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In the complex and confusing world of investments, a financial adviser may be the key to your future success. But understanding their limitations may be just as important to your prosperity.
Investment professionals whose income is based on your total assets, charge you an assets under management, or AUM, fee. They may perceive your financial options from their perspective without looking at your whole portfolio. Your investment adviser may have grown your assets and done well for you over the years, but their focus on AUM may directly or indirectly result in misleading guidance in two ways:
1. How and when they recommend enacting your goals.
2. Placing unnecessary limits on your spending.
No one wants to run out of money in retirement. However, when investment professionals fail to understand your priorities, their advice may put you a bit off track or worse, cause tax issues or unnecessary stress.
Read: How do you know if you should fire your financial adviser?
Calling in other professionals to match your goals
You may need to think beyond your investment adviser when your goals are more diverse than just investing. Having a team working on your behalf is practical and may guide you and your adviser to accomplish your financial vision. You may want to bring in an objective Certified Financial Planner or a financial team to explore the best technique to distribute those assets according to your wishes. An accountant who will help you plan how to support your financial mission while saving taxes.
If part of your financial strategy has always been motivated by gifting to others, be sure to get the best advice for this part of your financial plans. The adviser may be great at investing, but not distributing charitable gifts. They may even believe that waiting until your death is the best way to support your goals when there are other options. A philanthropic expert with experience in gifting strategically develops plans that guide you to assist charities while maintaining the income you need.
For example, Michael and Anne wanted to give to an important charity that had helped their disabled son, who had died too young. Rather than leave their adviser, they sought out the assistance of the foundation for the charitable agency. Once they understood their options for giving, they all sat down together: the couple, the professional charitable counselor, and their adviser. They came up with a solution to help the charity while lowering the capital gains they were paying taxes on each year. By donating stocks with capital gains instead of selling them, they accomplished several goals at once. They requested that stocks valued up to $10,000 with gains be given to the charity each year. With this in mind, the adviser continued to manage their money with their intentions in place.
Read: Want to live to 100? Here’s the No. 1 predictor of whether you’ll make it.
Asking to understand projections
Some financial professionals put unnecessary restrictions on their clients. For example, Robbie and Sally’s financial adviser suggested they must conserve funds and live on less to have enough assets to take them to age 100; however, the projections never considered their substantial cash in the bank, the value of their home or shared real estate with family. This induced unnecessary fear in both of them.
What are you to do when your longtime adviser is concerned about your spending? Do not change advisers because you do not like your current one’s suggestions. Instead, begin to ask a few questions. Often, the computer programs do not consider all your assets.
Though following up with questions sounds reasonable, some clients feel it is “challenging the expert.” Yet, most financial planners welcome an open dialogue because it shows that the client is engaged in their money and the presentation. There are no right or wrong answers when it comes to investing and planning as the future is unpredictable. Yet, the more we know about our money the better. You’re not questioning authority, you’re really learning more about your money.
This scenario often crops up with older investors who may have been frugal all their life and defer to authority, may listen without questioning the professional, who may only be looking at their investment portfolio instead of their total net worth.
If your parents or elderly friends say, “This is all I can spend according to my financial consultant,” there may be more to the story. If your relationship is close enough to share financial information, look into the details by asking what the projections are based on. Understanding the interest rates used, age at death and total net worth used in projections are critical. Typically, those details can be adjusted to create various projections, called a sensitivity analysis.
Here are the other sources of income that need to be in spending projections, beyond investments:
1. Selling your home
2. Reverse mortgage or home equity while living in your home
3. Charitable trusts
4. Annuities, life insurance policies and other assets you currently own
5. Business ownership
6. Cash in the bank
7. Defined-benefit pensions
There is always more than one answer when it comes to personal finance and retirement planning, even if the other option is to do nothing. You hired a professional to objectively analyze your financial picture from all sides. They need to save you time and energy to earn their fee, no matter how much you are paying them.
Meet regularly with your team to know your options
Your long-term investment adviser has hopefully helped you grow your portfolio and understands your risk tolerance – that is their specialty. They study the market and want to be conservative with your money. These are all strengths, but
Be sure to ask the right questions to know they considered all the options:
· How do the rest of my assets affect the withdrawals you are recommending?
· What other strategies can you suggest I consider over time?
· How does my net worth vs. the assets under management with you affect the fees I am paying you?
This is not about doubting your investment adviser, instead, it is about realizing the money in your investment portfolio is first and foremost yourresponsibility. Understanding the answers to the above questions makes you a better steward of your money. The buck stops here. Literally.
Meeting with your investment team at least annually is the way to stay connected and understand how they can help you. By sharing your changing life and thoughts, they can serve you better. The meetings are essential to mutual understanding and success. Be sure to make that happen in person or virtually on a regular basis.
If at any point you are not comfortable with what your adviser is telling you and saying to you, get a second opinion. This is your money and seeking objective guidance from an experienced hourly planner is another tool in your toolbox to stay in touch with all your money and what it can do for you. Many people seek second opinions from doctors and/or seek specialists for certain physical ailments. The same approach needs to apply to finances.
Investing your time and effort into your relationship with your investment professional assures you understand their work on your behalf and their limitations. With knowledge, you will ask better questions, create a long-lasting relationship, and have a prosperous financial future.
CD Moriarty, CFP, is a Vermont-based financial speaker, writer and coach who wants to create financial peace of mind for others. She can be found at MoneyPeace.com.
