How to avoid secret traps.
Some adult shame amounts to little more than a grown-up version of blocking a cookie jar surrounded by telltale crumbs. But too often, the adult piggy bank is at stake. And for financial managers, that can set the stage for disaster. "You cannot have trust if the client is withholding information or not telling the truth," says Mark Astrinos, a Palo Alto, California-based member of the American Institute of CPAs' Personal Financial Specialist Credential Committee. "Sometimes clients are embarrassed by their behavior," Astrinos adds. "Other times they don't want to share this information in front of a spouse." Here are eight details never to keep secret from your financial team.
Death and taxes may be certain but financial death by taxes is avoidable. "If an advisor is unaware of your specific tax details -- such as capital loss carry forwards or alternative minimum tax [status] -- they will be unable to invest or make financial recommendations to the best of their ability," says Leann N. Sullivan, vice president and shareholder at TFC Financial Management in Boston. Think gain over shame: Charitable deductions, for example, could come "from appreciated securities in the portfolio or even the use of IRA funds versus using cash."
Some investors see fit to keep their personal lives shuttered. But is that always wise? "It may be embarrassing to disclose private family situations, but clients should flag those that could impact their future finances," says Andy Watts, manager of wealth management support and advisor practice management at H.D. Vest in Irving, Texas. The hot-button issues that can impact the bottom line run the gamut from divorce "to having a family member who can no longer be trusted as a beneficiary."
Even great physical health can stress financial health. "Those in excellent health and with a family history of longevity can expect to spend more years in retirement than the average person," says Insured Retirement Institute President and CEO Cathy Weatherford. These investors, she adds, may be ideal candidates for annuity-based solutions. "Conversely, those in poor health or at higher risk of hereditary conditions such as dementia may greatly benefit from an advisor's assistance in developing a plan for managing health care costs and long-term care needs."
Sometimes investors struggle with "good debt" (a mortgage), other times "bad" (unsecured credit). Don't sweep either aside -- especially the latter. "Clients never seem to want to tell you too much about debt they may have on credit cards or other items they aren't necessarily proud of," says Greg Wells, vice president of EP Wealth Advisors in Torrance, California. "This is crucial for us to know when making recommendations, as usually credit debt is linked to spending more than you can afford."
Beyond allowances and student loans, kids can still cause headaches. "If little Johnny can't be trusted with pocket change, let alone millions of dollars in a future inheritance, your advisor needs to know this so they can help you design an effective estate plan," says David Twibell, president of Custom Portfolio Group in Englewood, Colorado. "Or if you're afraid Johnny's spouse -- whom you've never liked -- could divorce him and take half his assets, it might be better to gift money to him in a trust rather than directly."
Some bullish investors are, if you will, all too eager to dish the bull. "They'll overstate their understanding of investment risk, primarily to mask their ignorance of the topic," says John Bucsek, managing partner at MassMutual Tri-State. "Whether it's ego or embarrassment, too many clients learn the hard way that they aren't built for market volatility -- and worse, market losses." Humility, patience and listening make for a more solid approach. "Staying invested through bull and bear cycles has proven to be the best long-term strategy," he says.
Some investors are aggressive, others just passive aggressive -- and don't share what they really want. "Without proper upfront expectations set, neither side really knows how to act during the planning engagement," says Jeremy Shipp, managing partner at O'Dell, Winkfield, Roseman & Shipp in Richmond, Virginia. Years may pass with the client feeling unsatisfied, "but they may want to hide their true feelings. Once a client gets the point where they have to hide how they feel, that's usually the beginning of the end of the relationship with their financial advisor."
Duplicate accounts can mean double trouble for advisors. David Edwards, president of Heron Wealth in New York City, relates this story: "We had a situation last year where we routinely made the minimum required distribution from a client's retirement assets -- only to learn he had a 'secret' retirement account from which he'd already calculated and drawn the funds." That made Edwards scramble to return the unnecessary distribution to the account as a 60-day rollover. "Even then, the client had to do extra work to report the rollover for tax filings."
Lou Carlozo, managing editor for the Bank Administration Institute, is a U.S. News & World Report investment contributor who has covered a wide range of topics ranging from analysis of quarterly reports for Apple (APPL), Netflix (NFLX) and Tesla Motors (TSLA) to baffling nature of Wall Street jargon. An award-winning journalist, he served as an editor, syndicated weekly columnist and writing coach at the Chicago Tribune, where he worked for 16 years. He was also managing editor for Aol's personal finance team, a full-time contributor to Reuters Money and a weekly columnist for Money Under 30. His recent piece on Laughter and Sales was selected as one of the 10 Best Blogs of the Decade by Ambition.com. The author of a journalism textbook and an accomplished music producer/studio musician, he resides in Chicago with his wife and two children, just a long fly ball from Wrigley Field.