wealth, invest, Investing | Comments Off

Before you start trading on the market, read our guide to understand the pros and cons of common vs. preferred stock.

Jun

2025

Guide to Mega Cap Stocks

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Mega cap, or “megacap,” is a term that describes the largest publicly-traded companies, based on their market capitalization, which is typically $200 billion or more. Mega cap stocks typically include industry-leading companies with highly recognizable brands.

Investing in mega cap stocks, along with companies that have a smaller market capitalization, can help build a diversified investment portfolio. Spreading investment dollars across different market caps may allow investors to minimize potential risks. But like any security, mega cap stocks have both pros and cons that investors should consider. Learning more about how they work and what sets them apart from other types of stocks can help you decide whether there’s a place for them in your portfolio.

Key Points

• Mega cap stocks represent the largest public companies by market capitalization.

• These stocks typically have market caps exceeding $200 billion.

• Examples include NVIDIA, Apple, Microsoft, Alphabet, and Amazon.

• Investing in mega cap stocks may offer stability and potential dividends.

• Mega cap stocks offer limited upside and risks related to perception versus reality are potential drawbacks.

Market Capitalization, Explained

Mega cap stocks sit at one end of the market capitalization spectrum, representing the very largest companies in the public markets. Market capitalization is a commonly used method for categorizing publicly-traded companies. In simple terms, market capitalization or market cap measures a company’s value, as determined by multiplying the current market price of a single share by the total number of shares outstanding.

For example, say a company’s stock is priced at $50 per share and it has 10 million shares outstanding. Following the formula of $50 x 10,000,000, the company would have a total market capitalization of $500 million.

Most often, companies are assigned to one of three categories, based on their market capitalization as follows:

• Micro-cap: Market value of less than $250 million

• Small cap: Market value of $250 million to $2 billion

• Mid-cap: Market value of $2 billion to $10 billion

• Large-cap: Market value above $10 billion to $200 billion

• Mega-cap: Market value of $200 billion or more

While most companies fit into one of these three groups, some outliers exist on either end of the spectrum. The smallest of the small cap stocks are microcap stocks, while the largest companies are the mega caps.

Mega Cap Stock Definition

Mega cap stocks have a market capitalization that’s $200 billion or more. There are a handful of companies with market caps of more than $1 trillion (some with more than $3 trillion), and those companies only passed the trillion-dollar mark in recent years. That said, it’s likely more companies will become mega cap stocks in the years ahead.

10 Companies With the Largest Market Cap

As of June 2025, these are the ten companies with the largest market caps. Note, too, that there isn’t always a direct correlation between market cap and stock price!

1. NVIDIA

NVIDIA makes computer chips, and has a market cap of $3.51 trillion, with share prices of around $143. NVIDIA trades under the NVDA ticker.

2. Microsoft

Microsoft trades under the MSFT ticker, and has a market cap of more than $3.48 trillion. Microsoft is a large tech company that creates software and hardware for businesses and consumers. Microsoft shares trade for nearly $470.

3. Apple

Apple, which trades under the market ticker AAPL, has a market cap of $3.05 trillion, and shares trade at more than $204. Apple is a tech company that produces consumer tech goods and software, including the iPhone.

4. Amazon

Amazon is an ecommerce company that sells just about everything under the sun on its digital platform, as well as offering cloud services to businesses. Amazon trades under the AMZN ticker, and has a market cap of $2.25 trillion, and shares trade for more than $210.

5. Alphabet

Yet another large tech company, specializing in software and ad sales, Alphabet (the parent company of Google) has a market cap of more than $2.07 trillion. Alphabet trades under the GOOG ticker (it has numerous share classes), and shares trade for around $170.

6. Meta

Meta is the parent company of Facebook, and trades under the ticker META. Its market cap is $1.4 trillion, and shares trade for more than $690.

7. Broadcom Inc.

Broadcom is an American company that designs, develops, and manufactures software and semiconductors. Its market cap is $1.24 trillion, with share prices of more than $263.

8. Berkshire Hathaway

Berkshire Hathaway is a conglomerate holding company, meaning that it is involved in many industries, including real estate and insurance. It has many stock classes, but trades under the ticker BRK.A, and its market cap is valued at more than $1.06 trillion.

9. Tesla

Tesla is an electric car company, and has a market cap of roughly $1 trillion. It trades under the ticker TSLA, and its stock price is around $310.

10. Taiwan Semiconductor Manufacturing Company

Taiwan Semiconductor Manufacturing Company, or TSMC, is yet another semiconductor manufacturer, located in Taiwan. It trades under the TSMC symbol, and its share price is around $205 with a market cap of around $1 trillion.

3 Pros of Investing in Mega Cap Stocks

There are several good reasons to consider making mega cap stocks part of your asset allocation strategy.

1. Diversification

Investing across different sectors and market capitalizations spreads out risk, since economic ups and downs may affect smaller, mid-sized and larger companies differently.

2. Stability

Established mega cap companies are among the most stable in the economy and may be better able to withstand a market downturn compared to smaller or newer companies without cash reserves or a solid brand reputation.

3. Dividends

Some mega cap stocks pay dividends to investors since they don’t need to reinvest profits into growth. That can provide an additional stream of income or allow for faster portfolio growth if they’re reinvested.

Cons of Investing in Mega Cap Stocks

While there are some things that make mega cap companies attractive to investors, it’s important to consider the potential downsides:

Limited Upside

Since many mega caps have already done most of their growing, there may be limited space for their share prices to increase.

Perception vs Reality

Market capitalization measures the stock market’s perceived value of a stock, not its intrinsic value. So mega cap status alone shouldn’t be considered a reliable indicator of a company’s fundamentals or financial health.

💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How to Invest in Mega Caps

If you understand the investment risk and potential rewards that come with mega cap stocks and you’re interested in adding them to your portfolio, there are two ways to do it. You can choose to invest in individual mega cap stocks, or you can put money into an investment fund, such as a mutual fund or an exchange-traded fund (ETF) that holds mega caps.

You can also look at investing in a market index that can give your portfolio exposure to mega cap stocks.

Buying individual stocks allows you to pick and choose which mega caps you want to purchase. But this may require more of a hands-on approach as you’ll need to research individual companies. There are similarities and differences, in that regard, between investing in mega cap and investing in small cap stocks.

Investing in a thematic ETF focused on mega cap stocks may be a simpler way to diversify with larger companies. This allows you to have exposure to more mega cap stocks in your portfolio.

ETFs can be traded on an exchange, just like a stock, allowing for greater liquidity and flexibility than traditional mutual funds. Lower turnover ratios can make ETFs more tax-efficient than regular mutual funds. Depending on which mega cap ETF you choose, you may pay a much lower expense ratio than you would with traditional mutual funds.

The Takeaway

Mega cap stocks refers to stocks that have a market capitalization of more than $200 billion, and in some cases, more than $1 trillion. As of June 2025, there are a few dozen mega cap stocks out there, but several companies may become mega cap stocks in the subsequent years.

Mega cap stocks offer stability and the potential for dividend income, though they may have lower upside than smaller stocks that have more room to grow. The right role for mega cap stocks in your portfolio will depend on your investment goals, risk tolerance, and time horizon.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

What are examples of mega caps?

Some examples of mega cap stocks include Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Amazon (AMZN), which have market caps of more than $2 trillion.

How many mega cap stocks are there in the U.S.?

Mega cap stocks are stocks with market caps of vastly more than $200 billion, and as such, there are many on the market – dozens, in fact. But there are only a relative handful with market caps of more than $1 trillion.

What is the difference between a large-cap and mega cap?

While mega cap stocks are typically defined as having market caps of more than $10 billion (often more than $200 billion), large-cap stocks have market caps ranging from $2 billion to $10 billion.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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

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Jun

2025

Money Managers Explained

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

Money managers can help individuals set financial goals, plot and implement investment strategies, and more. You may not think you need one, either, but an experienced, trustworthy, and savvy guide can be a tremendous help when trying to wrangle your finances. Amid the sea of financial professionals are money managers, who can take a hands-on approach with an investment portfolio.

Before hiring a money manager, however, it’s important to understand what they do, how they get paid, and how they may differ from other financial professionals.

Key Points

• Money managers provide personalized investment advice and manage portfolios, buying and selling securities based on market conditions.

• They have a fiduciary duty to act in clients’ best interests, ensuring accurate and beneficial advice.

• Benefits include expert guidance, time savings, and avoiding costly investment mistakes through professional management.

• Drawbacks include fees, potential conflicts of interest, and the cost of services, which can range from 1% to 2% of the portfolio.

• Fee structures vary, including management fees, hourly rates, fixed fees, and performance-based fees, with considerations for choosing a manager.

What Is a Money Manager?

Money managers are also known as portfolio, asset, or investment managers. They are people or companies that provide individualized advice about building a portfolio. They buy and sell securities on behalf of their clients, provide updates, and make suggestions for changes as market conditions shift. Clients include individuals and institutional investors like universities and nonprofit organizations.

Money managers have a fiduciary duty to their clients: They are obligated by law to put their clients’ best interests first. This may seem like a no-brainer, but it is not necessarily true of all financial professionals.

Investment advice must advance a client’s goals, not because it is more profitable for the advisor. For example, a money manager could not suggest a particular investment to a client just because the manager would receive higher compensation.

Fiduciary rules mean that advice must be as accurate as possible based on the information that is available. A fiduciary (from the Latin “fidere,” meaning “to trust”) is to take into account cost and efficiency when making investments on behalf of clients, and alert clients to any potential conflicts of interest.

What Makes Money Managers Different?

As you search for someone who can help you invest, you may encounter any number of titles, from asset manager to financial advisor, wealth manager to registered investment advisor. To make matters more confusing, “financial planner” covers a broad range of possible professions. They could be investment advisors, brokers, insurance agents, or accountants.

A potential client can check the registration status and background of a professional or firm on Investor.gov, the SEC’s Investment Adviser Public Disclosure website, FINRA’s BrokerCheck, and/or individual state securities regulators.

Here’s a look at some of the most common financial professionals you may encounter and what may make money managers different.

Registered Investment Advisors

Registered investment advisors, as the name suggests, provide investment advice to clients. They must register with the Securities and Exchange Commission or a state authority, and they have a fiduciary duty to hold a client’s interests above their own. They can manage client portfolios, making trades and offering advice on investment strategies.

Registering as an investment advisor means disclosing investment styles and strategies, total assets under management, and fee structure. RIAs must also disclose past disciplinary action and conflicts of interest.

Broker-dealers

A broker-dealer is an individual or company licensed to buy and sell securities. Brokers act as middlemen, buying and selling stocks and other securities for other people. When they are buying for their own accounts they are functioning as dealers.

Stockbrokers usually work at brokerage firms and earn their money by charging a fee for transactions they make.

Brokers register with the Financial Industry Regulatory Authority, an industry group. FINRA has enforced a “suitability” rule for them, meaning they needed to have reasonable grounds to believe that a recommended transaction or investment strategy involving a security or securities was suitable for the customer.

Now the SEC is enforcing a new rule, Regulation Best Interest, that establishes a “best interest” standard for broker-dealers. It requires them to stop referring to themselves as advisors if they aren’t working under a fiduciary standard.

Certified Financial Planners

Financial professionals who carry the CFP® credential have gone through the rigorous training and experience requirements required by the CFP® board. They must also pass a six-hour exam.

They have a fiduciary duty to their clients but can offer services that don’t require regulation. They can help with general financial planning, such as putting together a retirement plan or a debt reduction plan. They may make recommendations about asset allocation, investment accounts, and tax planning.

Money Managers

Money managers may offer a combination of the services mentioned above. They chiefly manage people’s investment portfolios, but they may also offer other forms of financial planning. They likely give investment advice, which means they must be registered as an RIA.

	Fiduciary?	Offer advice?	Area of focus
Money Managers	Yes	Yes	Portfolio management
Certified Financial Planners	Yes	Yes	Financial planning (retirement, etc.)
Broker-dealers	Sometimes	Sometimes	Facilitating transactions
Registered Investment Advisors	Yes	Yes	Investment advice

Pros and Cons of Hiring a Money Manager

HIring a money manager, like any other financial professional, can have its pros and cons.

Pros of Having a Money Manager

The advantages of having a money manager are rather obvious: You get expertise and experience in helping you make financial decisions. This can save you a ton of resources — such as time — when trying to decide your next moves. It could, potentially, save you money, too, in saving missteps that need to be rectified (rebalancing your portfolio, for instance). In short, though, the pros of hiring a professional are that you have a professional guiding hand helping you out.

At the end of the day, a money manager is theoretically better at managing money than the average person.

Cons of Having a Money Manager

Likely the biggest drawback, in most people’s minds, to hiring a money manager is that you need to pay for their service. Some people may also like to make their own decisions as it relates to their money, and have trouble handing over the reins, so to speak. There’s also the chance that a money manager has a conflict of interest or is not acting in your best interests — something to be aware of when looking to make the right hire.

How Do Money Managers Get Paid?

Money managers typically charge a management fee equal to a percentage of a client’s portfolio each year. On average, advisors charge between 1% and 2% of clients’ assets under management. But there are a lot of variables to consider.

A manager’s fees may be assessed quarterly, which could mean the amount you pay at the end of the year may be a bit more or less than if you were to pay annually.

An asset manager’s fees may also decrease depending on the size of an account. For example, fees on very large accounts may be smaller so that single clients don’t end up paying exorbitant amounts.

Asset managers and other financial advisors may also charge an hourly rate, especially if they are doing any consulting or working on a special project. They may also charge fixed fees for certain services. Some advisors and managers may earn a commission when purchases or trades are made. And there may be performance-based fees if a portfolio performs beyond an established benchmark.

Fee-only advisors earn their money only from the fees they charge clients. They do not earn commissions. This fact makes them distinct from fee-based advisors, who may earn money from fees and commissions.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Should You Hire a Money Manager?

Managing your money can take a lot of time and effort, especially if you have multiple investment accounts or you’re juggling a lot of assets.

Money managers typically have many advantages when it comes to choosing investments. Not only are they trained to make investment decisions but they typically have access to a lot of information — including analytical data, research reports, financial statements, and sophisticated modeling software — that the average person doesn’t have. So they may be better equipped to make informed decisions.

For investors who have struggled to understand how to best put their money to work in order to meet financial goals, a money manager may be able to help. A large portfolio isn’t necessary. Even those who are just starting out may be able to benefit from working with one.

Even if you’re just starting to invest, it may be worth it to look into hiring one.

3 Tips on Choosing a Money Manager

You can review some money management tips, but additionally, here are a few things to keep in mind when choosing a money manager.

1. Know What You’re Looking For

Before hiring a money manager, figure out what type of financial help you need. If you’re just starting out, you may want to hire someone who can help you put together a long-term financial plan, for example.

2. Check Credentials

An online check with one or more of the aforementioned official websites will show how long an advisor has been registered, where they have worked, and what licenses they hold.

3. Interview

After narrowing the search, it’s a good idea to speak to a few candidates to get an idea of how they communicate, how they typically work with clients, and how they are compensated. If an advisor is cagey about answering the latter question, that’s a red flag.

The Takeaway

With so many titles and options, from financial planner to broker and money manager, it might be hard to choose a guide to handle your finances. A money manager is a strategist who specializes in managing investment portfolios and has a fiduciary duty to clients.

There are a slew of different types of advisors, planners, and managers in the financial world, so it’s important to know the differences. It’s also important to keep in mind that hiring a money manager can have pros and cons. Bringing in professional help may not be the best route for everyone.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

What is the difference between a money manager and a financial advisor?

A money manager is a sort of subset of financial advisors, often with more specialized services offered to clients. The differences likely lie in the specific services and expertise offered.

Is it worth it to use a money manager?

If you value expertise and a guiding hand in the market, hiring a money manager may be worth it to you. Be aware, though, that there are costs to hiring a money manager, and the costs may not always outweigh the benefits for everyone.

Is it better to have a financial advisor or a financial planner?

Depending on your individual circumstances, goals, and needs, whether a financial advisor or planner is better will vary. Each may offer different services, so know what you’re looking for before hiring either.

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2. Microsoft

3. Apple

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6. Meta

7. Broadcom Inc.

8. Berkshire Hathaway

9. Tesla

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Money Managers Explained

What Is a Money Manager?

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What Makes Money Managers Different?

Registered Investment Advisors

Broker-dealers

Certified Financial Planners

Money Managers

Pros and Cons of Hiring a Money Manager

Pros of Having a Money Manager

Cons of Having a Money Manager

How Do Money Managers Get Paid?

Should You Hire a Money Manager?

3 Tips on Choosing a Money Manager

1. Know What You’re Looking For

2. Check Credentials

3. Interview

The Takeaway

FAQ

What is the difference between a money manager and a financial advisor?

Is it worth it to use a money manager?

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