What is Fee-Only, Tax Focused Financial Planning?

February 12th, 2020
February 12, 2020
Joseph Vecchio CPA, CFP, MBA

As fee only advisor, I do not represent a bank, a brokerage firm, or insurance company. My sole source of compensation is paid directly by clients in the form of a fee.

Why is that important? If you don’t know how your advisor is being paid how do you know if the advice they are giving is good for you or good for them?

An important tenant of being a fee only advisor is that I am a fiduciary. What this means is that I have to do what is in the best interest of my clients’ at ALL times. That may not seem new or novel but you would be surprised how many “advisors” aren’t held to this higher standard. As a fiduciary, I am sitting on the same side of the table as you so to speak. Meaning we trying to reduce the fees and expenses associated with investing, setting up accounts, or transaction costs for example.

Finally, I want to highlight that as a fee only advisor, I also focus on areas other advisors may not typically. Advisors who are solely compensated by investments typically only focus on that one area. Whereas we will review many different areas including but not limited to, insurance, estate, and taxes being the best example.

Why would we choose to focus on taxes? Frankly this area we can add the most value. Every financial planning decisions has tax implications. How much you contribute to a 401k or 403b, what your various accounts hold, how you get your money in retirement, do you pay off your mortgage, etc.

We all remember a time or two I’m sure when we got the surprise tax bill come April. We are not only preparing tax returns for a certain level of our clients, that is the easy part, but we also more importantly are completing tax planning for our clients. This is practice where every fall we get together get paystubs and do projections. This allows us to make recommendations and changes in that current year rather than consoling you over a large tax liability.

Let’s step through what is entailed in each of meetings briefly. In our portfolio analysis and asset allocation meeting we are helping organizing your accounts and looking at things globally or factoring all of your accounts. If I had to ask what your investment strategy was for across all of your accounts, could you tell me? My goal is to not only come up with a strategy, but make sure WHERE you are holding the investments is as tax efficient as possible.

For your insurance review we don’t sell any insurance products but we are well informed on the different areas of insurance. We take you through an exercise that chronicles all of your different coverages from life, disability, long term care, even home, auto and umbrella. Where are you under insured and where do you maybe have too much coverage.

Estate Planning, we are not attorneys and cannot give legal advice. But you owe it to each other to have a basic estate plan in place, wills, power of attorneys (financial and medical) and living will. We also discuss what is a trust and why some people have them. Our goal is to save you time if you need to have your documents updated when you meet with the attorney and more importantly once the documents are done make sure your different accounts match your wishes. Updating beneficiary information, naming things in the name of the trust, etc.

Goal setting, there is an old saying any path will take you there if you don’t know where you are going. Now you may be very clear on your goals and speak about them frequently but what we have found is that most people get lost in the day to day issues of life and forget to step back and decide what they would like to accomplish. We take through exercises that help set goals and we validate them. We also discuss what impact they may have on your financial life moving forward. If you would like to take that big trip will affect your ultimate goal of retiring by age 62?

Tax preparation, we only file 1040s. I do not do them on a retail basis, only as a comprehensive service for my clients.

In the renewal year we will review the investments, complete tax planning and tax preparation. But we aren’t limited to just those meetings. That is the beauty of an open retainer, there is no limit to the number of meetings, phone calls, or email exchanges. Financial planning is a fluid process. If something happens that requires a meeting we are here to counsel you on the best course of action.

Let’s move on now to our investment philosophy. When it comes to investments we recommend investments that you probably have invested in the past i.e. mutual funds, exchange traded funds and individual bonds. When it comes to mutual funds we use what is called an evidence-based approach versus the conventional approach.

In the conventional method I refer to it as the Matisse at the garage sale style. It is the idea that you know something that the market does not and therefore could profit off of it. For example, let’s say that you were a world renown art expert and happened upon a garage sale where they were selling a Matisse original painting for $5 that you buy and then sell for several millions. This is the same thoughts most people have when it comes to investing. They believe if they just pick the right mutual funds or mutual fund manager then they will outperform the market because of some secret knowledge they have making you rich! In actuality what they end up doing is having a higher expense ratio because of the teams of people they hire to research and, buy, sell, and trade so frequently but do not beat their market indexes on average.

What if as an alternative you didn’t try to beat the market but instead invested in funds that mirrored the market indexes? This guarantees whatever index you are mirroring you will get market returns. Factor in that passive mutual funds on average have lower expense ratios therefore they cost less. Based on academic research clients who are buy and hold investors who hold passive mutual funds outperform clients who invest in conventional mutual funds when you factor in fees and expenses.

We also diversify across market indexes. Since I don’t know what will be the best performing asset class why not have a proper allocation to all of them. That way when it is the best we take the profits and reallocate to another index.

The four main areas that I believe Shore Financial Planning can add value to you as a consumer.

First, organization. You could be a very organized individual or couple that knows exactly what they have and where it is. But most people do not. The first step in a financial plan is being organized. Do you have old 401ks, or stock hanging out there? It is our goal to bring clarity to your financial goals and help you connect them in your financial life. We have tools specifically that will allow to view all of your accounts in one place as well as track a budget.

Second, being proactive. We help you plan for your changing financial life and working to take the right steps now to get you where you want to be. Whether that is getting a new job, saving for retirement, or knowing that you have enough to retire.

Third, accountability. I provide guidance and coaching to help you take the right steps to achieve your financial goals. Why does anyone need coaching? A successful professional team is comprised of highly skilled athletes, why do they need a coach? They need a coach for their expertise on various areas and most importantly for someone on the sidelines can see things the players can’t during a game to avoid making mistakes. In the financial planning area people I worked with in the 2008 depression who stayed invested got through it better than clients who sold at the bottom and didn’t know when to get back in.

Finally, education. We use a collaborative process to help clients feel empowered to make changes. Now I am not training you to be a financial advisor, but in our opinion, it is important to know not only what we are recommending but why.

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