California Business Journal Being an independent fiduciary was not only “the best option” but “the only option.”
Chad Willardson is the founder of Pacific Capital, best selling author of "Stress Free Money", and elected city treasurer managing over 360 million dollars in investments. Today we dive into the reality of wealth creation, why so many people are stressed financially, and how to resolve it all to build the life of your dreams.
Ditch Your Fragmented Approach to Finance
The following is adapted from Stress-Free Money.
Before one of my clients began working with me, he and his wife decided to sell a property and reinvest the proceeds into a different property, in an attempt to avoid hefty tax consequences. That sounds logical enough. People do it every day.
However, he and his wife learned after-the-fact that their transaction didn’t qualify for the 1031 tax-free exchange they’d tried to do on the realtor’s advice. As a result, this couple got hit with a surprise tax bill for hundreds of thousands of dollars. As retirees on a fixed income, they were forced to raid their monthly income-producing investments, essentially making unanticipated fire sales in order to cover the unexpected tax bill.
That’s the danger of a fragmented approach to personal finance. Unless you have an integrated plan to refer back to, all the pieces of your financial life aren’t going to come together neatly. All too often, working with a CPA or considering tax concerns represents a fragment of your financial life rather than a part of an integrated whole. The temptation will be to evaluate every decision as a standalone transaction, when it’s not. They’re all moving parts of your financial plan, and for them to function well together, you have to ditch your fragmented approach. When you do, you’ll reap the following three major benefits.
#1: Avoid Nasty Side Effects
As the example above shows, a fragmented approach to personal finance often has unintended side effects. They aren’t always quite so major, but these side effects can, nevertheless, have a significant impact on your finances over time.
For example, you’ll end up with lower tiers of service and higher tiers of expenses. In other words, you will typically overpay and be underserved. If you have money, insurance policies, and investments all over the place in different hands, you’re effectively a small client at each of them and will usually get less service and attention. If you had a single, consolidated plan, on the other hand, you’d get a higher level of service at a lower cost.
In contrast, an integrated financial plan includes coordination among professionals on your behalf and regular, proactive communication. A financial advisor can help develop the plan and coordinate the professionals involved, such as lawyers, insurance agents, CPAs, and so on. An advisor doesn’t replace those professionals but rather keeps the whole team aligned with your overall goals. One way or another, though, all the pieces of your financial life have to work together rather than in silos, and you will avoid the unintended consequences that come with a fragmented approach.
#2: Stay on Top of Coordination
Another benefit of coordinating moving parts is that everyone on your team will be aware of life changes. When these changes happen, there are legal documents and various forms that need updating. If they’re not, there will be major consequences.
I remember when a colleague back at Merrill Lynch had a situation in which a high-income client of theirs was married for just two years in his early twenties, got divorced, and then later married someone else for over twenty-five years. His $3.5 million life insurance policy went to his ex-wife whom he hadn’t seen in over twenty-five years—all because he hadn’t updated the beneficiary forms. It was devastating to his widow and children. This tragedy was the result of a fragmented financial life and the lack of a trusted financial coach in charge to help coordinate all the different professionals and moving parts.
Life insurance can be an Achilles heel in another way, too, if everything isn’t coordinated. Another common example of this comes from a client who had four different life insurance policies when he started with us, all for different amounts and all requiring monthly or quarterly premium payments. He said he wasn’t sure why he had them all—they’d just been recommended by his friend, who was his insurance agent. Together, he was paying $3,000 per month—that’s $36,000 a year—for life insurance, and he couldn’t even articulate why.
If your life is financially fragmented and you don’t know your cash flow numbers, you’re operating in the dark.
#3: Too Much Is Not Always a Good Thing
Sometimes, financial fragmentation leads to overconcentration in particular areas. If you have three financial advisors or brokerage firms, it’s a little bit like having three doctors. You might end up getting prescriptions for ibuprofen from all of them, but each might not realize the others have also prescribed ibuprofen. If you take all the ibuprofen they’ve each prescribed, you could overdose.
In short, if you think you’re being smart with your money by talking to a lot of different professionals, you can actually end up with a lack of diversification, more risk, and worse results. By the same token, it’s not safe to take certain medications together—doing so can make you sicker or even kill you. It’s the same here: investing in every possible opportunity under the sun recommended by a slew of different advisors who aren’t talking to each other isn’t necessarily less risky—it may actually be more so.
If you think because you get statements from Wells Fargo, Bank of America, JP Morgan, and Morgan Stanley, that means you’re diversified—think again. We call this brick-and-mortar diversification. You’ve successfully diversified where your mail comes from, but not necessarily where you are invested.
Buying the same thing in three places isn’t diversification. If, for example, you’re over-concentrated in technology funds, you’re actually in a very high-risk position despite working with different brokers. If the technology sector dips next year, you’ll lose a lot more money than if you’d truly diversified with a single coordinating advisory team working toward clearly identified goals.
Develop a Stress-Free Mindset
Having a single team working on a coherent plan brings confidence to make financial decisions, even if you never face a crisis. Knowing what to do, how to do it, and why with regard to your finances brings tremendous peace of mind. You’ll have more clarity, less stress, and lower anxiety.
Your financial advisory team should be transparent with their recommendations by tying them back to your goals and sharing the pros and cons of each piece of advice. Your team will know you and your family intimately and will be there to guide you through every big decision, and you’ll be well on your way toward a stress-free mindset.
For more advice on fragmented finances, you can find Stress-Free Money on Amazon.
Chad Willardson, CRPC®, AWMA® is the president and founder of Pacific Capital, a fiduciary wealth advisory firm he started in 2011 after nine years of climbing the ranks as an investment advisor at Merrill Lynch. Currently, Chad also manages a $350 million investment portfolio as the elected city treasurer in his community. He created and trademarked The Financial Life Inspection®, a unique process to remove the stress people feel about their money. He’s been featured in the Wall Street Journal, Forbes, Inc., U.S. News & World Report, Investment News, Entrepreneur, and Financial Advisor. Chad and his wife live in Southern California with their five beautiful children.