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 in all circumstances, but particularly amid the extreme market volatility we have experienced this year. So what is holistic financial planning?
Holistic financial planning revolves around in-depth conversations between you and your advisor, focused on the life you want to lead. Ideally, this also involves active coordination between your advisor 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 things in place regarding their financial planning, but it tends to happen in silos. The different finance professionals don’t really talk to each other and it’s up to you to try to coordinate everything.
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When an Expert Advisor reviews everything to ensure proper coordination, it not only optimizes your ability to live the life you want, but it builds your confidence in the plan. Therefore, you will be much less likely to panic or make rash decisions when the market experiences significant volatility.
Coordination between finance professionals is essential
Think of it like running a Fortune 500 company. The board (in this case, the client/family) creates the vision and explains it to the CEO (the advisor), who must then ensure that all of the individual departments of the business (silos) are working individually and collectively to achieve this vision.
If the sales and distribution departments operate independently and rarely communicate, major problems could arise. The same is true when an investment strategy works independently of cash flow and expenses. If an advisor does not know that a client is planning to take a substantial distribution from their investment account, is it the client’s fault for not telling the advisor or the advisor’s fault for not asking?
An investment-only advisor is not the figurative CEO, who makes sure everything is coordinated and has the relevant expertise. Instead, the client is the CEO in this scenario, and the advisor just runs the investment department. Customer coordination of silos is better than no coordination, but it won’t necessarily prevent unwise decisions. An Expert Advisor can do this by leveraging in-depth knowledge and continually focusing on the overall financial plan with each client.
The power of planning with a trusted financial planner
I believe the financial services profession is generally very honorable, and most advisors are good people who have their clients’ best interests in mind. But the majority of the industry was built around product placement. 40 or 50 years ago, it was about selling stocks to retail investors who had little access to relevant investment information.
Over time, detailed information on investment options has become widely available to the general public. Yet I think the industry still tends to believe that its value is based on reading the tea leaves of the market and making allocations that help drive returns. In reality, the true value of a top advisor now is to help align a client’s capital with their vision, values and concerns – not to be reactionary and say because the market has gone up or down. , you should underweight this or overweight that.
Planning is powerful, so make sure you have a trusted planner. When an advisory relationship is based on financial planning rather than investment management, your goals are clearly defined. The cash flow, time and expenses associated with achieving them are mapped, and capital allocation is based on this roadmap.
If the market is down 20%, and the only conversations you’ve ever had with an advisor revolved around managing investments, how do you access a place of emotional safety so you don’t panic and lock in losses? It’s up to the advisor to make sure your relationship gives you confidence and reassurance even in the midst of market volatility.
Investment mistakes are usually fear-based and result from short-term thinking. Because, historically speaking, markets are volatile in the short term, and none of us can predict what’s going to happen. But over the long term, the data clearly shows that the markets are going up.
Cookie-cutter questionnaires are problematic
Too often in the industry, a client’s high-level asset allocation has been determined by a generic questionnaire designed to assess risk tolerance and time horizon. In addition to not being personalized enough, the inherent flaw in this approach is that the same person can answer these questions differently from week to week, depending on what is happening in their life.
How do they feel about their job? What did they see on the news the day before? Has their neighbor recently had an accident? These and other factors can easily influence responses, and such questionnaires are unlikely to determine an overall allocation that a customer can truly connect with and feel confident with.
Asset allocation should not be driven by emotion. My company focuses on the math first, including a financial planning exercise to determine your lifetime cash flow needs, while at best avoiding sequence of returns risk. Because if you live a long, happy and healthy life, as we hope for all of our clients, you could spend at least 30 years in retirement. You are going to see market downturns and volatility during this 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 that we can evolve their overall allocation. People tend to be very comfortable with this approach because the planning was done first and they understand it. Investment recommendations are always linked to the overall plan. So if a client asks me what the reasoning is for a certain investment or allocation, I can respond by saying, “Because we discussed how your goals are A, B, and C, and that led us to implement these strategies in pursuit of them.”
Find the right fit
Decades ago, when individual investors didn’t have access to so much important information, it was valuable for the financial industry to offer investment management as a standalone product. With changing times, holistic financial planning now clearly offers the greatest value proposition.
That said, many investors aren’t familiar enough with the concepts to tell the difference between a real financial plan and a simple investment strategy. If you’re not sure, I recommend thinking about the last time your advisor reviewed your 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.