The forces that shape our financial lives

Powerful but invisible forces impact both individual and advisors’ financial choices. It is the financial advisor’s duty, however, to spot the warning signs and to work in a manner that eliminates (or certainly greatly reduces) their effect. Optimal results, and the peace of mind that comes from confidence that decisions made regarding wealth are the wisest possible, depend greatly on the advisor’s objectivity and commitment to the client’s best interests.

Like any personal relationship, the client and financial advisor relationship should be built on truth — truth about what is going on in the economy and truth about the ways the advisor can best serve the client.

It can be difficult to seek and speak truth in any context, and especially so when it comes to fundamentally precious elements like family, health and wealth. Despite this, it is the duty of any personal advisor to maintain his or her own objectivity, put aside personal biases to the degree possible and to act on the client’s behalf based on an articulable truth. Advisors ought to challenge and collaborate with clients as a crucible of truth for mutual well being.

Truth #1: Currently it is estimated that there are $1 trillion corporate-controlled dollars on the sidelines-that is sitting on corporate balance sheets around the globe, because executives are waiting to see how the economic winds will blow before committing their organizational capital. Similarly, individual investors are also waiting it out and keeping reserves of cash on their personal balance sheets. Consequently, regardless of how much liquidity is injected by the central bankers, the velocity of money in the economy will remain sluggish. Why? Because of fear. Until fear is diminished by confidence, this will be the status quo. Importantly, however, this confidence must stem from an accurate assessment of the conditions at hand and not some false premise or hope.

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Truth #2: Motive matters. As an investor or financial services client, one should always consider the possible motives underlying the actions and advice offered by an advisor. It is also important for the advisor to challenge the client’s motives as well, asking the reasons for their decision regarding specific financial objectives and tactics. Ultimately, the decision regarding a particular course of action rests with the client-but the advisor who does not plumb the depths of the client’s motives does the client a disservice. Thus, figuring out the “whys” of a particular course of action is a two-way street between client and advisor.

Truth #3: It is difficult to gain unfiltered and unbiased information in order to be knowledgeable in complex matters involving the economy, markets, etc. Essentially, how do individuals assure themselves that they can make financial decisions? Truthfully, in an increasingly complex financial world, with concomitantly increasingly convoluted dangers, individuals are disadvantaged in the financial marketplace without some form of assistance. Providing that assistance is one of the key roles a financial advisor must play on behalf of the client.

Truth #4: Individuals are going to feel the impact of the country’s economic condition this year and beyond. The economy is sputtering — GDP growth decelerated from 3.0 percent to 1.6 percent from the first to second quarter. Confronting this reality is harder emotionally than “hoping” we are on the road to recovery.

The government is spending too much money, is borrowing to finance its activities and already owes an enormous sum. As of the time of this writing, the national debt is more than $13 trillion and climbing. The Federal deficit this year is expected to come in around $1.4 trillion. The Bush tax cuts are set to expire on January 1, 2011, and that means personal income tax rates are going to rise. Itemized deductions and personal exemptions will also phase out. The result will be a sense of even higher marginal tax rates. It is likely there will be a return of the “death tax,” and tax rates for savers and investors (i.e., capital gains) will certainly rise.

Obamacare will impose restrictions on the use of pre-tax dollars in the form of Health Spending Accounts and Flexible Spending Accounts limits starting in 2011. There will be a “Medicare tax” on the country’s highest earners’ investment income. Charitable contributions from IRAs will be curtailed for purposes of required minimum distributions. Beginning in 2011, the amount of employer-paid health insurance will show up on individuals’ W-2 statements (while this amount will not be included in taxable income, one wonders how it will affect individuals’ tax brackets).

These circumstances can, quite naturally, provoke fear and worry. But fear can make investors wary, uncomfortable and even paralyzed — all of which can also make them vulnerable. Advisors are responsible for: 1) being aware of how these forces can impact clients; 2) putting client needs first; and 3) fashioning appropriate strategies for each situation. Goodwill and candor about these points between client and advisor are critical to the success of the relationship and the achievement of the client’s goals.
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