Recently I met with a couple that was referred to me by a long time client. At the meeting a comment was made that if a “financial advisor” starts talking to you about your taxes and estate planning you should run away. I know that sentiment is out there, because this was surely not the first time I had heard that comment. Never the less, it always shocks me. How do you solve a problem, without first seeking the cause? Many times clients want to look at “How to improve their investments?”, but what they are really asking is, “How do I improve my performance?” And performance is not a function of just portfolio allocation. Performance is about being in a better position. Athletes compare their performance to others records in order to determine their ranking. In the investment industry we use benchmarks like an index of the S&P 500. But I ask you, what does the performance of the S&P 500 mean to you? Most people are happy if they beat the markets performance in a year. So for example last year in 2013 if your investments made 31% you were happy. So too you should be happy then in 2008 when your investments were down only -38%, right? Funny how the answer to those two questions are not the same for most people. And the truth is it shouldn’t be. Because the performance of some arbitrary index has no bearing on if you are on track to achieve your wealth goals.
When clients come into meet with us, we do a full diagnostic of their current circumstances. We want to know it all, the good, the bad, and the ugly. To begin to solve any problem, first you have to start at the root cause. Some times that means clients have too much debt, or sometimes it means they aren’t effectively tax planning how their assets should be held. Recently I did a fee analysis for a client to demonstrate why being efficient can help boost their savings rate. This client could improve their investment strategy, simplify their management, and cut fees in their accounts. Through the time he had been investing, that would have meant over $100,000 of potential being able to work for him in his accounts. Now, you tell me does it seem helpful to your wealth goals?
Tax planning is a hugely overlooked piece of financial planning for most clients. Clients think that if they are saving into their qualified plan or IRA that is the best that they can do. That could not be further from the truth. The truth is that taxes, investing and your legacy are all tied together. If you affect one, you can affect them all. Sometimes that is for the better, and sometimes, without a strategy, it is to your detriment of your goals. Just like going to the doctor, you need a full exam to make sure you are treating the right problem. If you are paying more than you need to in taxes, because of lack of planning, then you have less cash flow to fix your root problem. The problem could be debt. The problem could be a weak stable of investments that doesn’t help you to manage your tax bracket. Your asset location could even be making your taxes worse!
To build wealth all of the disciples in financial planning have to work in concert. Tax planning is a part of financial planning. Most clients confuse that with tax preparation. Most tax preparers are not financial planners, nor are they licensed to give financial advice. That is the job of a financial planner. A good investment strategy is not just adjusting your investments once a year, or quarter. That alone won’t drastically change your ability to improve your net worth. What will improve your net worth is making sure that you have a holistic strategy around building wealth. Benchmarking your success to what you want to achieve for yourself, not what some index does in a given year. Be consistent and find a Financial Advisor who walks beside you in good times and bad. Studies like the Dal Bar show that clients consistently make better decisions when they have a knowledgeable advisor with whom they can discuss their options.
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