Money affects nearly everything that we do. However, there are certain times in our lives when we tend to think…
Money affects nearly everything that we do.
However, there are certain times in our lives when we tend to think more pragmatically about money. Typically, these are focused around major life events, such as getting married or divorced, having a first child, receiving an inheritance or even winning the lottery.
On occasion, there is a greater societal event that makes us pause and wonder “if we will be okay.”
A recent example is the COVID-19 pandemic. During the lockdown periods, people began contemplating major life changes — moving to a new state, changing careers or even starting a business.
At such times, people also begin assessing their own ability to manage their money and whether they should seek professional financial advice.
Some of the most compelling reasons to seek a financial advisor’s advice are:
— If you do not have a lot of experience with investments, insurance and taxes.
— If you have or will be experiencing a major life event.
— When you cannot afford any losses in your portfolio.
— When you need more sophisticated and complex planning.
Lack of Experience
While television and social media can make financial planning seem easy, the reality is that it can be far more complex than many realize. For example, it is not enough to simply have assets rise in value if they result in a high tax bill. Similarly, an advisor can help you find the most cost efficient means of acquiring an investment. They earn their fees by giving your investments their full attention, continually rebalancing a portfolio to maintain your desired risk and regularly ensuring that your investments are still achieving their stated goals.
Young people or people who have not handled money in the past may simply need to get a baseline for their finances. A financial advisor can provide foundational structure for their life goals by creating an initial financial plan for them.
Additionally, new investors can improve their overall financial literacy with lower risk by working with a professional rather than attempting a learn-as-you-go approach. They are able to understand, in real time, about key terms and strategies like diversification, volatility, dollar-cost averaging, risk, correlation and allocation that are designed to help weather market fluctuations. They can also learn to recognize how the market tends to react to inflation, recession and geopolitical events.
Over time, the investor may find that their comfort level is more compatible with having a professional taking the lead, or they may find themselves ready to take on more tasks themselves. Either way, partnering with a professional early is akin to a good internship.
Experiencing a Major Life Event
People are routinely faced with events that can literally change the course of their life.
These life events include:
— Relationships. Marriage, moving in together or divorce.
— Property ownership. Buying and selling a primary home, vacation home or investment property.
— Medical. Normal aging needs, a new chronic medical diagnosis or an unexpected disability.
— Elder issues. Caring for parents or receiving an inheritance.
— Children’s needs. Birth or adoption of a baby (and increasingly grandchildren), college planning or adult children moving back in.
— Employment. Major promotion, relocation or a layoff.
— Entrepreneurship. Starting a new business, buying a franchise or the succession of a parent’s business.
Each of these events tend to be accompanied by emotion. Unfortunately, emotional investing tends to lead to poor results. People can get caught up in the euphoria of a surging market, buying too late into the cycle. They may panic when the market has turned downward, especially if they were not experienced enough to build a portfolio that had resilience.
Too many people believe that they can time the market, but rarely do the results bear out positively. Financial investing requires discipline to let the data dictate activity. A financial advisor can be that voice of patience when emotions are overwhelming.
When Losses are Not Recoverable
Time is an investor’s greatest friend. Investment mistakes can often be overcome simply by holding tight and letting the market recover from the event that caused it to tumble.
As one gets closer to a child starting college or to retirement age, there is no longer enough runway to fill gaps in one’s portfolio. There is already a predetermined date for investments to be changed from an accumulation focus to a distribution plan. As clients get closer to that date, it becomes more crucial that investments are positioned properly to absorb market downturns.
Investments also need to be aligned to minimize taxes and avoid penalties. For example, if money is invested in an IRA and the person wants to use it for college funding, they could face both income taxes and an early distribution penalty if they have not reached age 59 1/2.
A financial professional can help you ensure that your assets are in the appropriate account and will be tapped in the most efficient pattern. They can also help reposition assets to maintain a steady stream of income during market fluctuations.
When Sophisticated and Complex Planning Is Needed
When a client suddenly comes into a significant amount of money, it can be imperative to address multiple issues. Some situations can benefit from having simultaneous professional guidance for investment decisions, risk management, creditor protection, legal and tax considerations. A financial advisor or wealth manager is able to bring together the appropriate professionals who are experienced in these situation-specific events.
Tax law changes regularly. The more complex the situation, the more important it becomes for a financial advisor to quarterback with the appropriate tax and legal professionals. In doing so, the financial plan and investment structures will remain in compliance with current tax law or can be adapted by the appropriate parties to align with the revised tax code.
Finding the Right Advisor
Some people may find that their issue is simple enough to be able to spend a weekend on the internet and feel comfortable that they can accomplish their goal. Or they simply do not have enough income to be able to afford a professional advisor. Fortunately, there are excellent resources available to assist DIY’ers with many of these questions.
Should you decide that you really do need professional guidance, but are limited in funds, there are also many free or low-cost options for getting professional guidance.
If you are ready to step up to an ongoing professional relationship, you can go to trusted persons in your community to get a referral. For example, you can ask your CPA or attorney for a recommendation to a financial advisor. Seek at least two or three referrals and interview them to determine who is a good fit for you.
The Perfect Partnership
You may choose an advisor by their expertise as evidenced by their niche market. For example, a person who has just learned that their partner no longer desires to be married may choose a practitioner who specializes in divorced clients.
However, it is equally important to match by personality. You will be divulging many personal details about your finances, your lifestyle and your dreams. It is, therefore, also important that you are truly comfortable talking with them about these topics. If you feel intimidated or that they are not explaining things fully for you, it is time to interview a different prospective advisor.
Finding an experienced financial professional that listens to your needs and desires, while educating you on financial choices, can feel daunting. But the perfect partnership does emerge when rapport and mutual understanding come together.
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Update 02/15/23: This story was previously published at an earlier date and has been updated with new information.