You visit your doctor to monitor and protect your health. A financial advisor can do the same for your financial well-being, especially in tumultuous financial times.
Columbia Metropolitan spoke with three local married couples and a local single person who is going through a divorce about their views on financial planning, their financial concerns and plans for the future. Their names have been changed to preserve their privacy.
Finding the right financial advisor isn’t easy. Mark and Marie, a couple in their mid-30s with three children, had wanted to use a financial advisor for a long time. Mark is a sales representative and Marie is a nurse by trade who has chosen to stay at home with their three children, ranging in age from a newborn to a four-year-old.
They’re smart people but they don’t have any extra time. “There’s so much going on in life,” Mark says. “I try to keep track of things financially, but financial planning isn’t my area of expertise, and I don’t have time.”
“About three years ago I realized I needed to do something, so I reached out to an acquaintance who represented himself as a financial advisor but was really a broker,” Mark says. “I told him my plans and asked, ‘What do I do? Where do I put my resources?’ What happened was that he opened up a few brokerage accounts, and I was paying more fees than I was earning. That wasn’t working out.”
“So I went to a friend of a friend who was supposed to be a financial advisor, and it turned out that they really weren’t,” Mark says.
Frustrated, Mark and Marie asked their CPA if he knew of a good financial advisor. It turns out that their accountant had one right in his office. This Certified Financial Planner (CFP) is paid a negotiated fee based on the clients’ needs and circumstances.
“We set up a meeting with her and gave her all of our information,” Mark continues. The financial advisor presented them with an analysis of their current financial situation and projections for the future.
“It was very eye opening to see the numbers, to really lay everything out and see where our dollars were going. We learned we needed to reallocate our resources, and realized that there is a better way to do it.”
“Before the advisor, we were doing what we thought we needed to be doing. Now we are working with real numbers. Seeing the actual numbers shows how much we actually need to be putting away instead of guessing.”
The advisor helped them focus on what they really wanted in the future and asked hard questions about their values and priorities.
Mark and Marie are now on track to have six months of reserve funds in case of an emergency, be able to retire early and even have money saved for not only their children’s college educations, but also their weddings.
“Our advisor broadened the scope of things we are preparing for. Then she gave us the blueprint to get there. We check in with her several times a year to be sure we are staying on track.”
“She’s also a resource for when we have questions. She’s somebody I can call and say, ‘I want to invest in this piece of property.’ I tell her my thoughts, and she looks at the numbers and tells me whether it’s a good investment or not. She’s not emotionally tied in like I am, so she can give unbiased advice.”
An added benefit is that working with a financial advisor has brought Mark and Marie together on their finances and has them working toward the same goal.
If you’re looking for a financial advisor, Mark advises, “It’s important to get a referral from someone you trust, and then to figure out how you’re going to interview that person. There are a lot of financial advisors out there, and they are all different in what they do. It took me three tries before I found the right person.”
Another couple, James and Susan, find themselves balancing the financial demands of having two kids in college and an aging parent in a nursing home.
“Fortunately, my mother and father did some financial planning to prepare for Mom’s widowhood and old age, so she’s taken care of. I don’t know what we’d do if they hadn’t.”
James, who is an independent consultant with a fluctuating income, and Susan, who has a management position at a local high school, have used a financial advisor to create their family’s safety net and plan for retirement.
“It’s hard when you don’t know what’s coming in from month-to-month,” says James. “That’s why planning for the worst — and using the guidance of a professional — has enabled us to send our daughters to the colleges they wanted while still saving for our eventual retirement.”
Ed and Elaine, a couple in their late 50s, are searching for a financial advisor to help them make decisions on what to do with their investments, retirement accounts and mortgage and to answer the big question: When can they retire?
Elaine, who is a CPA, says, “I simply don’t feel like I have time to keep up with things and do the research. We’ve tried to do what’s right, we’ve participated in employee savings plans since they became popular in the mid-90s, so we’ve saved money, but I’m not sure we’re properly taken care of. Even though I’m a CPA, I feel like I should know better.”
Ed adds, “And I’m mostly clueless.”
Until recently, Ed and Elaine didn’t know what they wanted their retirement to look like. They thought they wanted to retire near the lake, and had been trying to buy property for years. Recently, they found the answer when a new house near the lake was put on the market in a distress sale. They bought it and will live there when they retire — they just don’t know when that will be.
“Our notion is to pay off our mortgage sooner rather than later, but we don’t have a clear idea of how to accomplish that,” Ed says. “We’re trying to evaluate interest rates and market performance. We’re also trying to figure out how much longer we want to work.”
They’re seeking a financial advisor who can help them manage their investments and make smart decisions.
They’ve worked hard for what they have and said they have never lived in luxury. “We’ve never had a high-end car, and the last time we bought a new car was in 1985.”
But now it’s time for some professional help. Elaine says, “Are we doing the right things? When do we want to retire? Do we even have a realistic idea of how much we need to live comfortably? As a CPA, I know enough to be dangerous. Our situation is even more complicated because some of our retirement funds are in the federal Thrift plan. We don’t know if we should leave our money there or what.”
Financial planning can get even more complicated when you’re faced with a major life change, such as divorce. Columbia resident Alice has found real value in using the services of a Certified Divorce Financial Analyst (CDFA). “Divorce is traumatic and overrun with money worries,” she says. “Our divorce financial advisor has been instrumental in helping us make sound and fair decisions about how to divide assets. She doesn’t just look at the value of our assets and split them fifty-fifty. She uses software to predict how our separate financial positions will evolve over the next decades, based on the nature of the assets. That’s when the real shock can hit.”
What may look like an equal division of assets and debt can turn into one partner getting into serious financial trouble just a few years down the road because taxes, liquidity, costs and other factors were not fully considered. It’s very common for one of the divorcing parties to end up bankrupt.
“Many lawyers and even some financial people don’t think about all the implications when assets and liabilities are divided,” Alice says. “I’ve learned so much from my financial advisor. I was recently listening to Dave Ramsey’s radio show, and I heard him tell a divorcing listener to value their 401K at face value when splitting property in their divorce. I now know that his advice was only partially true in light of all of the other important factors besides an asset’s current gross value. That 401(k) asset may actually be worth much less than another asset with the same current face value due to taxes and the possibility of incurring an early withdrawal penalty. Financial mistakes made during divorce settlements can be especially costly.”
“Smart people know how to manage their money,” Alice says. “Smarter people know they don’t know enough on their own, so they hire a financial advisor.”
As Mark and Marie found out, it’s important to know whether your financial advisor is selling products, charging for his or her time, or charging an ongoing management fee. You should know what you’re paying for. It’s also important to separate financial planning from investment advice, as they are two distinct decisions. Finally, be sure to set realistic goals that you can actually meet and then follow through with them.