When you work with a financial advisor, the quality of the advice you receive largely depends on you. Wait, what? No, we’re not suggesting that you spend time studying investment theory or learning the ins and outs of the tax code. We’re talking about the fact that even the most skilled advisor can only be truly effective if you are honest and forthcoming. Trust is an essential part of an advisory relationship, and that means you must trust your advisor with all of the personal information he or she needs to do the best job for you.
Even when people trust their advisors, they may neglect to mention certain types of information because they don’t realize its importance. People also conceal things out of embarrassment or because they don’t like to talk about certain subjects. Imagine a patient who goes to see her doctor for a persistent cough and shortness of breath but doesn’t disclose that she has not given up smoking cigarettes, because she is embarrassed about it. There’s a good chance the doctor’s recommendations won’t be optimal for her. The same applies to your relationship with your financial advisor.
In this article, we describe seven types of things people often conceal from their advisors. We hope you use this article as a checklist. If you put a “yes” next to any of them, we urge you to reach out to your advisor. Just start with, “hi – I realize there’s something I haven’t mentioned that might be relevant.”
Family Issues – Family matters seem inherently “private” to many people, something to discuss with a close friend or therapist but not with their financial advisor. However, many family matters could be highly relevant to the work your advisor does for you. If you are thinking about a divorce or a second marriage, mention it long before you are ready to act. If you have a child (adult or minor) with a substance abuse problem, criminal record, or mental illness, that’s relevant. If you are accustomed to gifting money to an adult child who may be in a troubled marriage, discuss that with your advisor.
Taxes – If your advisor is not fully informed about your tax situation, it will be difficult to invest and make financial recommendations that are optimal for you. Did you take some big losses in the stock market? Your advisor might be able to help you optimize how and when to use those losses to reduce your taxes, but only if you disclose it. Are you an owner of, or partner in a private practice or other business and are starting to think you might want to sell it sometime in the next few years? Early planning is the key to minimizing the tax hit from selling a business. Let your advisor know what you’re thinking, even though you’re just in the “maybe” phase.
Health Issues – Your advisor may have raised the topic of long-term care insurance and whether or not it would be a good choice for you. Your health and the health of your parents are highly relevant here. If you have a chronic health problem such as diabetes, or a family history of certain conditions such as dementia, your advisor can incorporate higher health care costs and long-term care needs into your financial plan. On the flip side, if you are generally in excellent health and your parents lived long lives, you may face a higher risk of outliving your savings – your advisor would want to consider that.
Unpaid Debts – People may fail to disclose debts other than their home mortgage or student loans to their advisors because it makes them feel defensive or embarrassed. Of course, knowing how much you owe and when it needs to be repaid is critical to providing sound financial advice. Some people take out loans to buy a boat, or commit to a timeshare, then regret it and don’t want to talk about it, but your advisor needs to know. If you are concealing credit card debt from your spouse, tell your advisor. If you don’t trust your advisor with that information, you probably need a different advisor.
Hidden Assets – We’ve all heard the cliché about hiding money in a Swiss bank account (note: Switzerland has changed its laws, so it is no longer a great place to conceal assets). But why do people hide assets from their financial advisor? Sometimes people do “mental accounting” and decide to put aside certain funds for a specific purpose. Or, they may not entirely trust the advisor and therefore, may not want the advisor to guide the way the assets are invested. As noted above, if you don’t trust your advisor, it’s probably time for a change. Some people hide an IRA and fail to include it in calculating their required distribution, creating a big problem with the IRS. People have neglected to tell their advisor about tax losses in investment accounts even though the losses could have been used to reduce their tax liability because they are concealing the account from their spouse. Regardless of the reason, if you are hiding assets, you should tell your advisor. Since many financial advisor’s fees are computed as a percentage of the value of a client’s investment assets under their management (AUM), some clients conceal accounts to avoid having them included in their fee calculation. Of course, that means the advisor does not have a complete and accurate picture of the client’s financial situation, which often leads to significantly inferior recommendations and flawed guidance. To eliminate that potential conflict, some advisory firms, including Gold Medal Waters, offer a fixed pricing structure option that puts planning and advice front and center.
Ego – Many people, especially well-educated professionals, do not like to admit, to themselves or others, that they don’t fully understand something. This inexperience is quite common when it comes to investment and risk concepts. As experienced advisors, we’ve had clients who say “I get it,” but later, we discover they don’t. Sometimes people say they are comfortable with a certain level of investment risk because they don’t want to sound “wimpy”, then when markets become volatile, and they become extremely distressed and anxious. A good advisor does not expect you to know a lot about investing (just as doctors don’t expect their patients to have substantial medical knowledge) and should help you to explore what “risk” really means for you. We like explaining these things – that’s part of why we do what we do.
Unstated Expectations – This is a particularly tough one because people are not aware of subconscious expectations they may have when working with a financial advisor. When these unstated expectations are not met, they get frustrated and may even decide to end the advisory relationship. If you are currently working with an advisor, it’s a good idea to ask yourself whether you have some expectations that are not being met. If so, bring them out into the open.
At Gold Medal Waters, we use a systematic data-gathering process designed to provide us with a thorough understanding of your financial condition, family situation, and attitudes about money. That’s why we ask so many questions in our initial meetings. It could seem a bit tedious because it is so thorough, but it’s important, and we’re happy to answer any question you have about the process. Being honest with your financial advisor is truly in your best interest. We know that honesty and trust go hand-in-hand, and we take that to heart in everything we do. Reach out to us if you have any questions.