1. Major life events – new baby, marriage, new job, etc.
Financial planning should not be a static one-time event. Instead it should change as your life changes. If a major life event occurs, odds are, it will have an effect on your financial plan. A new baby means you should start college planning. If you get married you may have additional income, multiple investments, and shared responsibilities that all needs to be incorporated into your plan. If you are working with an investment advisor make sure they are able to account for your major life events not only by changing around your investment portfolio but also by updating your full financial plan including insurance, risk profile, and estate plan. If you have been doing all of your planning and investments on your own, when these changes occur, it may be time to consider hiring a financial planner as your financial life gets more complicated.
2. You get all your financial advice from CNBC.
CNBC and other financial shows are for entertainment purposes only. While it is important to stay up-to-date on the news, your financial plan is a long-term endeavor and should not be affected by the headline du jour or whichever investment manager happens to be featured on one particular day. While it is entertaining their advice does not take into account your personal financial situation as they know nothing about your goals and risk tolerance. The best advice, the kind you should follow, needs to come from people who know your situation and give advice that is specific to your needs, not just generalizations.
3. Your Investment portfolio consists of Savings Bonds, Certificates of Deposit (CDs), and a savings account.
Your savings account is not an investment. It is a tool used for short-term savings strategies and holding your cash reserves. US savings bonds pay next to nothing and there are almost always better alternatives. The returns on CDs are slightly better but unless you are extremely risk averse they probably shouldn’t make up the majority of your portfolio. And due to inflation you are probably losing money over time through the erosion of your purchasing power. Before you invest anything you should understand why you are investing and what you are trying to accomplish. This allows you to take the appropriate amount of risk. Once you know this you should build your portfolio using low-cost, highly diversified mutual funds and ETFs. If your goal is to build wealth the stock market has been one of the greatest tools to do this, you just need to know how to use it.
4. You are unsure how your advisor is paid.
If you don’t know how your advisor is paid, odds are they are a commission based “broker/dealer.” See our earlier blog post It Won’t Cost you Anything to Work with Me about how these types of advisors are paid. When an advisor is paid through commissions they are incentivized to sell you a product rather than provide objective financial advice. This is considered a conflict of interest. This can be avoided by looking for a “fee-only” financial planner. These advisors are a paid a fee based on the amount of assets they manage. This incentivizes them to grow your wealth. More information on the benefits of fee-only financial planning can be found at NAPFA.org.
5. Your financial plan review only includes an analysis of the performance of your investment accounts.
While the return on your portfolio is important, the goal is not to achieve the highest return possible. The goal should be whether or not you to achieve your financial goals. With extra return comes extra risk so if you do not need the additional return to achieve your goals then why are you taking on additional risk. Your financial plan should include a review of your insurance needs, an analysis of your current income and expenses, and a way to track the progress of your goals. This plan is then what guides your portfolio decisions.