Should You Have a Financial Planner?

In 1968 Nick Murray had to sell investments the hard way. He met most clients in their home. The tool of choice was the mutual fund. Most people he sat with were hard working people, but unsophisticated  investors. Fee-based advisors were rare in those days for the small accounts families had. Fees were high and people were risk adverse. To top it off, the market was having bouts of volatility, suffering a noticeable decline even to those who didn’t follow the market on a regular basis.

It was in this environment Nick Murray had to convince his clients and potential clients the best course of action for them. Investing in mutual funds came at a steep cost. Loads (aka sales fees) were as high as 8.75%. 91.25% of your money went to work right out of the gate trying to get back to the even water mark.

Nick Murray

Young families had to consider equities for at least a portion of their portfolio if they were ever to have enough money for a comfortable retirement, and Nick Murray knew it. The high fees were one issue; the market another. The question was always the same:

“Do you think the market will go up?”

An honest financial planner will never tell you the market will go up because no one has a crystal ball. Markets do go down at times, and significantly. In the long run stocks would provide the best return on investment if placed in a broad-based mutual fund. The gut-wrenching declines that show up now and again was the problem. Nick Murray had to provide comfort for the clients he served while encouraging the best financial behavior. He said:

“I do not know if the next move in the market will be up or down. The next 20% move could go either way and I have no way of knowing which way it will be. The same is true for the next 50% move. I just don’t know if the next such move is up or down. The same with the next 70%, 80% and even 90% move in the market. But I can guarantee you the next 100% move in the market is up, not down.”

How could Nick Murray make such a claim? Of course, the next non-100% move in the market is anyone’s guess. But to guarantee the next 100% move was up! 

Nick Murray spoke at a H.D. Vest Financial Services conference in Dallas in December of 1994 when he told this story. (I might be off a bit on the date as I’m pulling from memory only. It was December because H.D. Vest always had their December conference in Dallas. The year was 1992 to 1994, with my bet placed on 1994.) Murray explained why he made the statement to clients he did. He said:

“I could guarantee the next 100% move was up because the next 100% move has always up. And if I were ever to be wrong there would be nobody left to discuss it.”

Those words always stuck with me. Every bump in the night, ah, the market is not a cause for panic. Even if I bought at the height of the market in 1987 or 2008, it didn’t take long before another 100% gain was notched onto the market. Even the 1929 high eventually fell to substantial 100% gain after 100% gain.

Once again we face a market with a long up trend and worries abound. 

And now is a good time to ask if you need a financial planner.

 

What a Good Financial Planner Does

Financial planners come in so many flavors. Some are honest and good at what they do. Some are out for a quick buck. Others are incompetent, at best.

Earlier this week I met with a client in my office. This elderly couple had worked beyond the normal retirement age, but now were putting traditional labor in the past. They are simple people that prefer as little complication as possible. 

My husband/wife client have never used a computer. Normally I suggest a good index fund at Vanguard or Fidelity. That wasn’t the right advice in this instance. The 401(k) administrator (Transamerica) presented all the options. 98% of the page was annuity choices: single life, period certain, joint life. Way at the bottom was the lump-sum option.

My client was clear they did not need any of the money. They were aware of the required minimum distribution and that is all they would take from the funds.

So what does an honest financial planner tell a client in a situation like this? They didn’t need the money. They were not sophisticated investors. They were risk adverse. They had more than enough for anything they wanted.

After a half hour of discussion it was clear to me my client did not need an index fund or any other fancy sort of investment. I asked where they banked. It was a good local bank. I explained to them what laddered CDs were. They understood CDs and what I suggested. By the time you read this they will be working with their banker carrying  out what I feel is in their best interest. The interest earned will be small, but it is what serves this client best.

 

A good financial planner will be honest with her clients. No one size fits all. Usually when working with young families I have to spend serious time getting them to invest in equities. (Too often I must work my fingers to the bone convincing them to pay down debt and invest even a token amount.) 

I’m not a big fan of life insurance. (Don’t get me started on annuities.) However, there have been instances where the facts and circumstances indicated a client should have term life insurance. Business clients might best be served with key-man insurance or a policy for a buy-sell agreement. There have even been a few cases where the facts required I suggest annuities. With annuities I always go into a long-winded explanation of the high commissions so clients understand how much it pains me to make such a recommendation because I know commissions are ultimately paid by the client.

 

The most important task a financial planner has, in my opinion, is to prevent clients from panicking in a downturn and contain greed when the market is soaring.  Nothing else a financial planner does will do more to increase the value of a client’s account. 

As an accountant I see many clients. Over the years way too many have committed financial suicide because they got scared out of the market at a bottom. I’ve also seen too many invest on margin (borrowed money) when the market is hot. If I could have one wish, it would be to go back in time and convince more clients to walk away from a hot stock tip. A good financial advisor should encourage good long-term investments, like index funds. Sophisticated investors can invest in individual stocks because they know how to value a business. They use different financial planners from the proletariat. 

 

The duty of a good financial planner is simple: Stay in touch with clients to understand their financial plans and needs, helping them achieve those goals. In other words: Know Your Client!

It is easier than ever to walk the financial road without a financial planner. Mutual fund fees have collapsed to zero in some cases. (Does anyone pay a load anymore to buy a mutual fund?) ETFs are very low cost to buy. Automatic investing is easier than ever. 

The real questions is: Do you need a financial planner? There are only a few questions you need to ask yourself to get the answer:

  • Do you understand the investment choices available and the risks and consequences? Honestly!
  • Do you understand the tax implications? Or have a trusted tax professional to help you understand the tax issues?
  • Do you tend to want to “trade” the market?
  • Have you ever sold or panicked when the market was down? Be honest! How did you react, or not react, to the 2008 economic, housing and market meltdown?

 

Financial planners are different from the past. Many brokerage houses (E*Trade, Vanguard and Fidelity, for example) have in-house advisors available to help you make financial decisions.

Some advisors still pay house calls, but they are getting rare. And since commissions are totally different from a few decades ago when I was in securities, an alternative to a financial planner might be a better choice.

 

 

Alternative Financial Planners

While many consider stock brokers and insurance people financial planners, the truth is they are really salespeople for the firms they are appointed with. These traditional advisors still play a role in financial planning. However, their role is diminished compared to even recent times.

The stock broker wants to sell you stuff that generates a commission or fee-based product. So does the insurance guy. It’s how they keep the light on and I have no problem with that. Many financial planners are fee-based only today, charging 1% or something similar per year on the assets they manage for you. The fee seems small, but accumulates to a large amount over the years. And remember, the fees paid also no longer generate future returns for you.

 

There are two natural professions that can help you with your financial planning needs: attorneys and accountants. The accountant should not also sell products or fee-based services as well or you will find recommendations slanted toward what they sell.

Helping a client by telling them the truth — that they should use laddered CDs — is something an accountant can tell you. I don’t get paid a commission. I charge for my time and have no vested interest in the investment the client makes. 

As an accountant I can also help facilitate the process. If a client needs a Vanguard account I can walk through the set-up process with them or they can call Vanguard. All the client pays for is my time. 

Attorneys can play the same role. They might be more expense and have less time to work with you, but attorneys play a vital role in personal finances. Wills and estate issues will require an attorney anyway. The attorney and accountant can work together to help you deal with issues such a Medicare and future potential nursing home expenses. 

A good attorney and accountant can also keep you honest when the market is soaring or in free fall. These professionals have seen it all before in the market and in their client’s accounts and they don’t shake easy. Clients in my office know I wear cast iron underwear when it comes to taxes, investing and personal finance issues. I’m not moved by headlines! And I doubt your attorney is either.

 

Have an honest discussion with your accountant or tax professional. They might be the perfect choice for a financial planner. 

This makes even more sense if you handle your own finances. Having a disinterest third-party to bounce ideas off of in very valuable. When I’m not writing or preparing taxes, I am working with clients and readers of this blog, consulting on a variety of issues, including: index fund/equity investments, insurance, retirement planning, Social Security and Medicare planning, tax planning, business formation and session planning, and more. It amazes me the topics I discuss with clients. I get to enjoy some unique research at times which keeps me young.

 

Many people reading this blog are informed enough to actually be a financial planner themselves so you probably think you can handle it all on your own. I understand. The history of financial planners and advisors is not encouraging.

Consider an alternative to the traditional financial planner. At least in my office, I help clients make the right choice for them and send them to the most appropriate professionals to carry out the directives.  

Most important, always keep learning because everyone actually does need a financial planner. And the best one you can ever have is you. Because no matter how hard I try to know my client, you know you better than I ever will. My performance is best when my client also understands the rules.

 

This is an important topic. I hope we get a lively debate in the comments on how you, kind readers, interact with financial planners. My ideas are good, but as a team our knowledge will be more than the sum of the parts.

 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Keith Taxguy

6 Comments

  1. Stephanie on January 21, 2020 at 4:03 pm

    “everyone actually does need a financial planner. And the best one you can ever have is you.”
    I agree! And also the value of having someone to talk things over with. Last year I was so lucky to find a work buddy who saves like I do (I introduced him to mega backdoor Roth, which our awesome 401k allows, and he encouraged me to clean up my old rollover IRAs so I could do regular backdoor Roths)- absolutely invaluable. But no work buddy will get into some of the weeds I need to tackle this year- proper wills and how to work with some special family financial planning needs for special needs relatives. My own financial crisis “freak out” was to panic that I had all my money at Vanguard, so when I switched jobs a few years later I did my next 401k rollover to Fidelity instead :). So I am ok on not selling at the bottom, but I always worry about what I don’t know that I don’t know.

  2. KAREN YOUNG on January 21, 2020 at 8:04 pm

    I really struggle with this. When I chart my asset allocation choices on the Personal Capital website I’m very close to the efficient frontier (0.3 off). So, would another set of eyes really increase the amount in my portfolio? would the fees be worth it?

    • Keith Taxguy on January 22, 2020 at 6:19 am

      I think you’re asking the wrong question, Karen. The efficient frontier is only a mathematical model for finding a hypothetical maximum return with the least risk. The model brings the two lines together at the peak of the curve. But is this what your financial plan really needs?

      The efficient frontier assumes a relatively high level of risk and assumes you can handle the chop when the markets turn volatile or head south. These are not minor assumptions. I’ve seen plenty of clients hug the efficient frontier only to suffer a fake out when the market goes senile for a while.

      Your personal finance goals may not align with the efficient frontier assumptions. As stated in the post, sometimes a simple bank CD is what the doctor ordered.

      If maximized growth without respect for market gyrations is your goal then you are doing it right. A good financial planner will get you to dive deeper to assure you will stay the course during a storm and if maximized growth is the right way to achieve your financial goals. Sometimes safe and boring is the best course, especially if you have already made it. And only you can decide if a second set of eyes is something you want to face.

      • KAREN YOUNG on January 22, 2020 at 6:43 pm

        You’re right of course.
        I’ve been through many recessions and didn’t blink an eye. The ’08-’09 set back made me flinch. I stayed fully invested and contributed more, but decided to diversify 30% of investments into real estate.
        thank you for your writings and your feedback.

        I’d be interested in an update on your daughter.

  3. Susan on January 22, 2020 at 2:48 pm

    We met with a financial planner and researched on our own also. Fee only planner said we’re doing well and don’t need to visit again unless things change significantly. We have a trust and other end of life legal documents needed.

    As we look toward retirement later this year, we plan to see a tax consultant about a Roth Conversion strategy to save on taxes when we must take our MRD @ age 72. I agree this is an important advisor that we need to include in our planing.

    Our family history includes longevity. We also have a paid up Long Term Health Care policy. When we retire, we plan to move our company 401Ks to Vanguard index funds for stocks and bonds and keep an appropriate amount in a high interest savings account as an emergency fund. We plan to stay with a good amount in the stock index to stay ahead of inflation. We know there are risks but it seems like the right choice for us.

    After reading your blog, since we are in a good place, perhaps we should consider being more conservative – include some ladder CDs? By the way – One of our mom’s is over 97 and still living on her own. Another family member lived to 104+.

  4. Steve on February 27, 2020 at 7:09 am

    This is a question I’ve asked myself. I have generally told myself, yes I need some advice. But not quite knowing how to find a good advisor who’s worth the money has kept me from doing it. Maybe you can offer some thoughts on the type of advisor I should be looking for and what criteria I use to sort through my selection options. I’m 59 and have about $3M in assets: $1M in real estate, mostly income producing, $1.5M in 3 tax deferred accounts, and $0.5 M in taxable and cash accounts. My wife is retiring as an educator this summer and I will retire sometime within the next 1-3 years, depending on whether work is still satisfying or not. Our Will is old and should probably be updated, but covers the basics: everything to spouses or our two adult kids equally if a spouse is deceased. Our Term Life Insurance policies expire around the time we turn 65. I’m really looking for an advisor who will help me make good decisions now about the retirement that is not far away. How will I begin the draw-down of assets in retirement that makes the most sense? How does Social Security figure in the plan? How does RMD figure in the plan? How does Medicare and supplements figure in the plan? What positioning should I do to maximize the comfort of my retirement years? I don’t know how to go about finding and selecting a good advisor for my needs. Any advice would be much appreciated.

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