It is easier than ever to put your investments on automatic. From Vanguard to Fidelity to Schwab, every custodian has online tools that will help you diversify, allocate, rebalance and research your investment portfolio – if you are so inclined.
Financial planners and investment-only managers have those tools, too. And they make analyzing and designing investment portfolios very efficient. But that’s not why your portfolio needs a financial planner.
Your portfolio needs an experienced, qualified financial planner because YOU are not a machine or a software program. Your investments should reflect your goals, your wishes, your fears and your values. No machine or tool can tease that out of you – yet.
Maybe you’ve even heard all that before. Let’s break down what that really means when a planner, as opposed to an investment-only manager or an automated tool, is designing and managing your investment portfolio.
Many clients first start thinking a bit more about their investments when they are nearing retirement. Most planners and many tools can do retirement projections to see if you have enough money to live comfortably without a regular paycheck.
But it is not just about spending the same amount each year in retirement. More and more research is being done that shows retiree spending habits aren’t linear. When people first retire, they can often spend more than they were while working. They have more free time to spend and usually have a bucket list of trips, improvements, and hobbies that have just been waiting until retirement.
But guess what happens over time? Once the house is improved, the trips are taken, the adult children are supporting themselves, annual expenses actually go down. Sometimes for several years, sometimes for a short period. An investment portfolio designed for the “long term” retirement may not be generating enough income to provide for all of the extra expenses in years one through five. Or the software-generated retirement projections discourage that kind of spending (not realizing it will only be for a few years). Conversely, a portfolio designed to maximize income in the early years may be inappropriate in years ten through twenty. And then, as one nears the end of the plan, health care and long-term care costs can complicate matters. Different expenses occur, protection of your assets become more critical, and estate planning moves to the forefront.
A good financial planner will finesse the software inputs and outputs to craft a multi-stage, multi-goal investment portfolio. And, by also managing the portfolio for you, they will know when to adjust to the next stage of life.
Although sometimes used interchangeably, your wishes are different than your goals. Wishes are not needs, like living expenses, or wants, like a new car. They are things like a once in a lifetime trip or a desire to help pay for a grandchild’s college education. They don’t have to take place, nor do they take place every year, but baking them into a plan and an investment portfolio, is where a good financial planner really shines. Maybe you can’t really afford spending $10,000 a year on trips to Disneyland with each grandchild. But you could save up and spend it five years from now on all the grandchildren without seriously derailing your overall retirement plan. A planner can help figure out where and when that $10,000 materializes and manage the portfolio accordingly.
One “wish” I often hear from pre-retirees is that they want to be debt-free in retirement. Should they pay off that mortgage before they retire? In this low-interest rate environment, the math would tell you no. You could earn more in the market than what you are paying on your mortgage interest. Plus that mortgage interest is deductible on your tax return, making the after-tax impact even lower. But math be damned! If you want to be debt-free in retirement and paying off that mortgage a little early doesn’t destroy your retirement savings, why not? That is what a planner should be helping you figure out; not whether you will earn more in the markets than you are paying in loan interest.
Not many investment-only managers spend a lot of time talking about your fears. They like to talk about returns and asset diversification, but quantifying your fears is hard. Fears can be based in reality but are quite often a wee bit irrational. I once had a client who kept over three years of expenses in cash, even though she was still working and had a pension that more than covered her expenses. Was that necessary? No, but it allowed her to sleep at night. Most importantly, keeping that much in cash was not going to prevent her from living comfortably in retirement. She had her investments for that. In fact, a good financial planner would recognize it as an opportunity to manage her investment portfolio a bit more aggressively, since she had such a large cash cushion.
When we think of values in the context of investment portfolios, we often turn first to socially responsible investing, also known as ESG investing. But whether you want your individual investments to reflect your social conscious or not, values can and should dictate other aspects of your portfolio. Do you value family and want to make sure they are taken care of after your gone? The excess portion of your portfolio should be invested differently than the portion you need for your lifetime.
Do you want to leave a portion to charity? Using low basis stock or privately held investments might be most appropriate for that. Maybe part of your portfolio should be in a donor-advised fund, not in your regular brokerage account. Investment-only managers and automated tools are focused on a diversified mix of investments, not necessarily the location of those investments and the values they need to reflect.
There will always be good investment-only managers who understand the markets, the variety of investment products and the concepts of asset allocation and diversification. There will also be more and more automated tools to help with investing and with basic financial planning. But the value a good financial planner brings when they are managing your investments for you and your unique goals, wishes, fears and values, cannot always be quantified or automated. Doesn’t your portfolio deserve that kind of attention?