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Key Concepts: Working with a Financial Advisor

Key Concepts: Working with a Financial Advisor

October 30, 2018
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Get Healthy. Stay Healthy.

Working with your finances is a lot like working with your health. You do what you can to stay healthy. Minimize the risks with good habits and specific behaviors. If you get injured or sick, you do what you can to minimize the long-term damage, and hopefully get healthy again.

Just as in medicine, proper financial planning should begin with a thorough diagnosis. If the diagnosis is correct, then the best course of action is revealed. Can you imagine meeting with your doctor for the first time and telling them to prescribe a drug you saw advertised on television? Of course not. A good doctor needs to understand your current health before recommending any course of action.

This may seem too obvious, but your doctor also needs to know your goals. Your doctor will recommend different strategies if your goal is to lose weight versus if you want to run an Iron Man triathlon in two years. Goals should be specific, measurable, attainable, realistic, and have a time or date. Once your advisor knows your financial health and your future goals, they can prescribe the right solutions to help you.

A word on reason. Can you imagine arriving at a doctor's office weighing 1400 pounds, and expecting her to help you run a marathon within a year? Keep this in mind when you interview your advisors. Of course, you want FDIC insured investments to grow at 18% per year tax-free each year. You also want to win the MegaMillions lottery next week. Find out if your expectations are realistic as soon as possible.

Even if you eat right, exercise, and follow your doctor's advice to the letter, are you guaranteed to never get sick or injured? Nope. Sometimes, you might still get the flu, and you'll have to let it run its course.  Similarly, your financial plans or investment portfolio may take a step backward now and again. These corrections or bear markets should normally be treated as a viral infection. Do what you can, but ride it out and let nature take its course.  Regardless of your portfolio risk, the markets will get a vote on your results, just like weather affects air travel.  Interest rates and stock returns are not controllable or predictable. Plans should account for this so you aren't surprised down the road.

Goals and Objectives

You advisors need to know what you need to accomplish. Retirement strategies differ from college planning or estate planning.  Short-term investing goals require very different solutions than objectives that are longer-term. And "beating the market" consistently year after year is not only impossible, but it doesn't qualify as a financial goal.

Why are you investing or planning?

You need to know why you want your goal. There are times along the way toward any goal that you will be tested. You reason why can carry you through the challenges. In the financial world, challenges usually come from bear markets, declines in account values, a loss of your job, unexpected expenses, and others. Vanguard Research has shown that simply sticking to your plan can improve returns by up to 1.5%. Knowing your "WHY" is critical to stay disciplined.

Who benefits?

Who benefits from your goal? You? Your spouse? Your children? Grandchildren? A charity? Why is this so important? Besides the obvious, there may be tax advantages, depending on who is benefitting. For example, life insurance passes on income-tax free to the beneficiaries. But annuity earnings are taxed as income.

When is the goal?

This one is pretty important. Do you need to buy a house in six months? You'll invest that for stability instead of for long-term growth. That would mean a bank account or a CD instead of a stock mutual fund. But you're investing for the next 25 years to generate income and offset inflation? A globally diversified stock/bond portfolio will probably get you better results than a savings account.

Before your advisor can begin, they should know the who, what, why, and when of your situation. These all dictate the How. A good advisor will diagnose first, then prescribe what fits the situation.

Fundamental Concepts:

Loan vs Own

Nearly every investment can be described as either a loan investment or and ownership investment.

Consider a homeowner. Most likely, a bank loaned them 80% of the purchase price. The bank has invested in a loan. The homeowner has invested in a home.

The bank is promised to get a rate of interest until a certain date. They have more certainty of a return on their investment. Let's say they receive a 4% rate for 30 years.

The homeowner owns the home. Is there any guaranteed sale price in the future? Not at all. Can the value of their home fluctuate up and down year to year? Absolutely! If they own the home long enough, they will probably earn better than 4% on their home. But if they bought at a market high (like 2007?), it may take longer than if they bought near a market low like 2009. Make sense?

A loan investment has a rate and a date. But the return is lower due to the certainty. Banks, CD's, bonds, fixed annuities...these are examples of loan investments.

An own investment may make more in the long run, but its value can fluctuate. And your purchase price matters more with own investments. Buying low is better than buying high. And you may need to have a longer period to invest. Businesses, real estate, stocks, collectibles, variable annuities, and oil/gas drilling partnerships are all examples of ownership investments.


This is a big word for "don't put all your eggs in one basket." The idea is to spread your risks around so that the whole portfolio never gets hurt at the same time. But diversification isn't as simple as "I own five mutual funds." If those five funds own the see investments, you haven't really spread your risk around. They will all move in lock-step, and your entire portfolio can decline all at once in bear markets. Truly diversified portfolios are invested in different types of investments that move differently in the short-term. This can smooth out the bottom line over time.

Diversification also doesn't come from having multiple advisors. This is like having two or three family doctors, none of whom know your full medical situation. Pick one primary care advisor that understands your entire situation, and can help you coordinate all of your various goals. More advisors will simply make your life more complex, and less effective. If you worry about an advisor's competence, keep looking until you find a team you can believe in.

Taxes Matter

The biggest potential cost when investing is taxes. It isn't your advisory fee. It isn't your mutual find expense ratio. It's probably taxes. Always pay attention to how to maximize your after-tax results. The best advisors pay attention to this, helping you. avoid unnecessary taxes, and minimize the unavoidable taxes.

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Coming next: Risk, Volatility, and What You Control