Being a financial advisor has become increasingly difficult, and we face unprecedented challenges in providing guidance to our clients.
The recent S&P downgrade of U.S. government debt, for example, is a bridge many thought we'd never have to cross. The dot-com bubble and the financial crisis of 2007-2008 inflicted two 50% corrections to the S&P 500 in the same decade. Multiple years of a near zero percent interest rate environment has made it tough on clients seeking income, and the housing market crash has done tremendous damage to a large asset on the balance sheets of many of our clients.
All of this makes me examine my role as a financial advisor and ask, "Why am I investing?"
There are many ways we can help clients improve their financial position. The most common method is through purchasing financial products, but this may not always be in the client's best interest.
In today's environment, I believe more than ever the only effective way to advise clients is by a thorough examination of assets and liabilities, income and expenses, risk management, estate and tax planning, and retirement income distribution strategies.
Investing client assets is just one of the many roles we play as advisors and the one that seems to get the most attention, especially in times like these. It's crucial that we provide value to our clients outside of asset management and structure our compensation in order to reflect this approach.
I encountered a recent example of a situation where recommending the purchase of a financial product--i.e adding to the asset side of the balance sheet--wasn't the most effective strategy. The clients had a $360,000 mortgage on a home that was acquired two years ago. The balance was $348,655 and the monthly payment was $1,987 principal and interest. The clients had saved $100,000 in a non-qualified account, were risk averse and were looking for an alternative to the current yields on cash.
Due to an appraisal that came in lower than expected, the only way the refinance was possible was by reducing the loan amount to $280,000. Along with closing costs, this required the client to use $74,455 of their cash at closing.
Before refinancing, the client was scheduled to make 335 payments of $1,987 for a total of $665,645. The current mortgage requires 180 payments of $2,036 for a total of $366,519. That's a savings of $299,126. This advice had very little impact on monthly cash flow, but reduced the term of the loan by 13 years and yielded significant interest savings.
Sometimes the best "investment" might not be an addition to the asset side of the balance sheet but a reduction or restructuring of liabilities. In that vein, "investments" in future tax liabilities through Roth conversions, private mortgages to children and other non-traditional approaches can sometimes be ideal options for clients.
Putting the client's interest first is a business principal that never goes out of fashion regardless of the times. Our role as advisors is to help clients navigate through difficult waters, accomplish their objectives, and help them sleep at night. There are many ways to do this, and my goal is to not lose sight of this principal.
Michael P. Wicks, CFP, ChFC, is affiliated with LPL Financial and has 18 years experience in the financial industry in Ponte Vedra Beach, FL.