Thriving organizations, whether they are companies, sports teams, armies, or families, thrive in an environment of transparency and accountability. Investors would be wise to insist on full transparency and accountability in their dealings with legal, risk, and wealth management advisors.
Following are six strategies to create and foster transparency between you and your advisors. This is not just a feel-good exercise; it can lead to significantly more wealth.
Insist on a Fiduciary
A fiduciary is legally bound to put your interests first and has a duty to preserve good faith and trust with you. You should always ask if your advisor is a fiduciary, but there is also an easy test: a fiduciary won’t try to sell you anything.
Fiduciaries operate in many different types of roles. A child’s ward, or legal guardian, is a fiduciary. A person with a power of attorney for healthcare or the executor of an estate are other examples. More commonly, fiduciaries deal in financial matters. Company officers, board members, trustees, bankers, and accountants may all act as fiduciaries.
There are some nuances, and you should be aware of them. Registered investment advisors and insurance agents also have a fiduciary duty but may be limited to the offers their firm makes available to them. A useful rule of thumb is this: ask if your advisor is compensated for their advice and not for the products they offer. That gives them incentive to give the best advice they can.
Many Subject Matter Experts, One Goal
There are many areas of expertise in the area of financial services. There are asset management, financial planning, tax planning, estates and trusts, insurance, and real estate, among others. Each of these disciplines requires a different knowledge and skill set, and it’s unlikely that any one person could master them all. In real life, these disparate professionals compete for client control.
You may have noticed that insurance agents tend to solve problems using insurance products, while bankers favor bank products and so on. It’s a safe bet that each of these professionals knows something about the approaches of the others and has learned what their competitive advantages and disadvantages are. This is why when you hire an advisor, they say they “won the business.”
Winning implies someone outsold someone else, and that persuasion was critical in the process. For optimal results in your life, wouldn’t it be best if the critical outcome was your success? Wealthy people figured out long ago that having all of these different professionals working together as a team and sharing in the work and the rewards produces a better result. It’s like taking the value of a fiduciary to an exponential level.
Taxes First, Then Math
Controlling for your best outcomes will be dealing with costs, tax efficiency, diversification, and risk exposure. Taxes are typically the largest of these controllables, sometimes taking 50% or even more of a gain. Therefore, job one should be tax efficiency.
Tax strategy is obviously the domain of the CPA or the Enrolled Agent, but the best strategy is only as good as its implementation. Few things frustrate a tax professional as much as seeing their best-laid plans ignored or poorly implemented. You can’t expect your tax pro to be expert at insurance policy selection or portfolio allocations, and certainly not at managing trading or income distribution management. They need those other subject matter experts as much as those SMEs need them.
It’s tough to imagine a family office without a tax professional on the strategy team. And here’s a bonus: accountants are legally and ethically bound to act as fiduciaries. Transparency is part and parcel of tax compliance, something the IRS and other tax collection agencies insist upon. Your tax pro doesn’t sell you anything because they’re busy being your fiduciary.
You Need a Safe Space
Few things in life are as fraught with emotion as personal finances. We can only speculate on what life was like for the young Warren Buffett, but one imagines that he most likely took a while to mature into the fellow who would eventually say, “I’m greedy when others are fearful.”
As an aside, we always have to remember that Buffett runs an enormous financial company, and it makes sense to project confidence to your shareholders. For the rest of us, sometimes a good cry really helps. The market, and the hysterical news coverage that often covers it, can do a number on anyone. Transparency, like love, means never having to say you’re sorry—that you’re scared, that things make no sense, that you seem to have “lost” a lot of money.
Seasoned advisors understand that one of the most valuable things they bring to the table is experience. They not only studied the market’s behavior, they’ve lived through it. That experience allows them to act as a kind of spirit guide, or counselor, or even a crisis intervention specialist, who can remind you to keep your head when all around you are losing theirs.
The best advisors are natural empaths who can literally feel what you’re feeling. They know when you’re freaked out and they know when the flight response has taken over your mind. This is really the ultimate form of transparency: the knowledge that we’re all human, all subject to bias and potentially negative behaviors. And this is when the importance of trust becomes paramount.
Last year is considered by many to be a really bad year, a time of great concern: rising interest rates, persistent inflation, shooting wars with nuclear-armed combatants, and most economists forecasting a recession. Yet the S&P 500 was up over 26%, including dividends. Without transparency and the trust it engenders, you may have gone to cash and missed a terrific year. With transparency and the patience and discipline that investing requires, your retirement security may be nicely improved.
