Comprehensive Financial Planning

What is comprehensive financial planning? This involves understanding our clients’ goals and financial lives and empowering our clients to make smarter financial decisions.

Comprehensive Financial Planning includes:

  • Retirement Planning (a plan to generate the income to sustain a client’s lifestyle in retirement)

  • Estate Planning (helping to plan so that assets are left to beneficiaries in a way consistent with the clients goals).

  • Asset Protection (helping families protect their assets and income from a variety of risks.

  • Investment Planning (helping our clients to earn a competitive risk-adjusted rate of return).

  • Tax Planning (helping clients to save, title assets, and invest in a manner that is tax efficient)

Why a comprehensive approach is important:

When we think about these five areas in a vacuum, we often solve one financial problem and cause another one. Consider the common example of an elderly client who gives an appreciated asset away to his daughter to avoid state estate taxes. The client may avoid estate taxes, but there are also gift taxes. Even if the client is not subject to gift taxes, when an asset is gifted prior to death, the beneficiary inherits the cost basis. In other words, the client’s daughter will have to pay capital gains taxes based on the if the client received the asset after death. (When a client dies with ownership of an asset it receives a new cost basis as of the date of death [or alternate date of death valuation]. Therefore, the client was diligently trying to solve the problem of state estate taxes, but could inadvertently cause a bigger problem of capital gains taxes. There are countless problems like this.

We find that most people do different kinds of planning, at different times in their lives, with different objectives in mind. Each of the five planning areas are interrelated. The changing of one aspect of a plan impacts other aspects of the plan. By looking at the big picture, we can help clients to reach for their financial potential and better understand obstacles that may prevent them from achieving their goals. In many cases our most important work is simply filling in gaps or improving planning that has already taken place.

Common errors or mistakes that we find in financial plans:

  • Failure to implement an estate plan.

  • Lack of execution in the estate plan: (not utilizing the trusts and techniques that the attorney recommended). This can include very simple execution errors that people do not always realize.  This often occurs when a client’s financial advisors are not acclimated with estate planning.

  • Failure to title accounts properly.

  • Failure to name beneficiaries:
    Beneficiary designations on IRAs, taxable accounts, insurance policies have a tremendous impact. They can mean the difference between an asset going through the probate process which can have a negative cost and time delay impact, or passing simply to a beneficiary.

  • Having a plan that is out of date: Beneficiaries, estate taxes, objectives, trustees, are all things that can change over time. It is important to maintain an estate plan that accurately reflects your objectives.

  • Failure to tax optimize:
    It is generally more advantageous to hold less tax efficient assets (such as taxable bonds) in tax-deferred accounts, while holding more tax efficient assets (such as stocks) in taxable accounts. We also like to take advantage of tax-harvesting rules that allow investors to sell positions that are at a loss (in a non-retirement account) in order to offset capital gains or take a deduction against income taxes. Taking tax implications into account can help to improve the net return to investors.

  • Succumbing to psychological biases:

    1. The instincts of fear and greed are a problem for many investors. It is easy to get sucked into investing into the next “hot” investment idea. Many investors wanted to buy technology in the 90s, real estate in 2007, and gold when prices reached over $1,800 an ounce in 2011. When people feel that they are missing out on something the tendency is to want to chase the prevailing trend. Often the best investment ideas are contrarian. Value investors tend to want to buy something at a time that the price is relatively cheap and not everyone wants to own it. On the contrary, when prices are very low there is a tendency to want to avoid an asset. Sentiment was extremely low in early 2009 after the financial crisis when stocks hit their lows. In retrospect, this was the best entry point for stocks in recent years.

    2. Overconfidence; there is a tendency for most investors to think that they will outperform the general investment indexes. However, on average, less than half of investors do so. As a whole investors tend to confident than accurate.

    3. Recency Bias; Investors often extrapolate the events of very near history and make the faulty assumption that these events will continue over the long term. The financial markets tend to change significantly over time.

      There are many more investor biases that tend to inhibit individual investor performance. For a review of investor biases look up Daniel Kahneman and Amos Tversky http://www.amazon.com/Daniel-Kahneman/e/B001ILFNQG.

  • Failure to protect assets and income:
    A problem for many families. For example, in the early years of a working professional, they may have a lot of work ahead of them (or human capital), but very little in the way of financial capital. They may, however, have significant liabilities such as putting their kids through school, paying off a mortgage, etc. This is an example of where insurance can come into play. This is also an example of where low cost term insurance can serve an appropriate role. There are many risks that impact financial plans ranging from litigation, healthcare, fraud, and many other areas.

  • Failure to diversify investments:
    Diversification is mentioned in William Shakespeare’s Merchant of Venice, “My ventures are not in one bottom trusted, Nor to one place; nor is my whole estate Upon the fortune of this present year: Therefore my merchandise make me not sad.” The point is not to have all of your investment eggs in one basket. Many popular investment programs take concentrated risk in the stock or bond markets. We consider carefully the impact of risk, reward, and correlation across a broad variety of investments. It is important to note that just because someone wants a high rate of return does not necessarily mean that they want to take concentrated risk in the stock market.

  • Failure to plan for retirement:
    It is the role of your working self to save for your non-working self. Even those who feel that they will work forever may have a period of time that they have to retire due to changing business conditions or deteriorating health conditions. We like to get involved in different aspects of the retirement planning process including saving for retirement, optimizing the plan, implementing a withdrawal plan, and updating the plan based on changing investment conditions and client goals.