Titanic or Love Boat: What Course Will Your Retirement Journey Take?
A few weeks ago, I was explaining to a client the difference between financial planning and managing assets as an investment advisor. As she was sharing her love of cruises, I realized every time we set sail, we are putting our faith in a navigator and a captain. These roles aren’t much different than my obligations to my clients for their financial security!
Setting Sail: Financial Planning vs Investment Management
I know many people preparing for retirement are either under-advised or ill-advised. The financial services industry is bristling with titles, designations and confusing names that often overlap in functionality. Qualifying as a wealth manager, Investment Advisor Representative, financial advisor, licensed insurance agent, retirement planner, ChFC® etc., I should consider extra-large business cards! But instead, I’d like to explain what I feel are the two most crucial roles to actually helping people achieve their financial goals: financial planning and investment management. While a financial planner and an investment advisor may be the same individual, ideally they each fulfill two separate purposes.
I grew up watching Love Boat on tv (I can still hear the theme song in my head), so I’ll apply this vast knowledge of cruise ships to explain the distinct roles of a financial planner and the investment advisor. At the start of every episode, when the Love Boat would set sail from Los Angeles to Puerto Vallarta, I never questioned how the boat even got to its destination. Captain Stubing was never even steering the boat! In the real world, sailing the seas isn’t that easy, even with today’s advances in technology.
The Role of the Ship’s Navigator: What Does a Financial Planner Do?
When people sign up for a trip, they want to know exactly where they are going, and when they will get there. So, before a modern cruise ship ever leaves port, they plot the course. This is the responsibility of the Ship’s Navigator that utilizes a very high-tech computerized navigation system called an Electronic Chart Display & Information System (ECDIS). The ECDIS allows the ship to not only reach their destination in the time frame designated, but also helps the navigator to calculate risks, obstacles and weather patterns for the safety of the passengers. The importance of the navigator's experience and expertise in accounting for the ship's size, turning rate, and maximum speeds to chart the safest course cannot be overstated.
Isn’t this what a good financial planner does? They take the time to know their clients both financially speaking as well as on a personal basis. They take the time to know their clients, considering both their financial and personal situations when making recommendations. They know where their client is financially and where they wish to go. The planner is literally helping them plot a destination and a time frame to get there. With this information, a great planner will use sophisticated financial software that will help find the smoothest journey to achieving these goals.
Just like a ship navigator, input will include historical data in projecting success rates. Where a navigator might account for winds, currents and even storms, a holistic financial planner will account for market fluctuations, healthcare costs, tax strategies and more. With both, projections should show a very strong probability of achieving the destination in the time-frame outlined.
When Storms Hit: The Crucial Role of an Investment Advisor
But journeys don’t always go as planned. On Feb. 8th, 2016, weather conditions were clear when the Royal Caribbean's Anthem of The Seas left New York for a routine Bahamas cruise. Within hours, an unexpected storm suddenly developed and pounded the ship with winds of 122 mph and 30-foot waves that reached the fifth floor deck. As terrified passengers prayed the vessel wouldn’t capsize, the captain valiantly fought the storm for the next eight hours. Finally the storm subsided enough for him to successfully sail back to port. Needless to say, the storm and the return home the next day was not part of the original plan, but passengers gave full credit to the skill of the captain for saving their lives.
Unexpected events happen. So, would you get on a cruise ship without a captain? Theoretically, technology is advanced enough with artificial intelligence, we should be able to have a ship self-navigate, right? Would you want to be on that ship? Are you capable of steering it, if things went awry? Would you have the experience to spot potential risks before they develop?
We all know that a ship without someone capable of manning the helm would be a dangerous idea. In addition to storms, captains also have to deal with other events, such as health epidemics, mechanical failures and passenger issues. These are the issues they face that make the news. What we don’t hear about are all of the subtle adjustments made by great captains each and every cruise that ensures a safe and pleasant journey. This is why we have a captain, and in a very similar fashion, why every financial plan needs an investment advisor to implement and manage the plan.
The implementation phase of a great financial plan is like a captain pulling out of port, steering in shallow waters and adjusting the speed for the voyage. The investment advisor may have to choose the financial product to match the goals and path set by the plan itself. Choosing and correctly managing the movement of assets is seamless when done correctly, but mistakes when setting the course can lead to subpar results or even a financial disaster.
Staying the Course: Investment Management in Calm and Rough Waters
Assuming that a financial plan is launched correctly, what responsibilities does the investment manager have? Just as a captain is constantly monitoring wind, currents and weather patterns to stay on course, an investment advisor is always watchful for threats to his client’s financial portfolios. Tax law changes, such as The Secure Act, market changes and health issues often require adjusting investments and strategy to attain goals. These changes are often done with asset allocation, but a great advisor is often looking for strategies to minimize overall risk while looking for opportunities in a constantly evolving financial world.
Communication is Key: Navigating Financial Uncertainties
Often times, whether cruising or even flying in a little turbulence, the captain will communicate with passengers, to let them know what to expect and what will be his course of action. In the event of a major issue, such as the cruise mentioned above, this communication is not only psychologically comforting, but it helps them get through the ride.
As an investment advisor, I’ve more than once had to talk to my clients to keep them from jumping into a bad decision due to fear. I’m used to some hand-holding and solid advice during slight market down-turns. Counseling at these times can be great, to help them stay the course and weather the storm.
With that said, is it always wise, or should adjustments be made? When a captain is facing winds or slight storms, he could easily keep to the schedule and ride through it, knowing all will be fine. But, for the sake of his passenger’s comfort, he may choose to go around it. After all, how much fun is a cruise that has every passenger tossing, turning and heaving? If I find my clients don’t have the stomach for a rocky ride anymore, I can also provide some alternatives in reaching the destination. We can recommend financial products that fluctuate little or none in market swings and avoid stress while still achieving goals.
Other times, as an investment advisor, I find that when skies are clear and markets are up, people often want to vacate the predetermined path and move to riskier investments to capitalize on the growth. Psychologically, when they see their portfolio hasn’t matched the S&P 500 growth, they feel like they are missing out. As an advisor, I know I’ve matched their portfolio’s growth strategy to their risk tolerance and the reason is the risk wasn’t worth the reward. I’d much rather explain why we are missing out on some of the bull market’s gains than have to apologize for a sudden market drop that causes a loss of half of their assets.
I well understand that everyone would rather their retirement journey be more like a pleasant Princess cruise, as opposed to seeing their retirement sink like a cruise on the Titanic. In my opinion, the key to smooth sailing begins with holistic planning and it continues to evolve with the strategic guidance of a professional investment advisor.
Final Thoughts: Smooth Sailing in Retirement Planning
If smooth sailing is the goal, I’ll include two final tips. Whenever possible, it makes the most sense to utilize the creator of the plan as the ongoing investment advisor. In my opinion, the plan creator is the best person to continue the relationship established and professionally manage the portfolio. Trying to self-manage or have a different advisor implement someone else’s plan could end up like a bad episode of Gilligan’s Island – stuck in a bad situation that’s hard to get out of! And this brings me to my final tip, offered by the one and only, Thurston Howell, the Third, “If you are ever offered a cheap four-hour cruise on a boat named the Minnow, leave your cash in your investments and bring a satellite phone instead.”
Krista McBeath is an Investment Advisor, Chartered Financial Consultant, a Licensed Insurance Advisor, a Fiduciary, and an experienced tax advisor who specializes in financial planning, investments, and insurance. She utilizes advanced tools for in-depth calculations that analyze tax and retirement scenarios to help her clients avoid a future tax time-bomb. Whether this means enjoying more of your hard-earned money in retirement or passing along assets to loved ones with less tax burden, planning makes the difference.
Her Amazon best-selling book, The Generational Wealth System outlines a holistic approach to preserving lifestyle, wealth and legacy.
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