Access to virtually all human knowledge (financial and otherwise) resides just a click away on the Internet. This has caused some consumers and media pundits to speculate whether the need for financial planning advice has been rendered obsolete. In fact, I’ve been asked a number of times over my career what I do that a consumer cannot do on his/her/their own. I have read other financial planners take a defensive position in responding to this question. Two common planner rebuttals are as follows –
“Consumers tend to act emotionally, and part of the planner’s value proposition is to provide cold, emotionless guidance during challenging investment market environments.”
- “My professional experience and academic background in finance makes me better and more qualified.”
For the record, I am not sold on either of these responses. Sure, the ability to remain calm and communicate during periods of extreme volatility is a virtue, but I have seen plenty of planners and investment advisers panic and make bad decisions during such times as well. I definitely do believe that academic background and experience are important and that financial planning encompasses a wide knowledge base. At the same time, I don’t think financial planning is rocket science either. I do not believe you need a PhD in finance to be a great financial planner, and, as a practical matter, most of the zillions of little rules and strategies I have picked up over the years can indeed be found on the Internet.
So why should anyone hire a financial planner? My response is that, while all information may be at your fingertips, you, the consumer, do not know what you do not know. While any individual consumer may be well read and knowledgeable, he/she/they typically only has experience in a single set of financial circumstances – their own. In contrast, an experienced financial planner has reviewed scores of consumer financial circumstances and learns new concepts and rules from each of them that may be applied to future clients as well.
To illustrate this by example, here are few real-life examples of simple pieces of advice that we have given that even the most sophisticated and well-read clients have overlooked.
A client who is over age 72 and maintains a 403(b) tax-sheltered annuity plan from a former employer with an insurance company was advised by a customer service rep for the 403(b) that she could take her RMD from her IRA instead.
While it is true that IRS permits IRA holders to take RMDs from one or any combinations of IRAs, qualified retirement plan RMDs may not be included in IRA distributions. Had she taken the phone rep’s advice, she could have been subject to a 50% excise tax penalty for failing to take her 403(b) RMD.
A 65-year-old client who is still working, wanted to transfer a portion of his 401(k) plan to her self-directed traditional IRA to gain access to a broader range of investments and to reduce investment costs.
The HR director of his company informed him that she could not withdraw money (except as a loan) from her 401(k) plan until she was officially retired or separated from service. However, when I reviewed the Summary Plan Description, I discovered that the plan explicitly permits in-service distributions for employees over age 60.
During a financial planning review for a couple with four children, we discovered that the couple had updated their beneficiary designations after the first two kids were born, but forgot after the fourth. Our review saved them from accidentally excluding one for their children.
In reviewing a client’s employee benefits documents we discovered that the he did not realize that the beneficiary designation form he signed for the company’s group life insurance coverage did not cover his 401(k) plan. He had several hundred thousand dollars in the plan. The tax ramifications of failing to name a beneficiary on his 401(k) plan could have been catastrophic.
In the 30+ years that I have been reviewing client financial plans I have accumulated hundreds of examples like these. I may not necessarily be any smarter than you are, but I will almost certainly find mistakes or opportunities in your financial plan that you will detect on your own because you don’t know what to look for.
In closing, I offer a humorous example of how my confidence in this assertion was once put to the test. Many years ago, dyed-in-the wool DIY consumer called me out of the blue to ask for a bit of free advice about a new tax rule. In the course of our conversation, he posed the question of why he would ever need to hire someone like me. I told him that my range of experiences gave me the edge and that I would almost certainly find items in my review that he had not considered. He assured me that there were no flaws or oversights in his plan. He had thought of everything.
The man was an engineer. He was detail-oriented, thorough, and efficient by nature. He was extremely intelligent, sophisticated about investing, and well-read on tax and estate planning laws. As I quizzed him on the details of his financial plan, I was extremely impressed. His planning was as close to perfect as I had ever experienced. When he had finished explaining all the intricate planning he had done, I was still sure there were a few minor things I could probably catch, but I elected to go for the homerun instead. I told him how impressed I was with his knowledge and organization, but asked him a simple question – If he was hit by a bus and killed today, would his wife or his children have the same knowledge and experience to continue his plan without him? He professed that they had absolutely no clue. The man became a client.
Securities offered through J.W. Cole Financial, Inc. (JWC) member FINRA/SIPC. Advisory services offered through Financial Planning Hawaii and J.W. Cole Advisors, Inc. (JWCA). Financial Planning Hawaii and JWC/JWCA are unaffiliated entities.
Fee-only financial planning services are provided through Financial Planning Hawaii, Inc, a separate Registered Investment Advisory firm. Financial Planning Hawaii does not take custody of client assets nor do its advisers take discretionary authority over client accounts.
The information contained herein is general in nature. Neither Financial Planning Hawaii nor J.W. Cole provides client-specific tax or legal advice. All readers should consult with their tax and/or legal advisors for such guidance in advance of making investment or financial planning decisions with tax or legal implications.