A scuba diver usually needs to load himself with additional weight before he begins. If he provides an artificially low number when asked what he weighs, he may struggle to get below the surface and to stay down once his tank is low on air (a buoyancy thing). In other words, disclosing the truth is crucial to getting the most out of your diving experience.
The same rule applies with your financial advisor. The more you confide, the better the experience. Your advisor needs to know what resources are available to help you accomplish goals, create an accurate long-term roadmap, and to avoid potential landmines. All of your current and future assets will play an important role, but there are a few areas where it’s crucial to come clean.
People apparently hold about 23% of their wealth in cash1, even though advisors often suggest a number closer to 3%. Sometimes people just round up when it comes to the amount of cash they need to feel safe. While it’s nothing to be embarrassed about, one should know of the opportunity costs with having excess cash for extended periods of time unnecessarily. In “A Kibosh on the Rainy Day Fund,” I share a few thoughts about hoarding cash. If you’re worried that your advisor is going to urge you to invest all of your cash without addressing your personal circumstances and need for an emergency plan, you might need a new advisor.
Highly Appreciated Assets
Do you own shares of an individual company that you bought or inherited long ago, and you’re feeling emotionally attached to them? Or do you view this as your “play account” just to have little fun? Whatever it is, if you tell your advisor what you have and why you own it, you can explore together if these assets should have another purpose at some point. If you are a person who donates to charity regularly, these assets may be perfect match for your charitable giving and tax-minimization strategies.
My client, Joe, opted for an early retirement last year after losing his job, because he was confident enough about an inheritance that he’ll receive when his father dies. The inheritance, combined with his other future income streams (pension and social security), will allow him maintain his lifestyle even if he doesn’t go back to work. Sometimes people don’t have this parent conversation at all, or they’ve had it, and still don’t feel comfortable fully relying on it. Joe and his father discussed his father’s financial plan, so Joe was willing to let the inheritance be a factor in his retirement plan. If Joe didn’t confide all of this with me, my advice would have been quite different (he would have had to work longer or reduce spending).
Electing Pension or Social Security
Social Security and employer pensions that provide fixed monthly payments for life come with many choices. Your employer’s HR department might nudge you towards taking the pension annuity, while your advisor may suggest you roll it to an IRA account. If you don’t work with a fee-only advisor (who takes a fiduciary oath), it could be hard to know which option is best for you. Before you make your decision, have an advisor help you weigh the pros and cons. Your tolerance for risk, life expectancy, spending needs, family situation, and more, all play a role in this decision.
Even spouses keep financial secrets from each other, so it’s understandable if there are certain things that you don’t want to share with your advisor. Try viewing your advisor the way you see your primary care physician– the more you share, the better your financial health will be. So think hard: Is there anything you’re not sharing?