Frequently Asked Questions
Click on the questions below to get an explanation.
1. What is financial planning?
Financial planning is an ongoing process, not a one-time event as many financial advisors would have you believe. It can be as basic as setting up a basic budget plan for someone just starting out, or it can be a very thorough analysis of the major components. These include cash flow and liability management, insurance and risk management, employee benefits, basic income tax planning, retirement planning, and basic estate planning. Once you’ve had your financial plans reviewed, you should clearly know what your strengths and weaknesses are and then begin to address them.
It should ALWAYS cost you money to have a financial planner work with you. Any services to be provided should be tailored to your exact situation, along with a firm price quote and some sort of guarantee of satisfaction. The idea that an unbiased review of ANY aspect of your finances can be both free of cost AND objective should sound inconsistent, because it is. A good financial planner, just like a good Certified Public Accountant, must charge for his or her time because nothing else can be sold except knowledge and advice.
2. If I have already retired, why should I worry about having an independent financial planner work for me? Shouldn’t my Social Security, pension, and current methods continue to take care of me?
Maybe you shouldn’t, and maybe they will. Having an independent advisor review your investment and financial plans may actually validate that everything you are doing is fine. You could also be one of the fortunate few who has accumulated enough wealth that you simply do not have to worry. The reality for most retirees is that they need to be very concerned about how and where their money is invested and how they draw income from it during retirement.
Another factor to consider is the time and worry of managing your personal finances while in retirement. A competent financial advisor can usually find ways to improve the bottom-line performance of your money such that his or her fees are partially or completely offset. Any remaining cost could then be thought of as “buying a stress reducer”, a trusted advisor who is always looking out for your financial well being.
3. Can’t most people manage their investments and finances by themselves?
There may be more home improvement “do-it-yourself-ers” than there are who manage their own finances, but not by a wide margin. The bottom line is results, that is, how well do folks do who invest and manage their own money? It has been our experience that some people do it well but most do not. Many confuse information with knowledge, and lack any perspective or strategy that minimizes their own emotions getting in the way. So while it is true that many people do manage their investments all by themselves, not many do it well. Actually, Main Street Advisors maintains that it takes a matrix of time, desire, and ability for an individual to properly steward his or her money. Whichever one of these three components is lacking most will serve to decrease the effectiveness and efficiency of anyone’s financial plan the most.
It has been the experience at Main Street Advisors that perhaps one individual in seven or eight can (and therefore should) manage his own investments and finances. All of the others should (and eventually will) migrate towards an advice model that suits them. The more money and less time they have, the sooner this should (and eventually will) happen.
4. With all the information available today through the Internet and various financial publications, aren’t financial advisors becoming less important to me?
On the contrary, the very blizzard of information now available has caused more stress and concern than ever before. Most people do not like to play chess with a dozen onlookers shouting out suggestions and strategies. Yet that is how many feel today, as megabytes of confusing and conflicting information come from the press, television, radio, and the Internet. With a strong inclination, adequate time, and an acumen gained over time, the competent “do-it-yourselfer” can truly feast on today’s avalanche of financial information and advice. For the others, who may constitute six out of seven persons, Main Street Advisors maintains that they already work with trusted financial advisors OR they soon will, provided the service model makes sense to them.
People who do not consistently manage their own finances, especially when they have accumulated more money and have less (or no) time remaining to earn it, will eventually seek advice from trusted, competent sources. Many will want a fiduciary relationship with their advisor once they learn how important it is.
5. Explain the difference between the terms “retirement planning” and “retirement management”.
Retirement planning is one of the major components of financial planning, and includes the proper coordination of employer qualified plans, IRAs, annuities, and projected Social Security benefits into a cohesive strategy. For example, while you are working you need to be in a saving phase for retirement; retirement planning involves assessing where you stand versus your goal and then maximizing the annual contributions to retirement savings vehicles, perhaps by minimizing costs elsewhere. Retirement planning also includes insuring against loss of income due to disability or death as well as other considerations.
Retirement management is a separate phrase that simply connotes arrival, that is, the state of being retired and the need to properly oversee that current living standards are maintained or improved. Since many mature adults learned from an early age to “do without” and “tough things out”, they do not immediately notice a problem with tight cash flow, for example. Due to ingrained behaviors learned from past experiences during more difficult times in a different era, many tend to eschew outside advisors as “too costly”. When and if these people begin to work with a truly competent and trustworthy advisor, however, they benefit tremendously. Still, Main Street Advisors constantly encounters retirees who are needlessly wasting money due to
- poor income tax planning;
- unnecessarily high investment costs due to excessive trading of a securities account;
- unnecessary insurance coverages; and
- disjointed or improper income strategies.
Other problems include deficiencies in their risk protection strategies and a lack of basic estate planning. Today it is unnecessary for retired persons to “go it alone”, as retirement management administered by competent and trustworthy advisors can make retirement a less-worrisome endeavor.
6. There seems to be a huge debate between “fee-only” advisors and those who take commissions. How important is objectivity in the investment advisory and financial planning businesses?
Main Street Advisors believes it is of paramount importance to be with an advisor who works only for you. People need to know and trust that their financial advisor is motivated purely to help them and not any other entity. A competent advisor needs to have clients who trust him or her as well, so anything that interferes with these trust factors must be discarded because this “new” advisor relationship is about more than just picking investment products or buying life insurance. It’s about a total approach to money.
Just like their doctor, CPA®, or attorney, people want to know and trust that their financial advisor is motivated purely to help them and not by other financial incentives. While trust must be earned over time, people just starting to work with a fee-only advisor can take comfort from its oath of a fiduciary. Many people find it hard to believe that they can have a relationship with their financial advisor that is as completely open and confidential as the one they have with their doctor or attorney. They need to know that this current trend will soon be widespread.
7. I heard you refer to “optimal sources for drawing income during retirement” on a radio show once. Tell me about that.
This refers to setting up and timing the mix of income sources during your retirement as well as how to fund that income. Common questions include should you take early but reduced Social Security benefits? How much should you draw on your IRA? Should you roll over your retirement plan or accept a fixed monthly annuity payment?
Traditionally, income was derived from bonds and high-dividend-paying stocks such as electric utilities. However, the real focus should not be on investment vehicles that produce high levels of current income but on the total return of one’s entire portfolio. For example, if your account is assumed to return 6% annually, perhaps you can draw a fixed monthly income equal to a 4% rate of withdrawal.
Bottom line: The overall mix-and-match between Social Security, fixed pensions, annuities, IRAs, and taxable investment portfolios should be optimized for income tax and long-term investment return considerations. Retirement income should never be constrained to high-yield investment vehicles or, worse, by a misunderstanding of the “big money picture”.
8. What are the most common mistakes you see people make in their investment and financial planning?
- a focus only on risk and not on return, or vice versa
- lack of concern over “details” of investments or financial plans
- insufficient diversification in your investment portfolio
- abandonment of investment strategy during difficult periods
- not having a current will, and not keeping beneficiary designations up to date in retirement, IRA, and life insurance programs
- failure to coordinate employee benefits between spouses
- attempting to time the investment markets, looking for “big” hits
- lack of disability income insurance, insufficient life insurance
- overlooking impact of taxes and trading costs on investment performance
- preparing their own income tax returns or not utilizing a CPA®
- low awareness of where money goes due to lack of spending plan (“budget”)