Nobel Laureate

Financial Advice and Overall Wealth Management

Nobel Laureate

Financial advice is a prescription that guides investors to make decisions that best serve their interests. This advice is most effective when the following are carefully taken into consideration.

  1. An accurate analysis of the cognitive and emotional strengths and weaknesses of investors that relate to making decisions.
  2. The investor's occasionally faulty assessment of their own interests and desires.
  3. The relevant facts about investing that are often ignored.
  4. The limits of the ability to accept advice and to accept the results of the decisions made over time.

In the article titled Aspects of Investor Psychology by Daniel Kahneman and Mark Riepe that appeared in a 1998 edition of Journal of Portfolio Management, a very good checklist of the responsibilities of investment advisors was provided. It is useful in evaluating which advisor may be best for you. The authors asked, "How frequently do advisors do each of these items?"

  1. Encourage clients to adopt a broad view of their wealth, prospects and objectives.
  2. Encourage clients to make long-term commitments to investment policies.
  3. Encourage clients not to monitor results too frequently.
  4. Discuss the possibility of future regret concerning the outcome of their investments.
  5. Ask themselves if a course of action is out of character for their client.
  6. Verify that the client has a realistic view of the odds, when a normally cautious investor is attracted to a risky investment.
  7. Encourage the client to adopt different attitudes towards risk for small and for large decisions.
  8. Attempt to structure the client's portfolio to the shape that the client likes best (such as insuring a decent return with a small chance of a large gain). This can be accomplished in a well prepared Risk Capacity™ survey.
  9. Make clients aware of the uncertainty involved in investment decisions.
  10. Identify the aversion of clients to the different aspects of risk and incorporate their risk aversions when structuring an investment program.

It is clear from step one that if investors want to discover their most likely deterrent to successful investing, they need only to look in the mirror. Advisors who are aware of the above psychological factors are most likely to provide value to their client's investing experience. (See this additional article on Behavioral Finance)

In looking at the overall wealth management of an investor's estate, at least four other areas of concern are important for every investor. An independent team approach is best so that each professional is free to be critical of the others. If these are all at the same firm, you can be far less certain that you will get independent advice. An annual "Personal Board of Directors" meeting is a great idea for this team. The team should have professional in each of these areas:

1. Estate Planning: (Link)

After managing their affairs and building their net worth, many IFA clients wonder how to ensure that their families benefit financially from all their efforts? One way is to create a trust.

Or, if you are managing your own trust now do you wonder what happens to your investment assets after you pass away or what happens if you become incapacitated and cannot manage your affairs? If so you may want to take advantage of the trust services offered by Charles Schwab Bank or Fidelity Personal Trust Company.

These trust services allow IFA to continue managing IFA clients' trust investment assets while Charles Schwab Bank and Fidelity Personal Trust Company execute the administrative fiduciary responsibilities of a corporate trustee, perhaps across generations.

If this is something you want to know more about, ask your estate planning attorney or IFA how you can appoint IFA to continue to act as your investment advisor while perhaps taking advantage of certain tax law. You may also want to specifiy that your assets will be managed in accordance with Mark Hebner's book, Index Funds: The 12-Step Program for Active Investors.

1. Estate Planning:  Interview at least 3 estate planning attorneys in your area and select one that you feel comfortable with. Have the attorney prepare or review your trusts and wills. Be sure to evaluate the role of Charitable Giving and wealth transfer to children, families and/or charities. An IFA representative can assist you in evaluating attorneys. Another source of information is the National Association of Estate Planners and Councils. In California, we often refer clients to Leslie Daff and Randy Gardner of OnlineEstatePlanning, Inc., which owns and operates the Website, IFA does not receive any referrral fees from OnlineEstatePlanning, Inc. Leslie Daff has appeared in 5 shows, which can be viewed here. incorporates a detailed questionnaire that is used as the basis for creating an estate plan, and for a nominal monthly fee, they offer a maintenance program that will alert you to changes in the law that may affect your plan, let you obtain amendments to your estate plan at reduced rates, and provide you with free online forms, including forms necessary for a successor trustee to handle your affairs at your incapacity and death. 


2. Insurance:  (Link)

Find an independent insurance consultant who is not paid by an insurance company to sell you their insurance products. A fee-only insurance advisor can usually assist you in selecting insurance products without the traditional conflict of interests that may exist with insurance brokers for specific insurance products. You may need specialists that cover different insurance needs. An IFA wealth advisor can assist you in evaluating insurance consultants. Below is a list of some fee-only insurance advisors. IFA does not endorse or recommend any particular fee-only insurance advisor. IFA strongly recommends that clients perform due diligence on any fee-only insurance advisor that they may consider hiring.

Scott J. Witt (WI)
David Barkhausen (IL)
James Hunt (NH) 
Glenn Daily (NY) 

3. Accounting and Tax Advice: (Link)

Interview several accountants in your area and select one that you feel comfortable with. Accountants who are proactive in tax planning strategies will be able to make sure you are not paying more taxes than you should. An IFA representative can assist you in evaluating accountants. The IRS issued this tax tip concerning the choosing of a tax preparer.

Read This Before Choosing a Tax Preparer (from the IRS)

If you will be paying someone to do your tax return, choose a tax preparer wisely. You are legally responsible for what's on your tax returns even if they are prepared by someone else. So, it's important to find a qualified tax professional.

The most reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions, and other items.  By doing so, they have your best interest in mind and are trying to help you avoid penalties, interest, or additional taxes that could result from later IRS contacts.

Most tax return preparers are professional, honest and provide excellent service to their clients; you can use the following tips to choose a preparer who will offer the best service for their tax preparation needs.

  • Find out what the service fees are before the return is prepared. Avoid preparers who base their fee on a percentage of the amount of your refund or who claim they can obtain larger refunds than other preparers.
  • Only use a tax professional that signs your tax return and provides you with a copy for your records.
  • Avoid tax preparers that ask you to sign a blank tax form.
  • Choose a tax preparer that will be around to answer questions after the return has been filed.
  • Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?
  • Check to see if the preparer has any questionable history with the Better Business Bureau, the state's board of accountancy for CPAs or the state's bar association for attorneys. Find out if the preparer belongs to a professional organization that requires its members to pursue continuing education and also holds them accountable to a code of ethics.
  • Determine if the preparer's credentials meet your needs.  Does your state have licensing or registration requirements for paid preparers?  Is he or she an Enrolled Agent, Certified Public Accountant, or Attorney?  If so, the preparer can represent taxpayers before the IRS on all matters – including audits, collections, and appeals.   Other return preparers can represent taxpayers only in audits regarding a return signed as a preparer.
  • Before you sign your tax return, review it and ask questions.

You can report suspected tax fraud and abusive tax preparers to the IRS on Form 3949-A, Information Referral, by sending a letter to Internal Revenue Service, Fresno, CA 93888, or call 800-829-3676.

4. Investment Advisors:  (Link)

It is IFA's opinion that three critical characteristics of investments advisors include independence from all financial products and custodians, the exclusive application of a passive investment strategy and a fair price for their advice. An IFA representative meets all three of these criteria.


5. Life Planning: (Link)

Life planning is the art or human side of financial planning. In life planning you discover important goals through a process of questions. Then, using a mix of professional and relationship skills, an advisor resolves the obstacles to those goals, creates a plan, and guides you to the accomplishment of these goals in the most efficient and fastest way possible. At its core, Life Planning encourages investors to be sure they have asked and answered the fundamental question of, "what's it for – all this money that I've given so much to acquire, what exactly is it for?"  Stephen Covey encourages "beginning with the end in mind" in his work around The Seven Habits of Highly Effective People.  With a better idea of your end-destination in mind, future financial planning decisions including portfolio risk exposure become both more relevant and holistic. George Kinder has pioneered and promoted Life Planning for about 15 years. He suggests that investors carefully answer these three questions. Once you have answered them in writing, your investment advisor will be better guided in assisting you to meet your life goals that apply to areas such as family, creativity, spirit, and service. Here are the three questions:

  1. Assume you've got all the money you need. What would you do with it and how would you live?
  2. You just found out you have only five to 10 years to live. How will you live those years?
  3. You've just found out you have 24 hours to live. What did you miss? Who did you not get to be? What did you not get to do?


6. Charitable Giving: (Link)

Another area where an advisor can add value is charitable giving. Specifically, the advisor can identify securities in taxable accounts that have high long-term capital gains and are also sensible candidates for trimming back to keep the portfolio in balance, thereby potentially producing a double benefit for clients. Furthermore, a knowledgeable advisor can help the client establish a donor-advised fund, which is a charitable investment account that is held at a custodian such as Schwab, Fidelity, or TDAmeritrade. The client determines when and to which charity a donation is to be made from the account. In addition to providing growth potential for charitable assets, a donor-advised fund allows the client to have greater control over the timing of tax deductions while providing an opportunity to educate the client's family about investing and philanthropy. Laura J. Malone provides more inforamtion on Donor Advised Funds in this two part video series: Part 1 and Part 2.

If you would like a good guide to charitable giving organizations, visit the Charity Navigator. Donors often withhold giving because they are concerned the organization is not using the funds in a way they would think is appropriate. Is the CEO being paid more than you think is reasonable? Are the administrative costs to high as a percentage of donations? How does your charity's expenses compare to others. These and other important issues are answered at Charity Navigator. Please review this site before giving.