Your Financial Health May Need a Second Opinion

June 6, 2014
H. William Wolfson, DC, FICC, MS

The necessity of knowing what financial products to purchase and when to sell is usually an enigma, and most individuals have no rhyme or reason for what they choose to do with their investments.

In healthcare, a second opinion is viewed as an opportunity to ensure the advice given is accurate and all parties agree with the suggested resolution of the concerns at hand. If not, reevaluation is needed with possible additional tests, consultations and a revised course of action. A similar concept may be used in financial planning.

Individuals, after purchasing a financial security (i.e., stock, bond, mutual fund, etc.), may not know or carefully review the financial ebbs and flows occurring on a continual basis. Meanwhile, others may track their investments on a daily, weekly, monthly or other timely basis.

The necessity of knowing what financial products to purchase and when to sell is usually an enigma, and most individuals have no rhyme or reason for what they choose to do with their investments. Investors seem to have their own thoughts of what investing is all about. In reality, they may not fully understand what an asset class is, how it may relate and interact with other financial products, the effect of inflation and market risks or their own fortitude to maintain a strategy despite continual and inherent market shifts, according to the US Security and Exchange Commission.

Your portfolio is your wealth garden

Investments and portfolios should be viewed similar to growing a garden. After seeds are planted, and water and food are added, the growth process is expected. Plants are pruned, watched and cared for, yielding the resultant harvest.

Unfortunately, unforeseen circumstances may occur (i.e., insect attack, disease, wind, excessive heat, frost, etc.), preventing expected yield or worse, a total loss. This may necessitate a change in plant care protocol.

Investing is not that much different. Financial asset selections are made and, if given the attention and care they deserve, it is possible the expected returns are realized. However, investments are also prone to adverse effects due to different financial risks.

Research has shown that many individuals who go it alone are likely to make (unknown) investing mistakes. When purchasing a financial product, is the individual getting the best available price? Do they have a price goal or percentage return for the asset class purchased and know if the investment is a short-, mid- or long-term holding? Can interest rates adversely affect the asset or cause it to rise in value? Is the asset purchased appropriate for their financial situation and congruent with their financial goals now and going forward? If the asset loses value, is it best to sell, add to the cost basis, do nothing or gift it with resultant tax implications? If appropriate, are beneficiaries and contingent beneficiaries listed?

These are some questions an investor should ask him- or herself before investing.

“The bottom line is that relying solely on old rules of thumb and limited factors like time horizon and risk tolerance can cause people to take more investment risk than is prudent,” Karin Sifler, CFP, wrote in a MarketWatch article.

Portfolios should consist of financial products where assets may or may not be correlated to each other. This allows an investor to develop a portfolio with expected inherent risk, but also anticipated return. Diversification is important as it spreads risk over a broad amount of asset classes. This concept is similar to not putting all your eggs in one basket. Unfortunately, most individuals do not possess the knowledge necessary to build a portfolio which can fulfill their needs.

Rather than attempting to save a few basis points on cost by going it alone versus consulting with a knowledgeable advisor, investment return is usually best realized in concert with professional guidance. The cost for professional help may yield greater returns for the investor with less stress and costs.

“A leading research firm has gone beyond the anecdotes, compiling a comprehensive report on investors’ performance,” according to a recent MarketWatch article. “Not only do most individual investors not know what they’re doing; they seem incapable of improving.”

Financial advisors are not all the same

Using a certified financial planner (CFP) who is a fiduciary may allow a client to have a more profitable and well-designed portfolio ensuring all the financial assets are working in harmony.

Contrast this to a financial planner who, without fully knowing an individual’s financial goals, suggests suitable financial products resulting in a piecemeal portfolio yielding less than expected results. This may also be true of a self-investor who purchases financial products based on a “hot” tip they read, heard or were told about versus building a portfolio with clarity of financial products and being aware of the potential risks vs. returns.

A financial adviser who is a fiduciary has an obligation to act in the best interest of the client. This is diametric to a planner who is not a fiduciary and is only required to meet a suitability standard. According to FINRA, the “suitability rule states that firms and their associated persons ‘must have a reasonable basis to believe’ that a transaction or investment strategy involving securities that they recommend is suitable for the customer.”

Interestingly, Vanguard Chief Investment Officer Tim Buckley spoke in January 2014 at a Florida conference and referred to research indicating working with a financial adviser may add 3% to a portfolio’s return. He specifically mentioned 4 areas an adviser can help investor’s stay the course. These included: asset allocation versus chasing performance; tax planning with buys and sells of asset classes; active versus passive investing; and portfolio rebalancing.

A second opinion and you

The concept of a second opinion is only recently becoming more prevalent as investors make the realization their self-directed portfolios may not be cohesive or adequately researched and invested. Conversely, individuals who consulted with and retained a financial adviser or planner may not be dealing with someone who has fully explored and communicated to the client the true nature of his or her investments and if the portfolio is yielding the results the investor is counting on when needed.

When was the last time you asked for a second opinion of your financial health, portfolio and asset holdings? Since beginning your investing journey have any changes occurred to you or your family dynamics—marriage, divorce, birth, death, adoption, etc.? Have you saved and earmarked a cash account for emergency use? Is there a need for educational funding? Has a retirement plan been contemplated or instituted? Has adequate life, long-term care, or disability insurance been purchased? Have you accumulated debt and are concerned about the best way to reduce and eliminate it? Has your risk tolerance changed and asset allocation appropriately rebalanced? Has there been any life events causing additional challenges or concerns and not appropriately addressed?

These are only some of the important questions requiring answers after a comprehensive and thorough evaluation is performed on your financial health. It may not be that much different vs. the services a doctor is asked to perform for a patient—consultation, examination, discussion of test results, implement necessary care and monitor results.

You are responsible for your financial well being

Your financial well being and future is your responsibility to ensure. Be proactive, ask questions, learn all you can, and trust and expect those you work with to always act in your best interest.

Obtaining an objective review, analysis, and report is a smart action step possibly preventing you from realizing only too late that what you should have done is what you could have done if you only knew.

Working with a trusted fiduciary financial advisor who knows your goals and has thoroughly analyzed your financial health and communicates with you, is an advisor who is performing their duty to you, the client. Is your advisor offering these services and more? This is an important question you should be able to confidently answer in the affirmative or it may be time for that second opinion.

H. William Wolfson, DC, FICC, MS, MPAS is a financial consultant and advisor. After passing the rigorous Certified Financial Planner examination, Dr. Wolfson obtained a Master of Science in Personal Financial Planning from the College for Financial Planning. He was subsequently awarded by the College a Master Planner Advanced Studies. Dr. Wolfson is a member of the Financial Planning Association (FPA). Dr. Wolfson retired after 27 years of active practice and remains active volunteering his expertise to the continued education and success of professional colleagues and investors. Dr. Wolfson may be contacted at drhwwolfson@gmail.com.