Financial Planning Advanced Tactics
“Advanced tactics are just doing the basics well.”
Financial planning can seem excessively complicated. Entire industries are dedicated to the complexities of the stock market, private placements, and a multitude of other investment strategies. Insurance products become elaborate planning devices with a daunting implementation scheme. Even straightforward cash flow reports are sometimes overwhelming to view and understand.
Recently, a client shared a previous financial plan created by another company. After reviewing it with the client, I quickly became convinced its main purpose was to justify the existence of the advisor who produced it. The client could not explain the objectives, or even the underlying strategy of the beautifully colored charts and graphs. This is not the first time I’ve reviewed a previous plan and the target audience cannot understand the mission and the underlying strategy.
My theory is the financial industry is full of advisors who want clients to feel they provide an expertise the client cannot himself acquire. They do this by creating convoluted plans and strategies hoping to justify their compensation. I reject this approach, a true expert can take a complicated concept and communicate it effectively to a lay man. If you cannot understand a strategy or report provided by your financial planner, and if a financial planner uses the word “advanced” to refer to any planning or strategy, I recommend getting a second opinion.
This brings us to the second law of combat, SIMPLE. Simplifying as much as possible is crucial to success in any area of life. When plans and orders become too complex, people do not understand them. When things go wrong, which they inevitably will, this lack of understanding makes things worse. Please refer to (”Hardcore Navy Seals…”) where I discussed the four laws of combat and their application to financial planning. In all financial planning, the underlying goals are basic financial concepts that should be addressed in the most straightforward manner possible.
Common “Advanced Tactic” Failures & their “Basic” Corrections:
The Overly Complicated Life Insurance Strategy.
Failure. Purchasing a hard to understand financial product, that has a death benefit, with the goal of retirement planning (you think). For all intensive purposes, you are stuffing a lot of cash each month into this product, so it better work for retirement.
Basic Tactic Correction. You want to save money for retirement. Have you max funded your work provided retirement plans (401(k), 403(b), SEP, SIMPLE)? Can you fund a Roth? Sometimes, when a client comes in with a life insurance product they have not fully optimized their already existing retirement options. Begin there.
Only after exhausting all existing retirement saving options is it time to look at alternative approaches. Life insurance may well be a successful strategy to help with additional retirement savings, but it can be internally expensive, hard to maintain, and illiquid. Consider other options such as a traditional investment account. If you do undertake a more complex approach, I urge you to review the strategy with your advisor as many times as needed to fully understand the proposed tactics and their long term objectives.
The Real Estate Investment Trust (REIT) Black Box.
Failure. Purchasing a REIT investment with the goal of regular income or dividend payments.
Basic Tactic Correction. You want regular income. Consider purchasing dividend paying stocks, or bonds that have yield in your investment portfolio.
While REITs may have a place for some investors, many were sold REITs without a clear financial strategy. The REIT regulatory scheme is sometimes less transparent than other types of investment products; confusing investors who are seeking dividends without intricate planning. I’m convinced they are utilized largely because their complexities justify the need for an advisor (that and the up to 7.5% commissions these products routinely pay).
The Over the Top Financial Plan
Failure. The advisor provided reports are pretty, but you do not understand the bottom line or even your financial condition after looking over the booklet of details.
Basic Tactic Correction. To achieve victory, you must understand the objective and the tactics of the strategy. If you do not, discuss with your advisor until you do. It is their job to make sure you understand their advice so you can effectively implement it.
This is where I struggle as a financial planner. I tailor my plans to each client based on what information is most helpful and their level of financial sophistication. While it’s rare, I have fallen into the trap of “justifying” my compensation by producing an overwhelming work product. To avoid this trap, I apply the law of SIMPLE, and every plan contains a basic and straightforward summary of my findings, and the next steps.
Financial planning basics that are advanced when done well:
There are some foundational areas of of financial planning, that when done well, result in the “advanced” financial planning many often pay to achieve. Here are my core recommendations for anyone looking to work towards financial freedom:
Budgeting. Build a budget and stick to it. This alone will create a success you can only dream of. If you cannot do the basics of living within your means and putting money aside for a rainy day, you will fail at any next level planning.
Investing. Do not try to day trade, or look at investing for a short term period. Do not obsess over complex investments that promise the world, or money managers that beat the market routinely. I believe your best and most straightforward bet is to buy and hold high quality stocks and bonds. Do not let your portfolio choices consume you on a daily basis.
Retirement Planning. The rule of thumb I use with clients is if you have $1,000,000 invested, you can live on about $40k a year in retirement. So use that number and save. Max fund your work plan, once you’ve done that, talk to someone about the next steps.
There is no such thing as “advanced tactics”, especially in the world of financial planning. Instead, I urge you to focus on the underlying basics of your strategy. Do those well, and you will be on your way to a financial victory.
Full disclosure. Everything in this blog is solely my opinion and may be subject to change without notice. All above information is based on reliable sources, but my accuracy and completeness cannot be 100% guaranteed. Individual investor experiences vary and investments are always subject to risks, including principal. No investment strategy can assure profit against loss.