How Good is Your Team?
Building The Right Financial Team
How Good is Your Team?
Building The Right Financial Team
First, let’s discuss the reasons why you might want to build a competent team. Although extreme, imagine the following scenario:
At age 60, you had a net worth of $2.5 million, $2 million of which was in an investment account with the remainder mostly invested in your home. Your investments came mainly from the after-tax proceeds of a lump-sum payout of a defined benefit pension plan. You took the lump-sum distribution because you wanted to invest in the stock of a communications company that was the darling of Wall Street. At age 60, $1.5 million of your portfolio was invested in that stock and the remainder was in various other stocks. You had no life insurance and liability insurance of $100,000 limit on your auto and homeowners policies. All-in-all, you felt comfortable with your situation as you neared retirement.
Today is your 65th birthday. Your investment account is now worth $150,000. That satellite company you put your money into went bankrupt three years ago after a series of launch failures. When you were 62, you hit a pedestrian crossing the street because you ran a red light. You had to spend $100,000 of your own money to defend yourself in a lawsuit by the pedestrian because your liability insurer stopped paying after the first $100,000. The litigation has taken three years because you refused to settle for the limits of your policy two years ago. The final judgment was rendered today and now you owe $1 million to the plaintiff. Even after you sell your home and liquidate your investments, you will still owe the plaintiff $350,000. You are planning to file bankruptcy soon.
Could the above situation have been avoided? The answer is a resounding yes, if you had assembled a team of competent professionals and listened to their advice. Chances are you would never have withdrawn your retirement funds and put them into a risky investment. Your CPA, lawyer and financial advisor would have convinced you that doing so would be opening your assets up to loss and/or seizure by your creditors. Your property and casualty agent would have convinced you that $100,000 in liability insurance was inadequate. In short, their advice would have helped you structure your finances to avoid catastrophic losses. That’s why you need a competent team of advisors.
Now that we’ve established why you need a team, who should be included on it? You need people on your team who will advise you in all major aspects of your financial life. The members should include a certified public accountant, attorney (preferably an estate attorney with good grounding in tort law), property and casualty insurance agent, life insurance agent and financial advisor. It’s likely that the financial advisor and life insurance agent will be one in the same. Let’s look at the roles of each.
Your CPA will serve several functions, even the financial advisory role if he or she is licensed to do so. Your CPA should have a strong grounding in income taxation as well as the ability to evaluate your estate planning and financial needs. He or she should also be astute enough to recognize areas where you might be vulnerable to liability losses. Your CPA needn’t be an expert in non-tax areas, but should be honest enough to recognize his own limitations and connect you with others who can help you. In short, your CPA must be able to work as a team member.
An attorney is indispensable. While you could go to Legalzoom.com for some things, the truth is that the law is changing all the time. Sometimes, canned products can meet the requirements of law in your state, but there is always the risk that the sample documents have not been updated to meet changes in state or federal law. For this reason, you need an attorney on your team. He or she can help you prepare a will, establish any needed trusts, and draft the agreements needed for any of your personal and business affairs. Had an attorney been on the team in our example, she would have pointed out that removing your assets from an account that is protected from the claims of most creditors was foolish. Hopefully, her advice along with the same advice coming from your CPA would have kept you from losing your entire retirement. Just like the CPA, your attorney needs to stay in contact with other team members and be willing to cooperate with them.
Property and casualty agents are not often mentioned as team members, but given their expertise in helping establish the right amount of insurance to protect you, they should be. In our example, a true professional would have suggested insurance in an amount to protect your assets, including umbrella liability insurance. You would then have had at least $1 million in coverage and the agent would have advised you to listen to the insurance company and settle the suit. Need we say that the agent must be willing to work with the other team members?
Financial advisors most often can help you invest your funds and are also licensed life insurance agents. If your advisor plans on putting you in an annuity, he must be a licensed agent. It is the financial advisor’s role to help you decide which investments you need. He will do this by means of an extensive interview designed to determine your life goals, the feasibility of those goals and your tolerance for risk. The financial advisor looks at recommendations from other team members and helps you implement them in your portfolio. If he sees that you need the services of another team member, he should readily refer you to them.
A good team in the financial planning arena includes several professionals whose abilities complement one another. If you are to succeed in attaining your goals, your team, just like a football team, must act as a single body in pursuit of your success. Just like a football team, you will also need a quarterback and that’s the easiest call of all: that quarterback is you. Regardless of the competence and capabilities of the professionals on your team, the final decision on what play to make will come back to you. Therefore, you must also be willing to work with your advisors and listen to their advice. Sometimes, you will reject their counsel, but more often than not, you will take their suggestions to heart and implement them.
As certified public accountants, this firm continually works with other professionals to make certain our clients’ needs are met. If you are seeking to establish a new team, or just tweak the one you already have, give us a call. We are here to help and always play nicely with other professionals.
By the way, in the 1990’s a number of satellite communications-based companies did experience catastrophic launch failures and their investors lost fortunes because of the subsequent bankruptcies.
Let’s hope for cooler weather this month.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.