Hiring a financial advisor can be a smart and profitable decision: As we detailed in a recent blog article, advisors using industry best practices can help their clients earn a significant investment premium.
There’s a catch, though. Not all financial advisors do the right thing, consistently, for their clients. Surprisingly, the great majority of financial advisors are under no legal obligation to put their clients’ financial interests ahead of their own.
As we have watched the 2016 Olympics in Rio, it’s truly impressive to see the athletes from all over the world compete at such a high level and demonstrate their true dedication to their chosen sport. The athletes and their families have spent years devoted to hard work, incredible amounts of focused energy to training, exhibit world class discipline and dedication in order to be the very best in the world. Their ascension to the Olympics of course has not been linear, as each of the athlete’s had to overcome many obstacles and adversity in their paths to reach the pinnacle of their respective sport. The Olympian athletes’ training efforts, focus, and discipline are primarily behind the scenes with many hours working with their coach and trainers, with never a promise to compete or let alone win an Olympic medal. Their hard work and tireless effort’s provides them the best chance to execute their lifetime goals.
Financial advisors can provide peace of mind. But do they deliver a demonstrable, dollars-and-cents advantage to their clients?
Two studies show that the answer is yes—if the advisor is diligent in providing several key services. Let’s start with research from Morningstar, the big Chicago-based investment research firm. A 2012 Morningstar study found that advisors who use an “efficient financial planning strategy” can help clients increase their retirement assets significantly.
When it comes to financial planning, I have found that a systematic approach is needed to make important decisions, focus on what matters most, and evaluate options. In previous posts I introduced the guiding principles of wealth management:
- Make your balance sheet, cash flow, and portfolio your friend
- Compare your finances to standards of excellence
- Stress-test your financial plan
- Know what is holding you back and spurring you forward
- Be specific and proactive to make permanent changes
In my previous four posts I introduced my guiding principles of wealth management, along with the first four principles (links to one, two, three and four). Today I will discuss the fifth and last guiding principle:
Be specific and proactive by identifying and implementing the actions that will result in the best permanent changes
Over the years, I have had the privilege of observing how clients meet challenges and tackle opportunities. Some have a knack for succeeding in any task they take on, while others seem to struggle more than they need to. Eventually, I saw a key distinction between these two groups: Successful people are usually very specific and proactive, while those who struggle tend to be vague and reactive. They set goals, but they do not follow through with a plan of specific actions aimed at meeting those goals. Consequently, instead of controlling events, they wind up responding to events. Getting stuck in reactive mode is another example of the 85% Trap.
By contrast, when successful people see a need or set a goal for themselves, they develop a specific plan of action. In keeping with the concept of the Essential 15%, they strive to find a permanent solution to every challenge, as opposed to a solution that requires ongoing effort.
In my last few posts I have discussed my first few guiding principles for wealth management: make your balance sheet your friend and compare your financial plan to standards of excellence. Today I will discuss the third principle:
Back-test and stress-test your financial plan under various scenarios to further reveal strengths, weaknesses, and possibilities.
The “Elastic Limit” is a term I’ve borrowed from engineering because it has tremendous relevance in wealth management and financial planning. It refers to the amount of stress a material can withstand before undergoing permanent deformation. For example, if you stand on a wooden bench, the wood may sag a bit and bounce back when you jump off. However, if several NFL linemen stand on the same bench, the wood will probably warp, crack, or break.
Compare your finances to standards of excellence and use them to make enhancements
When people with wealth describe to me how they view their current position, they use a wide variety of yardsticks to measure themselves. Some are troubled because they are comparing their finances to friends, family, or associates who appear to be much better off. Others are troubled because they have lost a large portion of their net worth through market declines, bad investments, or business setbacks.
It is more common, though, to meet people who feel quite confident and secure because they’re doing much better than they imagined they would when they were younger. Their confidence may be fueled by the good opinion of others around them, since wealthy, successful people are often accorded tremendous respect and kid-glove treatment.
There is nothing wrong with these benefits of success, but you can’t allow them to lull you into false assumptions about your financial position. If you want to know where you really stand in terms of financial strength, you need to employ objective standards of excellence.
Principles for Devising a Robust System
Henry Ford’s solution to paying workers for time spent “walking about” was a new system, the assembly line, an idea he adapted from the overhead trolleys used in the meat processing industry. “The first step forward in assembly came when we began taking the work to the men instead of the men to the work,” Ford later wrote. That slight but critical shift in thinking led to a huge leap in productivity. Average production times for a car fell from 21 days to 9 hours. The price of a Ford-made automobile fell from $950 in 1909 to $355 in 1921.†
Like any successful system, Ford’s assembly line was designed around guiding principles.
- Each worker would have one task and one task alone.
- The line itself had to be “man high” so that workers would not waste time and get fatigued by constant stooping.
- The speed of the line was calibrated to ensure that a worker was neither rushed nor left biding his time. “He must have every second necessary,” Ford wrote, “but not a singe unnecessary second.”
Lessons in Financial Strength
“A financially strong investor is a superior investor.” This observation, distilled from my 25 years in the field of wealth management, is simple and yet so profoundly true, I decided to make it the motto of my company. All too many investors learned this truth the hard way during the recent financial crisis: You do not become financially strong by achieving superior results; you achieve superior results by becoming financially strong.
Early in life, my family drove home the importance of strength. My family didn’t buy the home we lived in, we built it. My brothers and I helped my father pound in the nails that held the frame of the house together, and you can bet we didn’t just walk away from boards or joists that still felt rickety. My father built nuclear power plants and oil refineries, structures that must be built to last and able to weather hurricanes and earthquakes. His duties gave him a “stronger is better” way of looking at life, which rubbed off on me.
The other day I read a Bloomberg article that cited a recent survey suggesting that while the average U.S. employee calculates that he or she will retire at age 65, as a group the odds are around 50% that they will still be working at age 70. By the tone of the story, I would surmise this is less by choice and more by need.
At Janiczek Wealth Management, we are very fortunate to work with financially independent individuals and families, who have successfully put themselves in position to control their own destiny as it relates to their financial well-being. In the majority of cases, this independence did not simply happen overnight, but was the result of hard work and perseverance that eventually resulted in a major liquidity event or accumulation of wealth that changed the equation from “having to work”… to “choosing to work”. It is a very powerful edge to know that you are going to work simply because you want to, not because you have to.