I had a friend reach out to me recently and we began talking about how you start reassessing your life as you get older. He went on to say that he was unsure if/when he would be able to retire. He said he had an advisor, but, I sensed that he wasn’t feeling too confident about his future which seemed a little funny if his advisor was really an advisor. He asked if I would be willing to take a look at his financial situation and weigh in on whether I had any suggestions. I agreed to help as a friend. After all, this is the kind of stuff I love doing – it’s like putting a jigsaw puzzle together!
As is customary, I provided him with a list of the documentation I would need so that we could begin to evaluate where he stands. Tax return, investment account statements, social security projections, household budget, etc are all critical if we are going to really help! We put together a financial plan “lite” version for he and his wife – enough where we could see if there were any major threats, concerns, or gaps that could derail his future plans.
As it turns out, they were in pretty good shape aside from a few minor issues that we found. I did question why so many capital gains were realized in 2022? The answer was because he wanted to divest of a concentrated stock position and was worried about the corresponding risk – very rational for sure! However, the timing was not well thought out. For had they spread the sales over two tax years rather than one they would have saved over $6000 in taxes since capital gains could be tax free if their taxable income was kept under 89K. My friend wondered aloud why his “advisor” had never pointed out this tax strategy. Well, how could the advisor head off this issue IF the advisor had never requested a copy of my friend’s tax return? The answer is that the “advisor” is an asset gatherer, NOT a wealth manager. Wealth managers (fiduciaries) add value to a client’s life in ways that go beyond delivering an investment return. Another example is that the advisor had invested in tax-free municipal bond funds. Sounds good on the surface, but, since this client was in a low tax bracket they would have been better off in taxable bonds that would have provided better after-tax return. And, to carry this analysis even further, there were bond funds inside his Roth IRA. Why? Because my friend told the advisor to take some risk off the table. But, had he read the tax return, the asset gatherer would have seen interest earnings from a high level of cash in the bank. Therefore, the Roth IRA should have been invested for maximum growth since it’s the last money that typically gets tapped since the earnings are never taxed at all!
So, what’s the point of all of this “criticism”? Know what type of advisor is working for you and if they have never asked deep questions or asked for a tax return or any other information besides an investment account statement, the advisor is likely an asset gatherer not a wealth manager. Wealth Managers are looking to ensure that you are making smart decisions in all facets of your financial life. Generating investment returns is the easy part!