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Last column, we discussed that wealth was not a cure for angst. That often acquired wealth becomes the source of much angst for many people. Individuals may be unable to make sense about what they hold in investments. They may be uncomfortable with some recent advice or action suggested by their advisor. They may be questioning perceived performance. They may be uncertain of the role of their advisor. They may be questioning why they are even in the "markets". They may not understand what their wealth allows them to do. Or they simply may just be confused.
In almost all cases, the source of the angst was similar.
1) They have no financial plan. This led them to never define broadly the purpose of their saving or what the money will be spent on specifically, nor did they quantify what their level of savings meant to their future. They just did the right thing and saved.
It is never too late to assess this. A good financial plan will help them understand how much they can spend each year without worry. It will clarify for them the end result (say, money for the kids as an estate, or maybe better yet, more cruises and the kids are on their own). Much angst will get removed.
Why? It provokes thought. It stimulates discussion among spouses or others. It demands questions be confronted and answered. All in all, most will realize the answers were squarely in front of them, and they just needed to be brought out. You have your answers – your financial planner just has the questions.
2) There has been very little education provided to them from their current advisor. Critical information important to good decision making had never been proffered. For example, they were completely unaware of the actual cost of involving an advisor.
Well, there is no time like now to have your advisor bring you up to speed. A good advisor will be more than happy to. Professional financial planners know that an educated client is an asset, not a liability. Ask them the hard questions that you have avoided: How do you get paid? How much do you get paid? Are there ways that I can reduce or avoid some of the fees that I'll pay? Do you make more if I buy this stock (or bond, or mutual fund) rather than another?
3) They have been sold investments that they do not fully understand. Individual investors are led to believe that understanding is beyond them, so they should leave the choice to their advisor. Advisors everywhere are selling complicated products, born from the minds of mathematical geniuses. If you cannot fully understand the product, do not buy it. If your advisor cannot explain it to you, yet wants to sell it, run.
Do not feel stupid about asking straightforward questions. Does this investment match my investment goals? Why is this investment suitable for me? How will this investment make money? (Dividends? Interest? Capital gains?) Specifically, what must happen for this investment to increase in value? (For example, increase in interest rates, real estate values, or market share?) How liquid is this investment? How easy would it be to sell if I needed my money right away?
4) They misunderstand the role of their advisor. Financial planning is about assisting clients in making the most of their financial potential. It is about helping people husband the wealth they have created through their life's work or their good fortune. Individual investors should not be led to believe that financial success will be created from the participation in the markets. Rather, their own success can be enhanced and or protected through good advice.
Your advisor is there to enhance your capabilities and find solutions for your road blocks. He should assist you in paying down your debt, not sell you an investment. He should assist you in planning to deal with catastrophes such as disability or death, not just sell you an insurance product you likely do not need. He should assist you in finding the right depository for your money,that meets your defined needs, not just a sure "winner". Ask your advisor plainly: "Help me succeed. Do not just try to make me money."
5) They do not understand their own financial position. Your financial planner can only get it right with your help and hard work. You cannot know where you are going if you do not know where you are. Add up those statements and list your assets and liabilities to develop a true picture of your current net worth. List all – all – of your current spending. Do it again, because you missed some.
Do the math. Rules of thumb are silly. Science tells us that everyone has a different thumbprint, so shouldn't we all need individual rules? The industry has been great at convincing everyone that they need millions to retire. This is simply untrue for most of us. We are led to aspire to 70% of pre-retirement income. Why? Most of us will need less.
Likely your annual savings, employment taxes, mortgage, kids and high marginal tax rates are behind you. Those take up more than the 30% reduction as a "rule". You might get a full CPP payment or very little. You may qualify for the standard Old Age pension, or you might get some extra. Again, there is no substitute for doing the math.
So, what is it that you should do? How you get back a sense of control? How do you raise your level of understanding? Most importantly, how do you reduce or remove the angst?
Start now! Ask, ask and ask! Write down the answers...and relax!
Gordon Stockman, CA, CFP
Gordon Stockman is the Vice President – Financial Planning at Efficient Wealth Management Inc., a leader in cost efficient financial planning. He teaches at George Brown College and Seneca College in their Financial Services and Accounting areas. He is also a frequent guest on television and has written numerous articles on investing and financial planning. Value For Money Investing means we wish to allocate and use our hard-earned resources in order to improve investment outcomes in a continuous and sustainable way at a fair and equitable price. In other words, achieve good investment returns AND receive fair value for the services provided. Costs do matter! |
