Ep #115: Ready, Fire, Aim?! Plan Before You Invest with HFG

Benjamin Haas | Apr 15, 2024

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00:00:04 Benjamin Haas:

Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Hey Adam. How are we doing this fine Tuesday afternoon?

00:00:35 Adam Werner:

Tuesday? It's Wednesday.

00:00:36 Benjamin Haas:

Holy crap.

00:00:39 Adam Werner:

Well, time flies when you're having fun, right?

00:00:42 Benjamin Haas:

That's right. It was almost an April Fool's joke on you.

00:00:44 Adam Werner:

Not till this comes out.

00:00:47 Benjamin Haas:

That's right. So, podcast time. Topic this week for our listening audience. Sometimes we get asked whether it's new people coming to us, maybe they've checked us out on the website. They're looking for advisor or sometimes a kind client wants to refer somebody they know. The concept that financial planning for us is a prerequisite to investing with us. Let's start to answer that question. Why is that the case? Simple answer being, we think it's pretty hard to do our job the way that we want to do it efficiently without planning. Let's dive a little bit into that today on why that is the case? Why that maybe makes us a little bit different than other investment firms that are out there and just let's go through it. I mean, your first thoughts.

00:01:37 Adam Werner:

Yeah, I think our approach, while not necessarily unique, industry wide and in the, I'll say the financial advisor industry. I still think we are in the minority. So for a lot of other financial professionals, there is often the opportunity for that to be more transactional. The idea being me as the client saying, here's what I want or here's what I need and that other financial professional said, hey, great, here's a couple of different options. I'll plug you into one of these. Check the box, problem solved, have a nice day, good luck. Where our approach is certainly not that. We do not necessarily want to be transactional. We want to build a relationship and as part of that, as you said, us being planners first, we need to be able to see the full financial picture to be able to feel like we're giving accurate advice. Because ultimately, there are so many different strategies. There are so many different ways that people can approach certain decisions that they need to make. None of that happens in a vacuum and again, maybe it's just our personalities wanting to leave no stone unturned. We need to be able to have that full picture.

00:03:01 Benjamin Haas:

So, the thought going through my head now is let's define that. When we say planning. In some ways we do want to do like goal orientation and we'll get into why goals and timelines shape investments, but we can even be a little bit more basic than that. Planning to us is pretty much our way of saying we want to get to know you as a person and an investor. What matters most to you? How do you best make decisions? What inspires you? What are you fearful of? You know, what hurdles kind of get in your way or biases do you have to progress forward? So planning are all those conversations that we think when we put those together, that is absolutely going to inform an investment strategy and without that, we're kind of at a point in our business where we firmly believe without that, we can't do the job the way that we believe the job needs to be done.

00:03:55 Adam Werner:

Planning for us is the filter. It's the funnel to get to those certain options or the certain strategies that may fit for that specific person, because not everybody is going to have the same preference on risk level or type of investment. I mean, there's so many different paths that could take, that will work for somebody and their situation, may not fit somebody else. Some of that may not necessarily be the financial situation, just maybe their feelings on money. So to your point, how they best make decisions, what actually matters most to them? What do they prioritize can impact the ultimate outcome for us is just giving that advice and then hopefully helping to implement it. So I kind of like to draw the parallel. Maybe it's a bit out there on the limb, but liken it to, you go to the doctor for the first time, they're not just going to, I assume they're not just going to give you a quick diagnosis. They're going to want to take some vitals, they're going to want to see your full picture before giving you, I'll say the official diagnosis. Cause from our standpoint, we can build, I'll use air quotes, the perfect investment plan for somebody, and without building in different contingencies or having things structured in a way that meets cash reserve, thinks about taxes in the future. How are you going to plan for health care? Again, we can build the perfect investment plan, but any of these what ifs coming down the road, if you don't have a plan in place that, if this thing happens, we're going to do X, Y, or Z. You can quickly derail your investment plan with any scenario where it doesn't matter how good your investment plan is if you just didn't check the boxes on some fundamental planning things. Then it's all kind of a moot point at the end.

00:05:53 Benjamin Haas:

Alright, so this is good. I think we defined what we mean by planning. I think you gave a really good example there on like why diagnosis matters and what makes up a plan. Let's now piece that together on how the answers to that really then will inform this whole idea of investment strategy and if, you know, play along with me. I think we often can sum these things up into three different things. We want to, planning is going to help us manage time horizon, manage liquidity, right? You just mentioned cash reserve and manage expectations on short term losses, long term gains, the things that will emotionally drive us. So yeah.

00:06:34 Adam Werner:

The behavior.

00:06:35 Benjamin Haas:

Let's go back.

00:06:37 Adam Werner:

Yeah.

00:06:37 Benjamin Haas:

Financial planning as it, as we would say, it helps us fill this three bucket theory that starts and is really based with managing time horizon. So what do we mean by that?

00:06:49 Adam Werner:

Yeah. So, I mean, that's the prototypical, the three-bucket theory. I think we've now recorded two podcasts dedicated specifically to that. We just did one recently with kind of redefining, trying to put it into people's words that they use, how do they view these different types of buckets. But to your point, it really just comes down to, I'm just thinking of a client scenario, if they know they're going to spend a certain amount of money in the next year or two for whatever reason, whether that's just part of their regular plan spending or it's a bigger project, home, purchase car, you name it. Part of our process, if we know that, then we want to build that into the plan, right? Those are whatever those funds are, should probably not be invested and at the whims of the market, so whatever that time frame is, a year goes past and now this money is needed. Great that you want to invest and we can, again, we've come up with that perfect investment plan. The downside is we can't control the markets. Nobody can control the markets and you don't want to put yourself in a spot where, now you're banking on the market being kind to your timing which isn't always the case. So again, that's just us kind of being prudent from that standpoint. If we know there's cash that's going to be spent, we want that. It's not the sexy thing to say, but we want that in a safe position. At least right now, people are getting paid to sit on some cash, if they're going to spend it. But it's just something as basic as that. If we know you're going to spend it, we certainly would not recommend investing that if you're going to need it within the next 12 or 18 months.

00:08:25 Benjamin Haas:

Well, it can go the other way too. If we're planning for longer term, it does help us understanding your planning aspects of that, your contributions towards that goal, the timeline of that goal, all of those things will help us be informed to say then, okay, here's how we can allocate that and how we can manage that over time. So, time horizon is a big part of it. Very hard for us to like do guesswork on that or blanketly give investment advice without understanding. Most people are going to have, I'll say, multiple or competing goals, right? So understanding how those things work together, too, will certainly help us.

00:09:04 Adam Werner:

Yeah, it's depending on how complicated the situation can get, it's often a good idea to essentially kind of build that timeline when our funds needed and to your point, how that then gets invested or those savings get allocated to align with those time horizons so that at any point, if you need to pivot, great. We can always adapt our advice. I mean, I know we've said this so many different times. Flexibility is such a core of what we believe in. You don't ever want to paint yourself into a corner where your options are so limited that you just have to take whatever comes your way. We are firm believers in having flexibility. So being able to kind of line up what you may need, when you may need it, even just thinking like bigger picture retirement planning. We often hear from clients and prospects that while I'm getting close to retirement, shouldn't I really be reducing my risk in my investments? And I think a lot of this from our standpoint, the answer is oftentimes, well, it depends, right? But the reality of it is on day one of retirement you're not spending every single cent that you saved or at least, hopefully that's not the case for people. We hope that they have a long and healthy retirement. You're going to want some growth over time to keep up with inflation. So just again, aligning when you may need things with that time horizon and how you're invested, which I know we'll get into a little bit of that risk side of things and how to maybe manage some of the emotional and psychological impacts of that. It just gives a good framework for that planning process when it comes to investing and when you may actually need or want access to some of your savings.

00:10:53 Benjamin Haas:

Yeah, and there's a good degree of overlap there between managing time horizon and managing liquidity. We think of that three bucket theory really being a good tool to describe retirement and the need for retirement spending but just understanding your spending aspects helps us determine how much needs to be in a cash reserve versus invested, going back to your point, you really don't want to be investing dollars you're going to need in the short term. So those two things, managing time and managing liquidity, that comes out of planning and then you're just kind of mentioning risk appetite. We need to make sure that your need for return is kind of matched up to a degree with the appetite or tolerance or composure. That is going to be required for short term volatility. So managing losses is another part of this process that helped by understanding all the planning aspects of that. So, I don't know if you have anything else you want to add on the concept of kind of managing losses.

00:11:53 Adam Werner:

Yeah, I think just generally speaking, when it comes to managing investment risk, I think it's one of those funny things that for certain instances and there's no judgment here but when somebody is getting close to retirement and asking questions of us, am I on track? Am I doing the right thing? Am I saving enough? You know, kind of all those really important questions that we hopefully can help answer through a planning process, right? Getting that full picture, being able to do the analysis to be able to give some specific answers to those questions. If someone hasn't saved enough or can't necessarily retire when they say they want to retire, there's levers that can be pulled, right? There's these different moving pieces in anyone's financial life, that it all comes down to tradeoffs. I know we've said that in other pieces, but it may just mean if you want to retire at this point in time, based on your expenses and based on what you have saved. You may need to take more risk than you are comfortable taking in order to make up for either time that you're not continuing to work or expenses that may be higher, whatever the case may be. That's often an unpleasant outcome because if someone needs to take more investment risk than they're comfortable with, that often just leads to, I can't imagine the emotional impact that that can have on somebody knowing that I want to retire. And sometimes that's forced based on health. So I'm not saying this is a selfish person saying, hey, I don't want to work anymore, but I don't care that I haven't saved enough. But there are those domino effects, but it can go the other way too.

00:13:35 Benjamin Haas:

That's just going to say

00:13:36 Adam Werner:

Where, you know, people who have lived within their means, have been aggressive savers and have really set themselves up for success in retirement. Theoretically they may not need to take as much risk. In retirement, they can invest in things that are maybe a little bit more conservative, a little bit smoother of an experience from an investment standpoint. But then you can get into the nuance of, well, this is where it's all situational. Even that person that may have saved enough can take less risk. They may be okay with taking risk because again, it's the mental and psychological component of seeing your investments and if you're able to kind of ride them out because you've done all a really good job, then again, there's trade offs to all of that. It's interesting how there's many different ways of going about it and there's no black and white answer to how should I be invested? How do I stick to that plan? It really just does come back to timing of when you need it, making sure that there is liquidity when you need it, and hopefully being able to structure your savings in a way with that three bucket theory allows you to kind of ride out at least a portion of your savings that may be volatile from time to time.

00:14:51 Benjamin Haas:

Well, and I'm thinking here too, Adam, that the basis of any relationship like this needs to be a degree of trust, right? You're going to come to us, you've got this life savings, in some cases now it's finite, right? We're talking retirement. We your trust. But I'm not always comfortable just banking on that and saying to someone, well, then here's what you need to do and you just need to trust me. Planning is what gives us, selfishly, the tools that we need to help set expectations and answer questions when you're going to have some pushback or some uncomfortable event or something that says, you know, hey, what can I ask the questions you just laid out there. What can I expect in income? You know, what is safe for me to spend? Again, we need all of that context to be able to confidently say, here's what we think you need to do and here's why. Not just try to wave this wand of trust and go, you're fine, don't worry about it, you know, you don't have to ask these questions because I got it. This is our investment portfolio, it will work, whatever. That's not, I think, the foundation for a good relationship over time. We want to be able to set fair expectations relative to what you said matters to you, relative to your finances, relative to all those things that come out of planning.

00:16:07 Adam Werner:

Yeah, I agree. So then as part of that, how do we actually manage those expectations? How do we kind of put things into context? I mean, we have some rules of thumb, right? Just thinking from a savings and income standpoint. We are believers of the 4 percent withdrawal rule. That just basically says if based on what you have saved, if you have a million dollars saved in an account or multiple accounts, you can reasonably take 4 percent per year over time and not run too high of a risk of depleting, essentially outliving your savings. There's our planning tool, eMoney, we can certainly plug in any number of scenarios. That's again, we're hopefully getting a full picture of somebody's financial life and once we have that kind of modeled in our planning tool, we can throw any number of what if, insert, whatever scenario a client wants to kind of explore. What if I retired at this age? What does that do? What if I spent an extra 10,000 on travel once I retire? What are those outcomes or what are those potential trade offs? Even just going through that exercise, I'll speak for myself. It's so powerful for clients just to be able to try to break it down at its most basic form of, am I going to be okay in the long run if I do this thing that I want to do? And if the answer is no, Then it's, okay, but what are those other levers that we can pull to either put it in a better spot that you could do it or just give people the information that they need to be able to make a decision. I mean, ultimately I think that's what planning is all about. Just giving all of that context and just giving the information that people can feel confident in whatever decision they're making, right, wrong, or indifferent for their situation. They have to be able to be comfortable with it and sleep at night.

00:18:00 Benjamin Haas:

Yeah, and hindsight's always 20, 20, but I never want to be in that spot where we give investment advice. We have this investment experience. Some question comes up or some client goes, oh, but I've got this other account over here or, hey, I inherited this property a couple of years ago, or if we didn't have the whole picture, I don't want to sit there and respond to something by saying, well, I wish I would've known that. I might've given you different advice, X amount of time ago, had we been able to put all these pieces of the puzzle together. So, I just want to kind of reiterate planning also then helps us kind of look at this as one big puzzle that needs to be put together to try to be efficient with things. We know that investments are not independent of planning and that any part of the planning may change the investment so we need to be very cognizant of that. That's another big piece of why we just say planning needs to be a prerequisite to investing because we don't want to be caught not in the know.

00:18:59 Adam Werner:

Right, and I think that's where I think I had said earlier, a lot of these decisions that people are faced with or even just investing in general, doesn't happen in a vacuum. So, what changes on an income side or the tax side of things or estate planning can certainly impact how you were to invest or the risk that you take. Any of those decisions impact another portion of your plan and that's where we want to be thoughtful on. What are those dominoes? And just making sure that we are double and triple checking and again, just giving people the, if this is what you decide, then here are the potential outcomes and just making sure that that still fits with what they're looking to accomplish.

00:19:44 Benjamin Haas:

I'm going to throw a scenario into this part of the conversation and then maybe we can wrap it up. The most recent example coming into my mind that we start helping this couple. He's been retired a little bit. She's retiring now this summer, have investment professionals that are purely investment professionals focused on. We're going to try to make your money grow, make your money grow. Lots of holdings, now they're going to have to go get healthcare. They're not of Medicare age yet and all this trading that's going on to try to drive investment return is creating all of these taxable consequences in a taxable account that now all of a sudden is going to affect their healthcare premiums. And we're just sitting there going, man, had you know, wish we would have met them a little bit before because planning would have informed a different investment strategy that I think could have been put in place to be more efficient on all fronts.

00:20:37 Adam Werner:

Yeah.

00:20:38 Benjamin Haas:

Taxes included.

00:20:39 Adam Werner:

Yeah. That's such a great example. I'm glad you shared that because that's the picture perfect, snapshot of the client and the advisor are on the same page. The intent was invest this money and grow it and that was the number one priority. Everything else was kind of secondary to that. But to your point, we don't necessarily view things that way.

00:21:04 Benjamin Haas:

Every decision has a consequence.

00:21:06 Adam Werner:

That's it. Was it Newton? Newton's law of whatever, physics. Every action has an equal and opposite reaction. That's when it comes to planning. I know I'm close. That's why I'm in finance and not science but planning is very much the same where any one decision or any change that you make to your plan or to your investments, there are those dominoes and potentially unintended consequences. That's what we want to avoid for people is those unintended consequences or as you said earlier, I wish I would have known that then and maybe I would have done something different. That's what we want to try to avoid, the regret behind certain decisions. That's where, again, it just comes back to information and education, and hopefully people can make a decision that they feel comfortable with and that they won't regret moving forward.

00:22:01 Benjamin Haas:

So in summary, when we say that we are planners, hopefully we've given all the examples on like why we think that needs to occur. I know that there are going to be people out there that would say, well, I don't think I'm looking for that. I just want someone to give me investment advice. We respect that. We will help you find, if you're coming towards us, we will help you find one, that's just not us. I hope we've kind of shared good reasons why we think planning needs to happen with us. Planning needs to happen before we dive into an investment relationship.

00:22:39 Adam Werner:

Well done there. Thank you.

00:22:41 Benjamin Haas:

Until the next one.

00:22:45 Adam Werner:

See you then.

00:22:46 Benjamin Haas:

Bye.

00:22:47 Adam Werner:

See ya.

00:22:49 Benjamin Haas:

Hey, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual to determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.

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Ep #115: Ready, Fire, Aim?! Plan Before You Invest with HFG