There is an old saying in business that “nothing is more expensive than cheap advice.” This maxim articulates an important truth—that sometimes in our attempt to save on fees we reduce the quality of advice that we receive, leading to potentially much higher costs down the road. It is another version of the adage of being “penny wise and pound foolish.” By trying to save on advice at the beginning (penny wise), we may be choosing a sub-optimal course of action over the long run (pound foolish).
The concept of paying for high quality advice rings especially true in the wealth management industry, where the stakes are high—the success, or failure, of your plan for long-term financial independence is the question at hand. Navigating the complex issues of asset allocation, risk tolerance, tax efficiency, estate planning, liability coverage and retirement income planning is often best done with the assistance of a team of highly competent advisors.
In preparing for a successful retirement, there are many possible mistakes that investors can make. These financial mistakes range from small and merely irritating to large and potentially devastating. The following examples highlight several areas when it usually pays to get the best advice and not simply the cheapest.
Identifying Risk Tolerance and Matching Asset Allocation
A common problem for affluent families is that they have not aligned their financial goals, the asset allocation of their investments, and their risk tolerance. By way of example: a family has amassed several million dollars in their investment accounts; they are on track to retire and feel comfortable with the nest egg that they have created.
They want to achieve solid investment returns as they approach retirement, but they are also fairly risk averse. They lived through the sharp downturn of 2008 and never again want to experience a 30%+ loss in portfolio value. In reviewing their investment portfolio, we observe that they have nearly 80% invested in stocks and other risk assets. This portfolio is potentially far too volatile if they are risk averse and seek capital preservation over growth. Rebalancing to a more conservative asset allocation may be needed in this case, where risk tolerance is not in sync with the investment portfolio.
We use what we call the Withdrawal Stress Test™ to align the asset allocation with the desired portfolio withdrawal rate (see chart below for illustration).
*This is a hypothetical example and is not representative of any specific investment. Your results may vary.
Taxes are a big deal as well. Being tax-aware with your investments and across your entire balance sheet can result in significant net savings. In concert with a high-quality CPA, setting a course of smart tax planning is almost always a net positive.
The Retirement Tax Filter® is our proprietary method for maximizing tax efficiency to fund cash flow in retirement. It is important to understand all of the potential sources of cash flow in retirement and utilize them strategically to arrive at the lowest possible blended tax rate. Read this article for a more extensive explanation of our approach to tax management in retirement.
Families will often feel overwhelmed by the sheer volume of advice that they receive. By working with a CPA, an estate planning attorney, an insurance broker and a wealth advisor, the amount of combined reports and paperwork can be voluminous. An effective financial plan will coordinate all of the best advice from each professional that serves the family, combining the recommendations to create long-term synergies.
It is common to receive good advice from a number of different advisors, but with the caveat that none of them know what the other advisors are doing. The result is that the overall financial plan is either redundant or missing important pieces. Either way, the lack of coordination is potentially detrimental to long-term outcomes. Families need an advisor who is going to put together all of the pieces of the puzzle.
There are those that prefer the “do-it-yourself” approach to financial planning and investing. When the motivation for self-management comes from a desire to cut costs, it can sometimes lead to sub-optimal outcomes. A focus on value, and not price, is an important filter for decision making. Are you favoring short term cost savings over long-term value? As the saying goes, cheap advice can be very expensive.
*This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.