Historically, financial advisors have tended to think of two broad categories of investors: do-it-yourselfers and delegators. Delegators tend to seek out advice and are willing to pay for it. Whereas, DIY types are less inclined to see the value of wealth advice and, therefore, are less willing to hire someone to help them. That’s the theory, anyway, but we’ve found that this type of categorization can be misleading.
We’ve learned over the years that a willingness to delegate can vary based on changes in circumstances and stage of life. For example, unlike the tendency to be outgoing or deliberative, a willingness to delegate is not necessarily a stable personality attribute. Instead, it tends to be contingent on the situation.
Many people are comfortable managing their own finances when they are younger and in the accumulation mode. At this stage, they often feel (for better or worse) as if their situations are sufficiently straightforward so as not to require the help of an advisor. However, as the level of complexity increases and the stakes become higher, they are much more likely to delegate to a professional.
At Brown and Company, we have encountered this situation many times with business owners approaching transition. It is not uncommon for them to have little or no relationship with a personal financial advisor until they get close to a liquidity event (and unfortunately in some cases not until afterward).
We believe there are two factors that most often cause former do-it-yourselfers to hire a comprehensive wealth advisor:
- The complexity of their situation
- The consequences of their decision-making
The higher you score in each of those two categories, the more likely you are to work with an advisor.
Here are three questions to assess where you are likely to fall on the DIY – Delegator spectrum:
1) Does my financial situation seem overwhelming to me when I think of all the different aspects I’ll need to consider?
2) Are the consequences of making a mistake potentially very high?
3) Do I lack confidence in my own knowledge and skills that will be needed to consistently make wise financial decisions?
An upcoming transition into retirement is the most common scenario where we see people deciding they need help. When you’re on the verge of retiring, things start to change. The main question is no longer “What amount do I need to save?” but instead, “How am I going to get paid?” After you stop working, you need to transform your nest egg into a reliable paycheck that will last for several decades and increase with inflation.
This can seem like a daunting challenge for a lot of people, but at the same time, it can also be a really good opportunity to minimize taxes. In retirement, you have multiple sources of income, each having their own unique tax treatment.
For example, withdrawals from 401(k) plans and IRAs are fully taxable. Social Security is partially taxable. Withdrawals from Roth IRAs or cash value life insurance are generally tax-free. And long-term capital gains and qualified dividends are taxed at lower rates.
Now imagine each of these different sources of income has a faucet you can turn on and off or control the level of the flow. We have created what we call our Retirement Tax Filter® to help our clients create income in a tax-efficient manner.
The goal is to actively adjust the flow of income from each source so that you are filling up the lower marginal tax brackets without creeping into the higher brackets (as shown in the chart below).
We have many examples of clients who started working with us as they approached retirement and realized the truth of the old adage, “what got me to here will not get me to there.” In addition to planning for retirement, there are other common life stages or events which increase the likelihood of working with an advisor who will develop a comprehensive financial plan:
– Going through divorce
– Selling a business
– Being laid off
– Coping with the death of a spouse
DIYers going through these types of events will often become delegators who are willing to pay for advice. If you have previously made a decision not to work with wealth advisor, it could make sense to revisit that choice as your circumstances change. The value of comprehensive wealth advice increases along with the complexity of your situation. At the same time, most people are more willing to pay for advice as the costs of making a mistake rise.
*This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.