Not everyone needs the skills you bring to the relationship. Some do. In today’s society, cutting out the middleman and dealing direct seems like a practical way to do business. It can often be more expensive than paying for objective advice. Lets consider four professions: Accounting, insurance, financial advisors and financial planning.
Not every American needs an accountant. If your single source of income is your paycheck, you live in a rented apartment, you are single and have no children, your tax situation is pretty simple. Put another way, you pay the money the IRS tells you to pay. This is one of the reasons why from time to time, Congress talks about the postcard sized tax return.
Once you have two incomes, own your own home, purchase rental property, have children or start a business, your tax situation becomes more complex. This is where accountants add value to the relationship. Put another way, you can pay what they ask for or what you legally owe. “What they ask for” might be the amount you arrive at doing your taxes on your own. What you legally owe may be the number your accountant arrives at after taking different aspects of your life and unique situation into account.
Many years ago, Morgan Stanley ran an add that said it well: “You must pay taxes, but there is no law that says you gotta leave a tip.”
Insurance is a complex and confusing product area. Years ago, I saw a greeting card in a store at O’Hare Airport reading: “What do hospital gowns and health insurance have in common? You are a lot less covered than you think.” That is only the tip of the iceberg.
Many individuals recognize the need for life insurance, yet feel term insurance offers better value compared to whole life insurance. They both deliver protection. The differences is in the word “term.” This means the coverage stops after a certain number of years. If you choose to continue coverage, prices are higher because you are older. If you live a long life and have continued your coverage, you realize term insurance has not built up cash value. Put another way, the only payoff is when you die. Although it is called the “death benefit” for the insured person named on the policy, there seems to be little personal benefit in death.
A second problem connected to insurance is getting the right coverage suitable for your situation. This extends into other areas of insurance like auto and home coverage. The only thing worse than paying premiums for years is discovering you were not covered for the specific damage incurred if disaster finally strikes.
A third problem is the person who can tell you which service station sells the cheapest gas in town may not have given any serious attention to their homeowners insurance since the day they bought their house. Premiums quietly rise, year after year.
A good insurance agent understands your unique situation. They review your policies and periodically shop them to determine if they can get similar coverage on your home or auto policy for a cheaper price. They explain how varying the deductible or removing certain elements of coverage can lower your costs.
Financial Advisors and Investing
Not everyone is emotionally suited for the stock market. There are some people who prefer earning money by earning interest. They have weighed risks vs. rewards and made their decision. They may go through life without a financial advisor. There are others who are born gamblers. They enjoy the thrill of speculating. It might be on horses, cards, dice, slots…or stocks. They act on their own hunches. They see stocks as a vehicle for gambling, not long term investing.
The majority of other people seek to build wealth over the long term. They might want to buy their first house, save for retirement, assemble the cash to start a business or achieve financial independence. They need help in setting goals, adding money on a regular basis, staying invested even when it gets scary and rebalancing their asset association even when it seems more fun to “let it ride.”
This type of person needs a financial advisor, ideally one who is acting as a fiduciary, representing the client’s interest first. Although there has been much discussion about the fiduciary standard and the suitability standard over the years, good financial advisors seek long term relationships and put the interests of their client’s first.
The roles of financial advisors and financial planners are often intertwined. They can be two separate skills, yet one compliments the other. The advisor will often provide financial planning services and the financial planner can often help the client manage their money. If you trust the professional in one category, that trust usually extends to the second category.
The area where investing and planning might diverge is budgeting. Many Americans do not know how to save. They live paycheck to paycheck. We find easy credit very appealing because we live in a culture of immediate gratification. It works. About 70% of GDP is categorized as consumer spending.
Before individuals can become investors, they need to learn how to pay themselves first. They need to learn how to take advantage of workplace based savings plans like 401(k)s.
Because getting people to pay for being taught how to save money is a “tough sell” financial planning is often part of the investment process in the financial advisory world. There are advantages to having your financial planning done on a fiduciary basis, yielding a plan that is portable.
These are four areas where most individuals need professional help, although they may be reluctant to pay to get it.