New Year- New Decisions to Make

“I don’t really need wealth management services.”

We find that some people are uncertain what wealth management services actually encompass.  Some think of advisors as purely investment focused.  Others think advisors simply throw clients into cookie cutter asset allocations.  We focus on educating our clients and prospective clients on the benefits of integrating comprehensive financial planning with customized portfolio management in an all-encompassing service to seek to accomplish the long-term financial goals of high net worth individuals and their families, charitable foundations, and trusts.  We find the following questions help provide a better picture of what comprehensive financial planning encompasses.

Estate Planning

• When was the last time you reviewed or updated your estate plan?

• Are you familiar and comfortable with your trustees, guardians, and dispositive provisions?

• Do you understand the ramifications of state estate taxes?

• Do you have an updated living will, health care proxy, and power of attorney?

• If you are a trustee of a trust, do you understand your fiduciary obligations?

• When was the last time you reviewed your beneficiary designations?

Retirement Planning

• What do you feel you’ll need in retirement to maintain your standard of living?

• What are you doing about saving for retirement and what is your plan for withdrawals from each account?

• Do you understand the options you have as to when you will claim your social security benefits?

• Have you considered the compounding effect of inflation on your retirement income plan?

• What is your retirement health insurance plan? Do you understand the differences and requirements for Medicare Part A, B, Medigap?

Investment Management

• Do you have an Investment Policy Statement for your investment assets?

• Do understand the risk and reward profiles of your investments?

• Do you receive an investment performance report that helps you understand whether you are on track to meet your goals?

Risk Management

• Do you have a plan for a financial emergency?

• How many months of cash and cash equivalents do you maintain for unexpected expenses? In what type of account do you keep your emergency funds?

• Do you understand your benefits, if any, from your short or long-term disability insurance policies?

• Do you have a home equity line of credit as a form of “insurance” should you need to draw from it in the future due to unforeseen circumstances?

• Have you considered whether you need life insurance and whether the insurance should be owned by a trust?

• When was the last time you reviewed your homeowners and automobile insurance? Do you have an umbrella liability policy?

Tax Planning

• Do your investment managers proactively work with your accountant to manage the tax implications of your investments?

• Do you understand the benefits of owning certain types of investments in different types of accounts?

• Do you have a plan to take advantage of your changing tax circumstances from year-to-year?

We advise clients to:

• Set measurable goals.
• Understand the effect your financial decisions have on other financial issues.
• Re-evaluate your financial plan periodically.
• Start now – don’t assume financial planning is for when you get older.
• Start with what you’ve got – don’t assume financial planning is only for the wealthy.
• Take charge – you are in control of the financial planning engagement.
• Look at the big picture – financial planning is more than just retirement planning or tax planning.
• Don’t confuse financial planning with investing.
• Don’t expect unrealistic returns on investments.
• Don’t wait until a money crisis to begin financial planning.

The process is broken into the simple components:

  • Financial Planning
  • Portfolio Management
  • Investment Implementation
  • Investment Management
  • Client Communication

“Am I really getting my money’s worth? What am I paying for?”

Wealth management is not just investment portfolio management.  Our clients are getting much more than just a portfolio from us.  We’ve always stressed that advisors are not stock pickers.  We are not going to put our clients into a “hot trade” that will make millions.   We know that some people enjoy the thrill of investing in single-name stocks or participating in speculative deals.  We liken that to simply betting for thrills.  An advisor should encourage the client to minimize those investments to a small percentage of their overall assets and assume potential full loss of principal.   It’s not prudent to bet the farm, but some people enjoy the game of betting.  We believe in diversification and implementing a portfolio that is in line with the client’s risk tolerance and objectives.  We provide full transparency with regards to the underlying portfolio components.

One of the most important benefits of an advisory relationship is that the advisor should see that your portfolio stays disciplined and does not let emotion drive decisions.    Data suggests that market participants typically buy at the highs and sell at the lows purely due to emotions. Investors who got scared in 2008 and pulled out of the equity market completely did not get to enjoy the ride to recovery the following year.    An advisor should monitor and periodically review the asset allocation of your portfolio.   For example, data from the Journal of Financial Planning (“Opportunistic Rebalancing: A New Paradigm for Wealth Managers” January 2008) illustrates that advisors who review their clients’ portfolios every 20 days and rebalance as necessary have been shown to add approximately 40 bps a year to the bottom line.

We find that many people are confused by the costs of an underlying portfolio.   We help break out costs and illustrate how costs are crucial to the historical returns of a portfolio.   We often find that clients don’t understand the various components of costs that one potentially pays (i.e., 1) your advisor’s management fee; 2) product fee; and 3) brokerage fees/custodian transactions).  We advise clients who are working with an advisor (or considering it) to have a discussion to get complete transparency as sometimes these fees can be buried in a proposal.   We also stress that fee-only advisors are only compensated by the management fee while brokers are typically compensated by transactional fees/commissions, but that some self-proclaimed fee-only advisors may not actually be fee-only. There is a need to dig deeper to make sure the fee-only advisor is not benefiting in any fashion from product recommendations (i.e., referral programs).  We would recommend that, as prospective clients compare various advisors, they make sure they are comparing apples to apples versus just the management fee.  We’ve offered on many occasions to evaluate another advisor’s recommended portfolios to help calculate overall costs and uncover any potential conflicts of interest.

 

About the author

Tom Orecchio, CFA, CFP®

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