Full disclosure for asset allocations
Joel Dresang: Art, in a national survey, 78% of investment advisors said they didn’t think their clients were telling them where all of their assets were. Why is that important for an investor to disclose all of that information, to give a complete picture to their advisor?
Art Rothschild: Any investor going to a professional for help should expect that the professional needs all of the information about all of their assets in order to help them make good decisions with respect to their money. So, it’s a mistake for them to not fully disclose to an advisor they trust everything that they have.
Joel: And you do a lot of asset allocation. Explain that a little bit and why that’s important to have the complete picture.
Art: It’s like putting together a puzzle. You have to have all the pieces in order to complete the picture, and retirement planning, investment planning involves, as you just suggested, asset allocation. The returns a client achieves are going to be predominantly from their asset allocation. Studies have shown that 90% of the returns that any individual obtains from their investments is going to come from how their assets are invested.
Joel: And if you don’t know the whole picture, then you’re not quite sure how those assets are allocated.
Art: Yeah. It’s very important for us to understand. An individual client, for example, might have 401(k) plans that they can participate in. Or they have IRAs from employers that they used to work with. If they have, you know, cash in the bank and what their earnings are, what their ability is to put money away for the future, specifically with respect to retirement planning, or when they get into retirement, to help them determine what assets they should tap for their sustenance in retirement.
Joel: Let’s talk about retirement specifically and why it’s important to know what all the assets are at that point.
Art: In retirement, it becomes even more critical. At that point in an individual’s life, they’re done with their main source of income, which was their wages or salaries. Now we have to rely on their assets to provide the income or cash they need to live a happy life in retirement.
So tax planning, for example, becomes really important at that point, as well. So it’s where the money comes from that they’re going to draw upon in retirement, as well as the tax consequences of taking money from different types of accounts. Those will vary depending on the type of accounts.
We have to know what assets they have. We have to know where they are. And then we put together a plan.
Joel: You talk about money in the bank. That’s cash that’s set aside maybe for more immediate expenses. Are there better places to put that?
Art: We’re finding that a properly developed bond portion of an individual’s portfolio should provide better returns than individuals now are deriving from money in the bank – with different risk characteristics, but definitely there are other opportunities.
Cash is a good thing. When money is properly invested, sure you can make more money, but we use cash as a tool to smooth out the ride, as a source for distributions.
But we have to know about it. If we don’t know about it, we don’t know how we might use cash to appropriately supplement other investments that we’ve made for our clients.
Joel: So 78% of advisors thinking that their clients aren’t telling them everything, does that surprise you?
Art: It would surprise me, if it was to happen here. At our firm, we need full disclosure. We explain to our clients in an initial consultation that they’re going to trust us to help them make good decisions, and so we trust that they’re going to give us complete information. They know how important it is for us to know everything they have.
Art Rothschild is vice president and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
(initially posted Nov. 25, 2015)