I read an interesting article about resolutions during the holiday break before year's end. Most people like to set lofty New Year’s goals--run a marathon, lose significant weight, quit bad habits cold turkey. The advice given in the article was to set process goals rather than stretch goals. Instead of focusing on the end goal, it is better to work on the process and let the end goal come as a result of completing the process.
A resolution to run a few miles a week consistently, or to cook at home a few nights a week, is a better approach than resolving to run a marathon in under four hours or lose 25 pounds, for example.
The process mentality and controlling what is controllable is especially good advice for dealing with the hectic start for markets this year. Concerns about a China slowdown, geopolitical risk, plunging oil prices (and the confusion for investors who are also consumers of gas, as to whether the energy sector decline is a good or bad thing) contributed to a volatile start to the year.
As an adviser, our firm has been communicating with clients about (i) reviewing investment mix, (ii) finding the opportunities -- yes, there are opportunities to find value in down markets -- and (iii) acknowledging that the headline news about declines on the indexes can be scary for all types of investors, whether they are already retired or about to be.
Typically, we as advisers do a better job at technical aspects of managing portfolios during turbulent markets and are less effective assuaging nervous investors, although I like to think we can add value by taking emotion out of decision making.
For investors who don’t currently work with an adviser, or for those clients of advisers who are still anxious, I think this is where the process mentality can be valuable. Focus your energy toward aspects of financial planning that can be controlled versus fretting about market volatility that cannot be controlled. Accumulating and preserving wealth requires a deft combination of investment return and acute attention to seemingly small financial planning details that, if neglected, can derail even the best asset allocation strategy. These process tasks are crucial to reach our financial stretch goals.
So here is a checklist of some detail-oriented and bigger-picture “process” items to consider as we move into the New Year to help investors achieve their financial goals:
Beneficiary Designation Mistakes
- Naming your estate as the beneficiary of your life insurance policy. Generally, naming an individual for a personally owned policy, or the trust for a trust-owned policy, is the appropriate method. Failure to follow this advice will subject the proceeds to probate or intestate administration, which delays access to the funds by surviving family members. The proceeds are now subject to estate taxes regardless of how policy ownership is structured.
- Failure to name a contingent beneficiary. All financial products that allow for a beneficiary designation should have a primary and secondary (contingent) beneficiary. This includes life insurance policies, annuities, and investment accounts. This ensures that the asset will go to the individual intended, even if the primary beneficiary predeceases.
- Naming a minor child as a beneficiary to life insurance policy. Insurance carriers will not pay benefits to a minor. This will lead to court proceedings to designate a custodian, conservator or trustee to receive the proceeds. Going to court delays access and use of the proceeds and creates unnecessary expense. If a minor is intended to be a beneficiary, then a trust or Uniform Transfers to Minors Act Account should be named as beneficiary.
- Failure to remove ex-spouse as beneficiary. A divorce may not automatically remove the ex-spouse as a beneficiary, depending on the financial product type (especially qualified retirement plans) and the laws of the state of residence. Make sure to change the beneficiary immediately upon a divorce. The Supreme Court ruling legalizing same-sex marriages may create a situation where the same-sex spouse will automatically become a beneficiary under ERISA-covered plans such as a 401(k). To designate someone other than a spouse as the beneficiary, account holders will need to obtain consent of the spouse to make the designation effective.
Protect Your Assets
- Make sure that you have adequate amounts of life and health insurance, disability protection, car and home insurance, business coverage, and an umbrella policy to cover catastrophic liability loss.
- Investment diversification will provide you with added safety and the highest after-tax return possible. It is necessary to diversify the types of investments as well. You should always have some growth, some income, and some liquid cash investments as well. Most important of all, have an emergency fund that you can tap into anytime so that you will not have to sell other investments at an inopportune time.
Evaluate Investment Costs and Fees
- The average actively managed equity mutual fund charges 0.89% annually. Index mutual funds that do not use a professional to manage the portfolio charge 0.12%. Exchange-traded funds (ETFs) that trade on an exchange all day have an average expense ratio of 0.5% for an index ETF (pay attention to trading costs as well, but with discount brokers these are costs are usually small). That hedge fund your wealthy friend suggested has an average annual fee of 1.5% of assets, along with 18% of any investment gains. It is important to keep these fees in mind when you are building an investment portfolio, and make sure you understand which products your adviser uses.
- There are many ways that advisers are compensated. If you are paying an annual charge based on the size of assets being managed, fees vary widely, but typically someone with $100,000 will pay 1.25% per year. The key here is to make sure you understand what you are paying for -- and that it is usually negotiable. Be wary if an adviser tells you that you do not pay a fee directly. What is probably happening is that he or she is being compensated by a 12b-1 fee or other sales charge directly from the mutual fund company, and although the fee may be competitive with other fees, you will have a hard time discerning what you are actually paying for without doing some research.
Robert Altshuler, JD CLU CHFC, founder of PlanningCore Wealth Advisors LLC, provides investment and estate strategies to entrepreneurs, executives and affluent families in Phoenix, Arizona.
Robert Altshuler, JD, CLU, CHFC, is founding partner of PlanningCore Wealth Advisors, LLC. PlanningCore, a registered investment advisory firm headquartered in Phoenix, Arizona creates individualized investment and estate strategies to help clients navigate risk. PlanningCore clients have already achieved success and our highly credentialed professionals advise them to make smart decisions to protect their core wealth. Every client's financial journey is different, but PlanningCore's mission is always the same, to know and understand the destination.
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