Allan S. Roth, CFP, CPA, president of Wealth Logic, LLC, a financial advisory firm in Colorado Springs. He is author of How a Second Grader Beats Wall Street: Golden Rules Any Investor Can Learn. DareToBeDull.com
Turbulent investment markets and soaring inflation are prompting more Americans to use financial advisers to navigate their increasingly complicated financial lives. In a recent Harris poll, 38% of respondents now work with an adviser, up from 29% before the pandemic.
Getting good financial advice doesn’t come cheap. Expect to pay anywhere from $2,000 for an adviser who charges by the hour to create a basic financial plan…to $10,000 or more if you have large assets and want someone to manage your savings, spending and investing.
Bottom Line Personal asked these leading advisers for their candid thoughts about what our readers should do to get the most value from their services…
Ask your adviser to explain everything so that an eight-year-old could understand it. Personal finance suffers from confusing jargon. Never put up with an adviser who speaks over your head or makes you feel ignorant. Be on guard against advice that contains trendy buzzwords such as “SPAC”…“blockchain”… “financial derivatives”…and “variable annuities.” Most of us don’t need to complicate our lives with these expensive products. In fact, in financial planning, simple almost always works better than complex. The more complicated your financial plans and portfolio are, the easier it is to make mistakes.
Don’t expect your adviser to beat the stock market for you. That may seem like the only goal if you follow stock guru Jim Cramer on CBNC, but it is more likely to result in lower returns. The stock market doesn’t care whether you want to pay for your child’s college education or when you are going to retire. A financial adviser’s job is to help you shape reasonable financial goals, then try to achieve the investment returns necessary to meet those goals. In fact, if your lifestyle and retirement depend on your portfolio trouncing the long-term returns of the S&P 500, you should rethink your plans. Reasons: You have a very low probability of beating the market and you don’t want to remain 100% invested in stocks as you get older. Most people can’t afford to take that risk near or in retirement. Also, picking market-beating mutual funds over long periods is nearly impossible. Over the past 20 years, 90% of all domestic equity funds have underperformed the S&P Composite 1500 index. Your chances of meeting your goals successfully are much higher if you base them on the returns you would get from a diversified portfolio with low costs and high tax efficiency.
Be honest about how much risk you can tolerate. Advisers typically gauge risk tolerance by asking generic questions such as, “Could you stand losing 25% of your net worth in a given year?” But that question is too abstract to be enlightening. Instead: Ask your adviser to translate these losses into real-life consequences for you. Example: Would you risk losing 40% of your portfolio in a single year if it meant you could no longer afford to send your child to that prestigious college that she worked so hard to get into? Or, “How would you feel if you lost 30% and had to postpone buying that dream house on the lake for another five years?”
Sometimes, a client insists that he has a higher risk tolerance than an adviser thinks is mandated. In that case, I ask the client to prove it. Say he wants to hold 70% of his portfolio in stocks, and I think 60% is more appropriate. I tell him, “Let’s start with 60%. Then if the stock market declines more than 20%, you can raise your allocation if you still want.” This tests the client’s resolve and his real-world appetite for risk in volatile markets, as well as forces him to invest in stocks at lower prices.
Get financially naked. Meeting with a financial adviser is a lot like getting a medical checkup. The greater the clarity, quality and candor of the information you provide to the adviser, the more effective the diagnosis and treatment you receive. Don’t hide anything, no matter how embarrassing. People are most secretive about credit card debt…bad investments…important actions they’ve put off until they reach crisis levels such as not filing taxes or missing mortgage payments…and exorbitant expenses. Some people don’t want to reveal how much they spend on golfing…for others, it might be shoes and clothing. Whatever your situation, the adviser has heard worse. You don’t hire her to judge you…you hire her to figure out how you can afford to live the life you want.
Alert the adviser to blind spots. Communicate big life events to your adviser even if they don’t seem urgent or directly tied to the rest of your life at the moment. Example: I had a client who discussed his personal finances and goals with me in great detail. Together, we created a sensible and comprehensive plan. At our last meeting, he casually mentioned that his mother had early-onset Alzheimer’s disease. There was a very real possibility that he would have to support her within the next few years, and that changed everything—from how long he would stay in his house to his life insurance needs since no other family member was going to support his mother if he died. Not only that, the disease can be hereditary, so this news opened up the possibility that he might be wise to invest in long-term-care insurance for himself.
Get on the same page as your spouse. It’s not unusual for one spouse to want to retire early and buy a vacation home…while the other wants another child. Advisers can help couples figure out the path to reach their financial goals and the trade-offs they’ll need to consider, but the process works best when the spouses have been up front about their goals with one another and have reached some consensus. How to start: Begin with an honest assessment of what you make, spend, owe and own. These very important data points will be the jumping-off point for your financial planner to develop strategies and deliver advice to help you reach your goals. Without these facts about your financial life, setting and prioritizing financial goals may be difficult.
Listen when the adviser warns you against certain actions. One of the most valuable services an adviser can provide is accountability and discipline, especially when the unexpected happens. Example: At the beginning of 2022, after the bond market suffered its worst first quarter in decades, many of my clients called me in a panic, insisting, “I can’t take the pain. I think I should get out now!” My reply: “When you don’t know what to do, trust the investment plan we created. We knew a bond bear market was coming. Your bonds will continue to throw off enough steady income to meet your needs and you won’t be touching your principal, so there’s plenty of time for your individual bonds to recover or mature.”
One client chose to ignore my advice. When that happens, I ask the client to…
Take baby steps. For instance, sell a little bit of your bonds this week…a little next week…just enough to take the edge off your anxiety but keep you on track long term. The people who experience the worst investment outcomes take binary action, either all in or all out.
Strategize about what else would make you feel safe, other than bailing on beaten-down investments. Example: Maybe you can boost your sense of security by increasing your emergency cash fund or putting off a big purchase.