Clients often equate wealth management with providing investment advice, but investments are just one subset of a strong financial plan. The others — risk management and tax planning — are also integral to the achievement and preservation of wealth, but they are often treated as afterthoughts. Beyond managing your investments, your adviser should be an accountability partner for your financial fitness.
Here are five key ways you can expect your adviser to keep you in shape:
1. Remind you to take care of yourself first
Many of our clients, baby boomers in particular, find themselves “sandwiched” between aging parents with ongoing health care needs and grown children who are saddled with student debt. Meanwhile, retirement age approaches.
While hope may sustain some of us, financial plans should not be built on it. Boomer parents often assume that their kids will repay their generosity by caring for them in their dotage, for example, but these expectations are not based in financial or logistical reality. Nor is the expectation that markets will bridge the gap; a long-term investment plan can be tweaked as life circumstances change, but not to the extent that the client is left assuming intolerable risk in order to meet the needs of multiple generations.
Remember what the flight crew says during their safety demonstration: Put on your own oxygen mask first. Your accountability partner is there to remind you that limits are healthy.
2. Nudge you back on track when you fall behind schedule
And yet, indulging ourselves and loved ones is one of the joys that make our sacrifices worthwhile. Just as we might work out a bit extra to mitigate the calorie count of a decadent dessert, your adviser can help you shift priorities within a budget to accommodate a splurge.
3. Get you through the ‘boring’ parts of financial fitness
Some of us love to study markets and individual securities. Maybe it is hard for you to stay on the sidelines when the hottest tech stocks keep rising. Investment decisions matter, but so do less-exciting considerations, such as where you own your investments and how you can maximize your after-tax return.
Suppose half of your investable assets are in certificates of deposit (CDs) and the other half are invested in index funds. A skilled adviser can help you determine whether each asset type is held in a structure that will maximize after-tax returns. CDs held in a brokerage account, for example, generate income that is taxable in the current tax year. These income-producing assets may be better suited to a qualified account, such as an IRA, where the income would accrue tax-deferred or tax-free. Your adviser can help you determine whether a switch would be beneficial, explain the tax implications and shepherd you through the process. When you start to draw from your portfolio, owning assets in the right place may make your investment proceeds last up to seven years longer than they otherwise would.
Where you own what you own can affect future generations, as well. Receiving an inheritance in the form of a Roth (vs. a traditional) IRA could make a difference of tens or even hundreds of thousands of dollars to a young, high-earning individual, as the tax-free distributions are stretched out over their life expectancy. Real property and other assets subject to a step-up in cost basis to their value at the time of death can also make for efficient bequests to beneficiaries in high tax brackets. Accounts subject to ordinary income tax, such as deferred compensation or a deferred annuity, make better gifts to those — including charities — who will not feel as great of a tax impact.
Making these adjustments requires knowledge, focus and a lot of paperwork. Like a good workout, it may be painful but is made much easier by the help of an accountability partner.
4. Protect you from the unforeseen scenarios that you would rather not think about
Yes, we are all aware of our mortality and yes, we know that life insurance can help to protect our loved ones, especially in cases where death occurs in an untimely manner. Yet despite widespread knowledge of those eventualities, far too many of us are uninsured or under-insured.
Moreover, even those of us who believe we have dotted that “i” are likely leaving some “t’s” uncrossed. Executives holding a chunk of their wealth in stock options and grants may not realize that these employee benefits may evaporate when said employee is no longer living, particularly if the options are not vested or exercised. In order to protect one’s spouse and any dependents, therefore, it may be prudent to purchase life insurance to cover the options’ value.
The byproducts of living a full life can hurt our finances as much as death and disability. Grown children get into accidents and incur life-changing expenses. Lawsuits happen. Umbrella insurance policies can mitigate these and other risks.
5. Orient you toward truly meaningful goals
Many new clients are surprised to learn that beating the S&P is not a worthwhile financial goal. Just since 2000, the S&P has seen its value halved twice. If your adviser had triumphed in your portfolio’s 40% decline in 2008 because it beat the market by 10 percentage points, would you have clinked champagne glasses or headed for the exit? What if that 40% decline had coincided with your retirement and converted your $1 million nest egg into a $600,000 shadow of itself just as you lost much of your capacity to replenish it? Your accountability partner can reorient you away from a relative performance mindset and set you on the course to an absolute financial goal.
It Don’t Mean a Thing If It Ain’t Got That Swing
Can investment performance alone get us to our financial goals? It is highly unlikely. The hotly debated questions of modern investment management — for instance whether to use ETFs or professionally managed funds — can impact ultimate outcomes in the way a professional-caliber putter or driver can improve your golf score. If your swing is terrible, the best clubs will just cause you to hit the ball farther in the woods. Similarly, without a financial plan and an accountability partner to keep it on track, it is difficult to deploy even the most sophisticated financial instruments in service of your goals.
Financial advice — delivered properly — is a dynamic combination of the swing and the clubs: a financial plan and vigilant implementation.
Advisory Services offered through MACRO Consulting Group, a registered investment adviser with the Securities and Exchange Commission. MACRO only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.
Mark Cortazzo, CFP®, CIMA® is the founder and senior partner of MACRO Consulting Group, an independent wealth management firm located in New Jersey. He offers expert financial advice as an Investment Adviser Representative and retirement planning specialist. With over 25 years of experience in financial services, Cortazzo has been profiled in many publications and has earned numerous industry awards and accolades.
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