Rick Kalb: The benefit of a second opinion
November 4, 2018
When Bob and Mary Jones came into my office just before Thanksgiving last year they thought they were set financially and on track for a comfortable retirement.
Bob and Mary were only politely visiting with me as a "favor" to a mutual friend that suggested they meet with me to get a second opinion on their financial plan.
After the pleasantries, Bob claimed they were all set and that he didn't feel I could improve on his situation or help in any way. Mary looked down as Bob's tone was a bit direct. Granted, he had done quite well saving and, in the process, had developed a sizable net worth. I agreed that on the surface, it looked as though he had been successful and they had been lucky that certain circumstances had not occurred along the way that could have hijacked their retirement plans!
They had been with their advisor from the Bay Area for years now, even though they had moved to the Gold Country over 20 years ago. In their mind there was no need to change advisors. They were doing quite well.
However, when we took a deeper look, I was able to shine the light on some potential areas of concern that, if left unattended could be quite detrimental.
Hanging on too long to a specific stock or stock sector.
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Lack of diversification among asset classes.
Unfavorable tax distribution strategy.
Bob and Mary both worked for a locally based Bay Area company and had most of their net worth in that company's stock now in their IRAs. Even though it had performed quite well over the years it was the equivalent of having all their eggs in the same, familiar basket. Many people make the mistake of hanging on to a single stock far too long because it got them where they currently are. It is important to diversify to spread the risk of a position going down in value. I explained my philosophy to Bob and Mary: The plan should always be to take the least amount of risk possible to achieve your retirement goals, especially if you are nearing retirement age.
Even when people diversify, they tend to make the mistake of divvying up one stock into several stocks in the exact same sector. For instance, diversifying Wells Fargo stock with Bank of America and Citi stock. The challenge is if that one sector takes a hit you haven't mitigated much risk at all and could still suffer the loss. True diversification is to spread the risk among several asset classes as well as among growth and income stocks not just one or the other.
Bob and Mary were able to understand the logic of not hanging onto any one stock for a lengthy period and diversifying effectively to dramatically minimize their market risk. They were starting to become a bit perplexed as to why their current advisor never really explained the importance of proper diversification.
Another consideration that never seemed to be addressed was the tax consequences on any distributions from their portfolio. Suffice it to say if left unattended over the next few years, when they were going to start taking distributions, they would have contributed nicely to Uncle Sam's retirement but were leaving less for their own future.
By considering current tax laws, understanding tax treatment of various investments and how they are titled, I was able to show Bob and Mary how their portfolio could be adjusted to conserve a significant amount of money from being eroded by taxes.
They were pleased that they listened to our mutual friend and came in for a second opinion which lead to discussing some options for stretching their retirement dollars. Now Bob and Mary understand the difference between a fee-based and fiduciary planner and a commission-based stock broker that was not properly attending to their changing needs.
Rick Kalb is a Wealth Management Advisor with Northwestern Mutual Wealth Management Company and Registered Representative of Northwestern Mutual Investment Services, LLC. Financial Representatives do not give legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.
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