Managing your financial plan can be overwhelming. After all, it’s ultimately up to you to make sure that your investments, retirement plan, estate plan, insurance policies, and taxes are all on track and working efficiently. That can be an intensive task for a financial professional, let alone for someone with limited knowledge about each of these areas. But, even if you’ve successfully implemented strategies in each of these areas, are you sure that each strategy is working together the best that it can?
It is typical for individuals to hire a wealth or investment advisor, an accountant, an attorney, an insurance agent or two, and maybe even a banker for your lending needs. However, how often do these individuals get together and discuss your entire situation? Unfortunately, the answer is usually, never.
Not coordinating your financial plan comes with consequences that includes real dollars. Here are just a few of the pitfalls of not properly coordinating your financial life:
1. The Tax Pitfall
Should you do a Roth Conversion? Should you take an IRA distribution a year or two before you’re required to do so? What is your forward-looking tax bracket projected to be? Should you take some capital gains this year vs. leaving for the future? What is the best retirement plan to initiate for a self-employed person?
Most of these scenarios outline opportunities to reduce tax liability in the current year. However, it takes a proactive approach to identify these opportunities. As one example, an accountant wouldn’t know the amount of realized capital gains in an investment account for the year without coordinating with the investment advisor. It is typical for an accountant to assume something similar to the year before. However, while that may be sufficient in some years, it can also be inaccurate if there were an unusually higher or lower amount of realized capital gains in the current year compared to past years. And, it certainly seems to make sense to get an accurate number for the current year.
As Wealth Advisors, we’ve worked with accountants to find opportunities for clients to take capital gains in the current year while avoiding increasing tax liability due to a year with low reportable income.
These are simply just a few of the key issues that can be resolved by simple coordination between your wealth advisor and your accountant. Accountants will often look in the past as a barometer to make decisions. They will compare the current year to years past. A wealth advisor can use detailed cash flow projections, using all of your financial information (income, Social Security, investment account balances, etc.) to look years into the future. Together, with all the information, they can make your financial plan more efficient.
2. The Estate Planning Pitfall
So, you hired an estate planning attorney to draft your important documents like your trust/will, power of attorney for healthcare, power of attorney for property, etc. Your attorney did all this great work in drafting your documents, but did you follow up with your investment advisor or insurance agent to change beneficiaries or retitle certain accounts into the name of a trust?
Unfortunately, this mistake is all too common. By not properly following through and changing beneficiaries or retitling accounts, all of the estate planning work done by your attorney can be made void. Many think that simply creating a will or trust document that labels beneficiaries will trump whatever beneficiary designations are in place on investment accounts or insurance policies, which is, of course, not true. Some attorneys will advise on how to change your beneficiaries, but I have never witnessed one that would go so far as to fill out beneficiary forms with their clients after drafting documents.
Advisors and financial planners are there to make sure those changes are made and that beneficiaries and trustees are updated as life changes. With coordination, your advisor can communicate directly with your attorney to make sure there are no errors in the designating of beneficiaries or titling of accounts.
In addition, an advisor can also help remind attorneys of certain trust provisions that may need to be included, such as the need to retain benefits of inherited IRAs by setting up a see-through trust. And, getting documents drafted in the first place can be difficult as many people procrastinate regarding their estate plan. An advisor can often help facilitate the estate planning process as well.
3. The Insurance Pitfall
Do you need life insurance? Should you have more life insurance? What about long-term care insurance? Are your policies current? Have you reviewed your insurance policies lately? Are they on track to perform as they were designed to on the day they were issued?
Life insurance agents, unlike financial advisors who advise on retirement plans, are not bound to a fiduciary standard when it comes to making recommendations for insurance policies. And, once policies are written, it is rare to find an agent who will actually review those policies over time to make sure they are still helping the client achieve the objective that they initially set out to achieve.
Why aren’t policies reviewed? One might say it is because most insurance policies pay advisors a front-end commission. In other words, it doesn’t pay the agent to monitor those over time (this is something the insurance industry is trying to solve). The result is that over time, as goals change, and as life changes, these policies may need to be updated, altered, or even removed altogether. A good advisor will monitor your insurance policies to make sure they are still achieving the objectives originally desired. If not, the advisor can communicate with the insurance agent in order to make alterations that best suit you. Sometimes, the advisor and the insurance agent might be the same person, which could make things even more simple.
It is also common that an insurance agent may not know the full complexity of your situation. They may not be looking at your entire financial picture, considering future cash flows to foresee what’s ahead for you, or, how your portfolio may offset your insurance needs. Whereas, an advisor might point out that due to the increased value of your portfolio, you might consider an umbrella policy. Or, you may now be able to self-fund any potential liabilities in the case of death or a long-term care event. Coordination can allow an advisor and an insurance agent to work together to get more defined on what’s best for you.
The Bottom Line
Coordination can be complex, especially when you are trying to coordinate between two or more complicated topics, like the ones mentioned above. For the average individual, this is a daunting, or even impossible task. This is where some see the benefits of hiring a financial planner, to oversee all aspects of their financial plan. An advisor with the right credentials, like a CERTIFIED FINANCIAL PLANNER™ designation, will be trained in all of these areas and should be able to effectively work with the subject matter experts (like your accountant or attorney) to arrive at the best solution for you.
So, if you’ve been proactive enough to begin to address each of these areas, you’re probably ahead of the pack. The next step; make sure that what you’ve done in each area works best with the rest of your plan, or, find a qualified advisor to do the hard part for you.
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