When you think about the advice offered by your financial advisor, is it really holistic financial planning or just investment management? This distinction is important under any circumstance, but particularly amid the extreme market volatility we have seen this year. So what is holistic financial planning?
Holistic financial planning revolves around extensive conversations between you and your adviser, focusing on the life you want to live. Ideally, it also involves active coordination between your adviser and other financial specialists in your life, such as your accountant, estate planner, and insurance professional.
Many investors do a good job of putting different elements in place regarding their financial planning, but it tends to be done in silos. The various financial professionals don’t really communicate with each other, and it’s up to you to try to coordinate everything.
When an expert adviser analyzes everything to ensure proper coordination, it not only optimizes your ability to live the life you want, but also increases your confidence in the plan. Consequently, you will be much less likely to panic or make reckless decisions when the market experiences significant volatility.
Coordination between financial professionals is key
Think of it like running a Fortune 500 company. The board of directors (in this case, the client/family) creates the vision and explains it to the CEO (the consultant), who then has to make sure that all the individual departments of the company (silos) work individually. Y collectively to execute that vision.
If the sales and distribution departments operate independently and rarely communicate, major problems could arise. The same is true when an investment strategy operates independently of cash flow and expenses. If an adviser does not know that a client has been planning to take a substantial distribution from their investment account, is it the client’s fault for not telling the adviser or the adviser’s fault for not asking?
An advisor who focuses only on investments does not act like the figurative CEO, who makes sure everything is coordinated and has the relevant expertise. Rather, the client is the CEO in this scenario, and the adviser just runs the investment department. Customer coordination of silos is better than no coordination, but that won’t necessarily prevent unwise decisions. An expert advisor can do this by leveraging comprehensive knowledge and continually emphasizing the overall financial plan with each client.
The power of planning with a trusted financial planner
I believe that the financial services profession is generally very honorable, and most advisors are good people who have their clients’ best interests in mind. But most of the industry has been built around product placement. Looking back 40 or 50 years, it was all about selling stocks to retail investors who had little access to relevant investment information themselves.
Over time, extensive information on investment options has become widely available to the general public. However, I think the industry still tends to believe that their value is based on reading the market tea leaves and making allocations that help drive returns. In reality, the true value of a senior advisor now is helping to align a client’s capital with her vision, values and concerns; Don’t be reactionary and say that because the market has gone up or down, you should undervalue this or overvalue that.
Planning is powerful, so make sure you have a trust planner. When an advisory relationship is based on financial planning rather than investment management, your goals are clearly articulated. The associated cash flow, time, and expenses to achieve them are mapped out, and capital allocation is based on that roadmap.
If the market is down 20%, and the only conversations you had with an adviser revolved around investment management, how do you get to a place of emotional safety so you don’t panic and lock in losses? It is up to the adviser to ensure that your relationship instills trust and comfort, even in the midst of market volatility.
investment mistakes they are generally fear-based and due to short-term thinking. Because, historically speaking, markets are volatile in the short term, and none of us can predict what will happen. But in the long run, the data clearly shows that markets are going up.
Standard questionnaires are problematic
Too often in the industry, a client’s high-level asset allocation has been determined by a generic questionnaire intended to gauge risk tolerance and time horizon. In addition to not being personalized enough, the inherent flaw with this approach is that the same person may answer these questions differently from week to week, depending on what’s going on in their life.
How do they feel about their work? What did you see on the news the night before? Has your neighbor had an accident recently? These and many other factors can easily influence responses, and such questionnaires are not likely to determine an overall allocation that a customer can truly connect with and feel confident about.
Asset allocation should not be determined by emotion. My company focuses first on doing the math, including a financial planning exercise to determine your cash flow requirements for the rest of your life, while avoiding return sequence risk. Because if you live a long, happy and healthy life, as we hope all of our clients do, you could spend at least 30 years in retirement. You will see market declines and volatility during that time, and it is important not to overreact.
I always ask clients to keep me updated on how they want to live and the things they want to do so we can evolve their overall allowance. People tend to be very comfortable with that approach because the planning has been done first and they understand it. Investment recommendations are always connected to the overall plan. So if a client ever asks about the rationale for a certain investment or allocation, I can respond by saying, “Because we’ve discussed how their goals are A, B, and C, and that’s led us to implement these strategies in pursuit of them.” .”
Find the right fit
Decades ago, when individual investors did not have access to as much important information, it was valuable to the financial industry to offer investment management as a stand-alone product. With changing times, holistic financial planning now clearly offers the highest value proposition.
That said, many investors aren’t familiar enough with the concepts to know the difference between a true financial plan and just an investment strategy. If you’re not sure, I recommend that you think about the last time his tax advisor reviewed his tax returns. estate planning documents and insurance policies. If the answer is never, it’s probably just an investment management relationship, and you deserve a better approach.