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Fees, Performance and the Bigger Picture

A short list of areas that deserve far more attention when making financial planning decisions.

Over the past few years, one trend that I’ve noticed in the financial advisory field is the fixation by some individuals on fees and performance. A few basis points difference in either area can directly impact an investor's decision, without any consideration of many other (more important) factors.

The industry is evolving. Financial products are becoming more tax efficient, lower cost, and more transparent. Over are the days when investors did not know what they were paying or how they stack up to their competition. Practitioners that do not embrace these new developments are essentially phasing themselves out of the business. That being said, obsessing exclusively over fees and performance, while spending too little time on other areas of financial planning, is losing sight of the bigger picture.

Below is a short list of areas that deserve far more attention when making financial planning decisions:

  • Cash Flow Management: Understanding your cash flow is the cornerstone to financial planning. It determines how much cash you should have, as well as how much you can set aside for other goals. Predicting a fairly accurate future cash flow is also what will ensure that you can afford to maintain your lifestyle in the future, when a steady paycheck is no longer coming in.
  • Savings Rate: The amount of money set aside for future goals is the only thing investors fully control. The markets will be volatile and various investments may not perform as expected. However, the decision to sock away more money in your 401(k) instead of spending it elsewhere is up to you and it will often determine when/if you will reach your financial goals.
  • Asset Allocation: In a paper published in 1986, “Determinants of Portfolio Performance,” the authors, Brinson, Hood, and Beebower, concluded that asset allocation is the primary determinant of returns, with security selection and market-timing playing only minor roles. If you are concerned about performance, a discussion about asset allocation should be at the top of your list.
  • Risk Management: Not every investment works out and not every market goes up forever. Planning for the inevitable bad investment or Bear market with prudent risk management will help investors stick with their strategy and not bail at the worst possible time.
  • Insurance:
  • Life: If the breadwinner in the family dies, how will the surviving members pay their bills? How will their business survive? Who will pay the estate tax if this individual has a large portfolio of illiquid assets? This is where some form of life insurance comes into play.
  • Disability: If the breadwinner can no longer perform his or her job, how will their family pay their bills? This is when disability insurance can be a savior.
  • Long-Term-Care: There is no need to bore you with statistics of how many people will need assistance when they are older. Everyone has experienced this personally with a loved one. Does the client want to be a burden on his or her family? Do they want to wipe out their life savings to pay for care instead of passing it to their heirs? Long-term-care coverage can offer a level of protection.
  • Estate Planning: If you are incapacitated, who will make decisions for you? To whom do you want to leave your assets? Are there certain values that you would like to pass down to the next generation? If you’d like these questions addressed, then form an estate plan.
  • Tax Planning: Some people don’t mind paying Uncle Sam a hefty sum of money. Most people, however, would prefer to keep that extra money and give it to people, organizations, or causes of their choosing. This is when having a discussion with your Financial Advisor, Accountant, and Attorney can be extremely beneficial. There is never a reason to pay more taxes than legally required when you have many other priorities in life that compete for your hard earned dollars.
  • Retirement Planning: “Failure to plan is planning to fail” is a cliché I hear all too often when it comes to planning for retirement. And it’s absolutely correct. Unless you plan on mooching off your kids in your retirement years, then having a strategy in place to maintain your lifestyle for the 30+ years after you retire is imperative.
  • College Planning: Whether it’s your kids, grandkids, or whoever else you’d like to help further their education, there are tax efficient strategies you can use to help you achieve that goal. Navigating the various different college planning options is an essential part of the planning process. Furthermore, as more post high school education options present themselves and the college landscape continues to evolve, having a discussion with your trusted advisors to ensure that your loved ones are making a good life and financial decision after high school is invaluable.

In reality, the reason why so many individuals ask exclusively about fees and performance isn’t because they have such expansive knowledge on those subjects. Rather, it’s because they don’t have any background in investing or financial planning and don’t know what else to ask! It’s the job of the practitioner to educate their clients on what is actually important.

At the end of the day, a client who is well informed is also much better positioned to reach their financial objectives. Educating prospects and clients on the aforementioned topics will ensure that they are on track towards achieving their goals, and that is what investing and financial planning is all about.

Jonathan I. Shenkman is Associate Director – Investments with Shenkman Private Client Group, Oppenheimer & Co. Inc.

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