Should You Manage Your Investments on Your Own?

Recently, we have been coming across more “do-it-yourself” investors or individuals that have an “advisor” or “consultant” attached to their portfolio. This is typically assigned to you through your 401k administrator and is pretty cookie-cutter.

In another article, I’ll discuss my thoughts about a large custodian consultant over a financial planner or independent fiduciary advisor. But today, I want to dive into managing your portfolio on your own and the risks we often see with that over time.

When you are in your 20s, 30s, and 40s, you are typically still building wealth. I could easily make an argument as to why you still want proper guidance with financial planning and your investments. However, if you are savvy enough, you could decipher the tax code and allocate your 401k and investment accounts in a way to maximize growth all on your own during those years. Even though this is not always optimal, it can be acceptable for building wealth…

However, there comes a point where you’ve accumulated a mass amount of wealth relative to the beginning of your career. With retirement planning, there is a concept known as sequence of returns risk that is an important factor. The closer you are to retirement, the more you need to avoid a massive decline in your portfolio value. If you have to sell at lower prices to take distributions, this can compound losses and impact your retirement plan long-term (not just immediately). Of course, it depends on your situation. If you don't need to tap into your retirement accounts, sequence of returns risk becomes less relevant.

Whether you are a senior executive with a significant amount of your wealth tied to employer stock, a small business owner with a liquidity event, or you are an engineer with a pension and sizable 401k, you may be wondering if it’s time to work with an advisor or just continue to do things on your own with your finances.

I was recently speaking to a potential client on our discovery call, and they said, “I have friends who are very wealthy and just manage their portfolio on their own, why shouldn’t I just do that?”

The main reason: you don’t know what you don’t know.

Coincidentally, a few weeks before, I came across another potential client with a net worth of roughly $30MM. This person had been managing their assets on their own for years. They didn’t think they wanted to work with an advisor but figured they would just “get a second opinion.” Well, come to find out, they had no idea about estate tax rules and the benefits of lowering their taxable estate through irrevocable trusts. All they had was a basic estate plan… Their estate and family would potentially be paying hundreds of thousands in taxes and attorney fees upon passing if they kept everything as is.

Even if you don't need advanced estate planning, the same concept applies. Our team has come across hundreds of families where there were massive gaps in their finances, regardless of whether they felt financially comfortable or not.

When thinking about working with an advisor and financial planner, it is not just about your investment portfolio and asset allocation (even though that’s important too). Here are a few main reasons why you would want to work with an advisor:

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• Delegate: Successful and truly “wealthy” people understand that time is their most valuable asset. If you have a career and family, trying to manage your wealth in the most optimal way is usually very time consuming.

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• Tax and estate laws: legislation is always changing around taxes, which in turn impacts your estate and finances. It’s difficult to stay apprised and privy to these new rules unless you are constantly staying educated about relevant laws (that’s why it’s a full time job). SECURE Act 2.0, TCJA potentially expiring, Estate tax exemption rules sun setting, and much more.

• Family: If you are the person managing your portfolio and finances, what happens to your wealth once you are gone? This burden falls on your spouse and children, and you better hope they know what they are doing. Unfortunately, there is a common statistic in our industry that roughly 90% of wealth is lost by the third generation… Ouch...However, by building a strong relationship with a trusted advisor, you can potentially help your family avoid this terrible statistic. Even having the advisor and wealth management team introduced to your family well before you pass can help build that connection with your family before you pass away. Your family will know exactly who to call and what the next steps should look like for your legacy plan.

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• Emotions: We are all human, and with that comes behavioral biases. Investing your own money can be very emotional, even for a seasoned investor. The more you have, the larger the swings in your portfolio value. If you have $5MM and you see that drop by 25%, would you feel comfortable to just “ride it out?” by yourself during the thick of a down-trending bear market. Having the right team guide you during the inevitable declines of the market, which can help you avoid emotional moves that can be detrimental to your financial health.?

Before you think you know everything about the tax code and your investments, it may be a good idea to have a "second opinion" with a fiduciary advisor. Our team of CFP??professionals are here to help:?https://www.clarkgroupam.com/schedule-a-call

Written by: Brandon Clark, CFP?