On April 6th, the US Department of Labor (DOL) released the final version of the much anticipated “Fiduciary Rule,” which is intended to protect retirement investors from receiving financial advice that benefits the broker or salesperson at their expense. The Rule requires any investment adviser receiving compensation for making individualized investment recommendations to a retirement plan participant or Individual Retirement Account owner to put their client’s best interest first. As a fiduciary, they’ll be held to a higher standard than what most retirement advisers adhere to today—a lesser 'suitability' standard that lets them recommend products that are not necessarily in their clients’ best interest. The Rule is an excellent first step but much more needs to be done, and the revolution in the music industry provides an example of how an industry can be 'reformed' for the benefit of consumers.
The music industry has transformed over the past decades to drastically lower the costs consumers pay while, at the same time, greatly improving the experience of listening to music. My first musical memory was back in the summer of 1972, when my family and I were on a camping trip in Washington State. I was riding in the cab of our turquoise 1971 Ford pickup and Johnny Cash’s “A Boy Named Sue” was playing on the aftermarket 8-track player that was bolted below the dashboard. The sound quality was poor, compared to today’s standards, and the 8-track design caused songs to be interrupted as the player periodically changed tracks. Next came tape cassettes and then in the 1980s, CDs. Then came the iPod, which allowed for music to be purchased and downloaded to a very convenient device one song at a time. Now we have subscription services, such as Spotify, which allows access to a near unlimited universe of content for a monthly fee.
Meanwhile, in the financial industry, a lot of investment management continues to be delivered by brokers who charge commissions based on the transactions they execute for you and investment advisors who charge an additional 1-2% annual advisory fee on top of underlying mutual fund or ETF expenses for the investments they oversee. We meet regularly with prospects who are disappointed with the investment returns and overall experience of working with their brokers and are looking for more holistic and comprehensive guidance. Based on years of those conversations, we have identified the major categories of services that, together, provide a comprehensive approach geared toward optimizing long-term wealth. Here is a partial list:
Financial Planning: This can be as simple as helping our clients clarify and prioritize their life and financial goals, and creating and monitoring plans to help keep clients on track with their financial goals. We use sophisticated modeling software, but always start with our financial blueprint that shows your family risk management, balance sheet and income statement on a single page.
Retirement Planning: This includes specific recommendations for your current 401k account (investments, deferral amount, Roth -vs- Traditional) and an analysis of any additional financial products you may have purchased, such as annuities and Long-term Care protection. This process identifies inefficiencies and gaps in your current plan, along with approaches to close those gaps, including strategies for creating reliable retirement income from your savings.
Investment Management: I believe that for some investor needs, a well-diversified portfolio of efficient, low-cost funds (either mutual funds or ETFs) may provide superior after-tax results. Key areas to address are asset allocation (which broad asset classes to invest in such as US stocks and bonds, real estate, and foreign stocks and bonds) and broad diversification within those asset classes to manage volatility. For some investor needs, more complex (and expensive) approaches will continue to make sense but we do not believe this is the proper place to begin the conversation.
Strategic and Tactical Tax Management: This is one of the most promising areas where financial advisors can add measurable value through the elimination of unnecessary taxation. While we certainly can’t control (or reliably predict in my view) the future short-term movements of the financial markets, we can strongly influence the timing and amounts of both capital gains and income tax payments, and this activity can have a profound long-term impact on overall wealth accumulation and preservation.
Risk Management: Risk management analysis identifies the various risks that can threaten your financial security, and then evaluates the solutions you have already implemented to assist you towards protecting yourself against the risks you cannot afford to take. Proper risk management also evaluates the benefits of LLCs, asset protection trusts, and family limited partnerships to protect your assets against creditors and predators.
Complex Financial Modeling: Many of our clients have more complex finances involving executive benefits, company stock or options and/or closely-held businesses, and this creates the need for more complex analysis and recommendations. For example, we help our clients balance the benefits and risks of concentrated stock positions and also help them analyze the most efficient use of executive benefits, such as non-qualified deferred compensation plans and employee stock options and stock purchase plans.
Our Vision: Our vision is to be leaders in transforming the way financial services are offered to clients. We have created a comprehensive, efficient and yet simple service model that provides a holistic client experience geared toward optimizing long-term wealth. We believe that clients should expect more than being overcharged for increasingly commoditized investment management services and then having to figure out all the financial planning areas themselves.
Please give us a call or email to learn more about how our client engagement model may be a good fit for you, or to spend a complimentary hour picking our brains about anything that is on your mind.