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I am sure you rely upon many people in your life, such as your doctors, dentist, hairdresser, and financial advisors.
I am seeing more and more instances of otherwise careful and successful clients getting, and taking, very bad advice on financial matters. These clients have lost a lot of money which, with only a little more care, could have been saved.
These financial disasters fall into two broad categories. In the first group, the client took bad advice from his so-called "financial quarterback." In the second group, the client relied only upon himself, refusing anyone else's input.
Watch Out for Quarterbacks In the first group the bad advice came from the client's trusted advisor who had positioned himself/herself as the client’s “quarterback.” The advisor-quarterback was to identify and evaluate all the client's financial needs, then call in the client’s CPA, lawyer, broker, or insurance representative when the advisor felt it appropriate. However, the advisor-quarterback fumbled the ball. In each case, he gave incorrect advice on matters beyond his expertise, matters on which the CPA, attorney, or insurance agent should have been consulted.
Smart People Do Dumb Things In the second group, the client took bad advice from himself. Because the client was smart --- a doctor, lawyer, executive, or CPA --- he felt he did not need any outside help. I call this "intellectual arrogance."
Need for Advisors In the old days, paternalistic employers provided their employees and retirees with all the financial advice and benefits they needed. Health insurance, life insurance, disability insurance, savings plans, retirement planning, and pensions came from the employer. The employee or retiree had few financial decisions to make, so why look anyplace else? When my father retired from a big company thirty years ago, my parents' only decision was whether or not to move to Florida. Every other financial need was taken care of by "The Company," which had a well staffed benefits department to give guidance on the few financial decisions that my father had to make.
Not so today, or ever again. I made a list of the people whose advice I rely upon. I have a primary care doctor, a dentist, a gastroenterologist, an ophthalmologist, a personal insurance agent, a business insurance agent, a broker, a computer guy, and a CPA. Even though I am an attorney, when I buy, sell, or refinance real estate, I hire a real estate lawyer. (I do not, however, have a personal trainer or an astrologer.)
You cannot look to a single person, or firm, to provide all your financial advice. Taxes, insurance, investments, and retirement benefits are far too complicated. And, if you think you can do it all by yourself, you're going to be in trouble.
Here are some of the mistakes I have seen in the past few years made by otherwise very smart people who are successful in their businesses and professions.
- An elderly widow moves from New York to Florida to be closer to her son, who is a businessman there. He's smart and decides to do mom's tax returns. He figures, why bother with mom's CPA back in New York, when I just bought Turbo Tax? The son doesn't understand IRA minimum distribution calculations, and mom is stuck with the 50% penalty on underpayments.
- A husband and wife get divorced. The husband, a finance executive, doesn't hire his own attorney, letting the wife's attorney "draw up the legal papers." Three years later the husband is audited by the IRS, and his alimony deductions are disallowed because that's what "legal papers" require.
- Husband and wife have no estate tax exposure. Their tax return preparer (not a CPA) advises the husband to make his estate, rather than his wife, the beneficiary of his IRA "to save taxes." The husband does this without asking his attorney. The husband then dies. The IRA is paid to the estate, triggering a huge income tax liability. The wife is deprived of a tax free rollover.
- Husband and wife, in a rocky second marriage for both, move from New York to South Carolina. Their financial planner in New York advises them that their New York wills are valid in South Carolina (which is true), so don't bother seeing a South Carolina lawyer. After the husband's death, the wife learns that although the husband's will is valid, her spousal elective share in South Carolina is far smaller than what the share would have been under New York law.
- Here are investments my clients have made without asking anybody (other than the salesman who sold it to them): expensive condos, time shares, and real estate in Florida, California, Maryland, Colorado, Arizona, and Hawaii; a commodities limited partnership investment ($500,000); an airplane; and, a business franchise.
- Husband is a business owner and the wife is an engineer. They have no wills. They have two young children. They need wills with trusts for minors, which I draft. Engineer/wife refuses to sign the proposed will until she "learns all about trusts" by reading about them on the internet in her spare time. She reminds me, more than once, that she could have been a lawyer rather than an engineer, so how hard could it be for her to become an expert on trusts? I suggested getting a second opinion from another lawyer. No, she wants to do this herself. Two years have passed and the couple still have no wills.
- A business owner's elderly father needs a durable power of attorney. At the suggestion of his company's controller, the business owner downloads a power of attorney form from the internet, fills it out, and has his father sign it. Why pay a lawyer to fill out a "standard form?" Years later the father becomes incompetent. The son then learns that his "standard form" was not filled out correctly so it is void.
- A business owner has about 15 employees in his company. His financial planning "quarterback" sells him a 401(k) plan. The owner doesn’t ask his CPA or his attorney about it, because the quarterback whiz-kid "will take care of everything." When the CPA does the company's tax return, the owner learns that the 401(k) plan is not qualified. Reason: the owner also has another business with 25 employees which must be part of that plan under the controlled group rules. That other business is losing money and cannot afford a plan.
Danger Signs and Tips Here are the danger signs and tips on getting and taking financial advice.
- Be wary of anybody who overloads on sports metaphors. Run away from a financial "quarterback." Beware of investments that will be "home runs" or "slam dunks." Be especially careful with "teams." Some financial services firms tout a "team" of "specialists." I have yet to see effective tax, legal, insurance, and accounting advice come from one source.
- Avoid relatives giving financial advice --- the son-in-law or daughter-in-law who "knows all about these things." Since they are "family," they will protect me.
- Don't become a potted plant, being moved around passively by your advisors. Making financial decisions is a participatory and collaborative activity. Ask questions and get second opinions.
- Be informed. You can't beat a pro at his own game, but you can gather basic information about insurance, taxes, and legal matters. The internet has endless information, some of it is bad, some quite good. Reading the Wall Street Journal is a good start.
- It's very healthy if your financial advisors disagree among themselves on some issues. Listen to the different opinions, then evaluate. A good advisor should, and will, challenge questionable advice from a fellow advisor.
- Keep your family informed about your advisors. Give them the names and phone numbers of your CPA, attorney, insurance agent, etc. Summarize what assistance you get from each.
- Be suspicious of cozy or exclusive relationships among your advisors. If your lawyer tells you he sends all his insurance referrals to the XYZ agency, or all his investment referrals to the ABC firm, be wary. You'd rather hear that your lawyer deals with, and refers to, all the reputable agencies and firms in town.
- Use your advisors as sounding boards. I get many confidential calls from clients asking my thoughts on a recommendation made by their CPAs, insurance agents, and brokers. I expect that these clients ask their CPAs and insurance agents if my legal advice makes sense to them.
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