Money Clinic: Asset Coordination is a Critical Key to Financial Success

I see it all the time. Many hardworking people are saving money. They are trying to do the right thing, sometimes sacrificing instant gratification for the rewards of long-term success. They work with multiple financial salespeople (commonly called “financial advisors”) and purchase multiple products that are supposed to help them make more money.

However, in most cases, people end up with a hodgepodge of financial products that are not coordinated properly to make their overall portfolio more efficient. I have even seen clients that get sold the same product from the same financial company that is supposed to be doing a completely different job! Was it because there was a financial incentive for the advisor? Was it because his manager told him that was the hot product of the month? Did he get an email from his boss telling him to push a certain product that week?

Whatever the case, there are too many times that unsuspecting people are getting bullied by the financial system. It is hard enough to save money. It shouldn’t be so easy to get manipulated by the system..

The easiest way to free yourself from the financial monsters that are trying to steal your money is to put up a barrier to keep the bad guys out. The simplest way to do this is to follow a successful model and put rules into place so you can implement successful strategies that the wealthiest people use.

Where you are in life and where you want to be in the future ultimately dictate the money decisions you should make. In other words, the purpose of the money dictates where you should put it. Any financial decision you make must be considered thoroughly because of the impact that it has on your whole financial picture and how it may affect other assets you own. When building wealth, you must put every dollar towards its greatest use and optimize the performance of each financial asset that you own.

The asset allocation decision (i.e., identifying an appropriate mix between different types of investments, such as stocks, bonds, and cash) is the primary tool available to manage risk for a portfolio.

Given the importance of asset allocation, identifying a coordinated portfolio management structure that provides a disciplined mechanism for adjusting the portfolio as market and economic conditions change should be an important part of a prudent risk-managed investment program.

The financial macro-environment is tumultuous. We cannot control that. We can, however, control our own microeconomic environment. The easiest way to do this is to avoid making stupid money mistakes.
Security over-diversification, excess fees, and security overlap are common symptoms of a portfolio management structure that lacks coordination.

Most people expect the financial advisor to recommend the right products, at a fair price, to make sure you steer clear of these drawbacks. Unfortunately, that is not how the system works. Financial advisors are salespeople that usually do not look at your complete picture. The accountability in the portfolio structure for key investment decisions belongs with you. Therefore, they have no vested interest in your success or failure because they have too many clients to take care of. They don’t have time (or knowledge) to make sure all your assets are coordinated in the most efficient manner. They must keep selling or else they don’t get paid.

Most advisors hand-off your money to a portfolio manager that you don’t even know. Whether it is a mutual fund or a managed account, you have no idea what that manager is doing, and the manager has no clue what your goals and objectives are.

And it gets worse. If you have multiple money managers, you are very likely to suffer from over-diversification, overlap, and major inefficiencies in your overall asset mix. For example, while exposure to multiple funds/investment styles/asset classes is intended to improve a portfolio’s diversification, multiple mutual funds investing in similar and/or like securities may not provide meaningful additional diversification benefits. You may be subjecting yourself to risk that you had no idea you were taking, and you are the one who is accountable, not your advisor.

Even if you are lucky enough to make a ton of money but it ends up getting tax-bombed when you need to use it, you are the one that ends up losing, not your advisor. Because we all know that when it comes down to it, it’s not the money you earn — it’s what you keep. And if you are an investor who must pay taxes on your earnings, not taking tax implications into consideration can directly affect your chances of meeting your life and wealth objectives.

Certain investments generate their returns in a more tax-efficient manner than others. Certain accounts shelter investment returns from tax better than others. Therefore, choosing your investments wisely can significantly improve the after-tax value of your savings. Each asset’s after-tax return should be considered in the context of every available account. Then you can arrange and coordinate your accounts to maximize the after-tax performance of the overall portfolio.

Is this the kind of conversation you had when your financial advisor was busy pushing products down your throat?

Again, it is vitally important to understand that any financial decision you make must be considered thoroughly because of the impact that it has on your whole financial picture and how it may affect other assets you own. Make sure you are working with someone who has your best interests in mind and will help to make sure all of your assets are coordinated efficiently.

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