In the field of wealth management, a topic that is widely misunderstood by individual investors is compound interest.

Recently Treece Investments launched a banner ad on 1370 WSPD Toledo’s Web site (www.wspd.com) with a focus on this subject. Titled “The Power of Compound Interest,” the ad shows a calculation revealing how much money an investor would have if they saved twenty dollars each week for fifty years, making an average of ten percent per year over the life of the program.

For those who haven’t seen the ad, the result of this calculation is absolutely remarkable. An investor who met these conditions would, at the end of their fifty years, be a millionaire, with $1,331,511.37 accumulated between savings and interest.

This ad reveals several crucial aspects of investing. First and foremost it is an excellent illustration of the importance of saving early. If an investor began saving their $20 per week at age 20, they would have massed their $1.3 million fortune at age 70.

If, on the other hand, they waited until age 30 to get serious about saving, assuming they put away the same amount of money, when they hit 70 they would have less than half their younger, more responsible counterpart, or roughly $506,000.

This concept of getting serious about saving early in life is perhaps the biggest obstacle for individual investors. Most people, particularly younger segments of our population, have quite a bit of difficulty committing to a plan to put money away over a long period of time.

Equally difficult, is once an investor begins to see some wealth accumulate,  they must resist the temptation to spend that money on any number of unnecessary purchases. This has been widely popular in recent history and has been reflected in economic numbers, particularly in the historical US savings rate, which had been negative for several years leading up to the collapse that began in 2007.

The second important revelation from this ad is the incredible importance of finding a way to achieve a decent rate of interest on money that has been saved away. The most common solution to this obstacle is finding a sound financial advisor.

The search for a financial advisor can, of course, be a task in itself. This has been discussed in detail previously, particularly in my article from January of 2009, entitled “How to pick a financial advisor.” While I encourage readers to refer to this earlier article as a resource, the following are two of the critical things to look for when searching for a reputable advisor.

First and foremost, investors are strongly urged to check into a broker’s history with FINRA, the regulatory agency that oversees brokerage firms and individual brokers. Investors can go to www.FINRA.org/BrokerCheck to look into broker histories. Any complaints filed against a broker are revealed in this documentation and they should be of particular concern to investors.

The second major concern for investors ought to be an advisor’s returns net of fees. While obviously investors should not choose any one advisor for returns alone, making money is, in the end, the driving force behind any financial relationship. After a decade of no returns in stocks, this metric can be especially revealing about how much value a particular advisor actually adds to their clients’ portfolios.

One last issue for many investors, particularly those who have had success in saving and investing, is how to responsibly pass their accumulated wealth on to future generations. While some argue that giving kids any substantial sum ultimately does them more harm than good, there are smart ways of going about the transfer of wealth.

For years one of the most popular methods for transferring wealth, particularly among the super-rich, has been through trust accounts. Trusts have long been used to transfer wealth in a controlled manner, prohibiting beneficiaries from losing control of their spending.

However, more recently this fantastic legal device has gained popularity among all Americans. No longer are trusts reserved for Americans on the top rungs of the socio-economic ladder. Trusts have become significantly more commonplace, in part because they have become much more economical to establish and administer.

While there are certainly fees associated with trusts, they can be very worthwhile in aiding with the controlled transfer of wealth. In addition to trusts, there is an ever-growing list of retirement plans provided by the government, which many investors can easily take advantage.

Because individual circumstances vary among investors and goals quite often differ, I encourage investors to speak with a financial advisor to learn which plans can benefit them, and how. A reputable financial advisor can help investors to navigate the sometimes confusing world of finance, and they should be utilized as a valuable resource in a wide range of capacities.

Dock David Treece is a stockbroker licensed with FINRA. He works for Treece Financial Services Corp (www.treeceinvestments.com), serves as editor of the financial news site Green Faucet (www.greenfaucet.com) and as a business commentator for Toledo Free Press. The above information is the express opinion of Dock David Treece and should not be construed as investment advice or used without outside verification.

This entry was posted on Thursday, February 4th, 2010 at 8:21 pm and is filed under Toledo Business Link, Treece Blog.
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