The question of whether or not to work with a financial advisor is very personal. For some people, dealing with financial issues is unpleasant and requires a great degree of undesired discipline. For these people, the real question will be how to choose the right advisor, rather than whether or not to work with one. Others choose to embrace the financial decisions which we cross in our lives, such as investing and purchasing real estate, and may be resourceful enough to work without an advisor. Interestingly, many of those who are most eager to seek help are actually very knowledgeable about financial issues. They confer with professionals to reinforce ideas and seek second opinions about what they may already know. Perhaps my cousin Laura has a good feel for investing but she doesn’t know much about how to determine insurance needs. Or, insurance may not present any problem for her, whereas issues surrounding her will and choice of beneficiaries does. I had a professor once tell me that anybody wise enough to handle all aspects of their personal finances on their own should probably be in the business of advising others. This wasn’t always the case, but financial issues have become so complex and convoluted that even experts must meet up to refresh themselves from time to time.
Let me give a few scenarios in which one might work with a financial advisor. This will help you understand the various topics and decisions which can be costly to you if overlooked.
•Traditional Financial Planning
Take for example a married couple with one or two children and a stable income. This is a great case for financial planning because of how many issues a family in this situation will deal with. They may be trying to help support elderly parents while putting money away towards college for kids and planning for retirement at the same time. They probably want their family to live in decent style, dress well, and take an occasional vacation. Most importantly, they need adequate funds to comfortably cover all the necessities- because these are items one can’t ever ignore.
•Goal Planners
This financial planning scenario may appear for a client who is reaching 40 and starting to pull down some decent bucks. She may want one million dollars saved up by age 59, not including the value of her home. This amount, she’s concluded, will provide her with adequate income for the rest of her life. We will deal with this type of client in two phases: accumulation and dispersion of assets. The process here is mathematical in nature, involving timing and monthly savings targets.
•Speculative Clients
There are plenty of people who are less concerned with an exact age when they can stop working and more focused on taking risks now to make money. This is not as short-sighted as it may seem. We’ve all heard the phrase “risk and return” and many of those who understand the concept of calculated risk are living in better style as a result. These clients may obtain an advisor to help them study the risks in a potential investment. They may also need the advisor because they can’t utilize financial instruments such as options and futures without one. Or, they may simply need advice on putting together a portfolio of stocks which meets their objectives and risk tolerance.
In reading these three scenarios you’ve probably crossed at least one which sounds familiar to you or somebody you know. Your financial advisor, if properly trained, can do a number of things for you. The first is to expose your current situation in such a way that you can get a good grip on it. There are traditional ways of doing this, such as putting together personal financial statements which you can use to track your progress. Then, there are client-specific methods for those advisors who get a good understanding of a client’s psychological process.
Your advisor should also teach you about investment vehicles that exist for different forms of savings. For example, 529 plans exist to save for higher education expenses*. It’s named after section 529 of the IRS tax code and allows for distributions for qualified higher education expenses to be exempt from federal income tax. This provides a nice incentive for using the plan rather than accumulating funds elsewhere. The 529 plan gained in popularity after the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). Other examples of beneficial savings vehicles include IRA’s for tax-deferred savings, and 401k plans for corporate workers looking to reduce their taxable income base and, depending on the plan, possibly catch an employer match. However, not everyone knows that these different vehicles exist and knows how to properly utilize them. Your planner can help expose these benefits for you.
Your financial planner can also administer a plan for specific goals. This process goes hand in hand with creating and maintaining a budget. If you need $30,000 for a car, and you have $10,000 today plus your future earnings potential, you can figure out with excellent accuracy a savings pattern which will make this possible. Perhaps you’ll figure out that $2,000 saved annually for 7 years plus accrued interest will be sufficient. If you divide this cost monthly, this difficult expense will run you only about $175 per month. That isn’t quite as scary, is it?
Further, your financial advisor may have a specialty. Some advisors like to hone in on certain demographics, such as the high net-worth market or clients in retirement. Others will specialize in an investment product such as insurance needs. In the following chapter, we will discuss some of the different types of financial professionals and how they get paid. This will give you a better understanding of the financial planning process and perhaps lead you to becoming a more knowledgeable consumer.
I’d like to briefly return to my original point that financial advisors are not just for the wealthy. Nowadays, personal finance issues can be as complicated for the middle class as they are for the wealthy. Often a simple flat-fee can be enough to retain the sort of financial plan which can dramatically improve your personal financial situation. Try to keep an open mind, and find a planner who will sit down with you and develop saving, spending, and investment plans. You may find it the most valuable few dollars you will ever spend.
As always, feel free to contact me with any questions or comments.
Russell Bailyn
Premier Financial Advisors
(212)752-4343 *31
rbailyn@premieradvisors.net
*As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments. The tax implications of a 529 plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.
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