What Advice Can Help Clients Avoid Common Financial Pitfalls?

What Advice Can Help Clients Avoid Common Financial Pitfalls?

In the maze of financial decision-making, it's easy to stumble into common pitfalls. We've gathered eleven pieces of advice from top financial professionals, including financial planners and Chief Investment Officers, to steer you clear. From avoiding high-fee investment products to maintaining a diversified investment portfolio, discover the seasoned insights to keep your finances on solid ground.

  • Avoid High-Fee Investment Products
  • Emphasize Fiduciary Accounting Practices
  • Leverage Tax Credits Effectively
  • Invest in Bespoke Stock Portfolios
  • Plan for Short and Long-Term Goals
  • Monitor Cash Flow Regularly
  • Maintain Liquidity and Assess Payment Terms
  • Focus on Comprehensive Tax Strategies
  • Avoid Consumer Debt
  • Start Saving for Retirement Early
  • Maintain a Diversified Investment Portfolio

Avoid High-Fee Investment Products

The two most common mistakes I see clients make are:

1. Having high-fee A, B, and C shares. These funds often charge a 5.75% front-load fee or have a deferred load fee of 1% of their entire position. These funds also come with a higher-than-average ongoing fund fee ranging from 0.5% to 1.5% per year. I would argue that most fund fees should be below 0.2% unless they are invested in a small or difficult-to-access market.

2. Being oversold whole life or universal life insurance when there isn't a large need for insurance in their life. These insurance policies typically come with surrender charges of up to 10% to exit the policy, and the opportunity cost of investing these funds in most other options will lead to a higher net worth if invested in a 60/40 stock/bond portfolio or possibly even T-Bills at their current 5.3% return. Not to mention the illiquidity that comes with these insurance policies and the need to pay an interest rate to access your money. Infinite banking is also an insurance strategy shrouded in complexity that is being incorrectly communicated to would-be buyers. These policies also have an 80%+ cancellation rate, meaning even though they are sold for life, due to premium increases or lifestyle changes, most people end these policies before they realize the death benefit.

Stephen Boatman
Stephen BoatmanPrincipal & Financial Planner, Flat Fee Financial

Emphasize Fiduciary Accounting Practices

One crucial piece of advice I consistently offer clients is to prioritize fiduciary accounting practices. It's not uncommon for trustees and executors to face legal challenges due to inadequate documentation and communication with beneficiaries. I've seen many cases where the lack of annual accounting or improperly documented investment and distribution decisions led to family disputes and lawsuits. By ensuring thorough and regular fiduciary accounting, especially by maintaining a detailed general ledger, trustees can protect themselves from potential legal pitfalls and foster transparency within the family.

Another significant recommendation is the active application of tax planning strategies. For instance, I once worked with a Forbes 400 family, where our strategic planning around commercial properties, family trusts, and private foundations saved them substantial amounts in taxes. By leveraging options like Section 1031 exchanges for property investments or optimizing charitable deductions through private foundations, you can defer or reduce your tax liabilities significantly. This proactive approach not only conserves wealth but also allows for better reinvestment opportunities.

Lastly, I stress the importance of maintaining a comprehensive and dynamic financial plan. In my experience working with various businesses, including as a senior manager at a leading CPA firm, regular financial reviews and updates are vital. One client, a service-oriented business, benefited immensely by shifting to quarterly financial reviews. This allowed them to respond swiftly to market changes and align their short-term actions with their long-term goals. This dynamic approach led to a 20% increase in annual savings within just a year, showcasing the power of regular financial oversight.

John F. Pace, CPA
John F. Pace, CPATax Partner, Pace CPA

Leverage Tax Credits Effectively

One piece of advice I've given to clients to help them avoid common financial pitfalls is to leverage tax credits effectively. Many small-business owners overlook valuable tax-credit programs such as the Work Opportunity Tax Credit (WOTC), Research & Development (R&D) Tax Credits, and FICA Tip Credits. These can significantly reduce your tax liability and improve cash flow.

For example, one client in the hospitality industry wasn't aware they could claim the FICA Tip Credit, which allows businesses to get a tax credit on the employer portion of FICA taxes paid on tips. By accurately tracking and reporting their employees' tips, they were able to save thousands of dollars annually, which they reinvested into their business for improvements and growth projects.

Another impactful strategy is maintaining thorough documentation for R&D Tax Credits. One technology firm I worked with thought their activities didn't qualify. However, by keeping detailed records of their experimentation processes, payroll for R&D staff, and supplies used, they successfully claimed significant tax credits, offsetting their R&D expenses and boosting innovation without stretching their budget.

A key takeaway is to consult with a knowledgeable financial advisor who can help identify which tax credits you qualify for and guide you through proper documentation. This proactive planning ensures you not only stay compliant but also optimizes your financial strategy to make the most of available opportunities, driving long-term growth and stability for your business.

Philip Wentworth, Jr
Philip Wentworth, JrCo-Founder and CEO, Rockerbox

Invest in Bespoke Stock Portfolios

Several of our clients come from advisors who selected rudimentary mutual funds for their portfolios and rebalanced on a scheduled basis. We highlighted a number of problems with this approach. First of all, many mutual funds charge fees which are deducted from the fund's value. In this case, the clients were paying double fees—one to the mutual fund manager and the other to their former advisor. Some of these fees are called 12b-1 fees, which are charged on top of the management fees and provided to the broker-dealer as sales commissions. These fees add up! Without realizing it, it's far too easy to pay excessive fees for mediocre performance.

Additionally, scheduled rebalances can cause arbitrary asset reallocations. A valuation-based rebalancing approach can be a much more effective strategy. Ultimately, I advise my clients to invest in a bespoke portfolio of individual stocks. As new opportunities arise, we rotate out of mature holdings on a continual basis. This approach is designed to produce superior performance and reduce risk, in line with each client's unique needs.

Asher Rogovy
Asher RogovyChief Investment Officer, Magnifina

Plan for Short and Long-Term Goals

One crucial piece of advice I often give clients is the importance of creating a comprehensive financial plan that includes both short-term and long-term goals. This dual approach allows them to adapt to life's inevitable changes and avoid common financial pitfalls. By having a short-term plan, they can manage immediate needs and unexpected expenses without derailing their overall strategy. The long-term plan ensures they stay on track for major milestones like retirement or buying a home. This flexibility and foresight helps clients stay prepared and resilient, no matter what financial challenges come their way.

Chad Harmer
Chad HarmerSenior Financial Planner & Managing Director, Harmer Wealth Management

Monitor Cash Flow Regularly

One piece of advice I've frequently given to clients is not to overlook the importance of regular cash-flow monitoring. Early in my career as a fractional CFO, I saw a tech startup falter because it didn't pay enough attention to its cash flow. They had an innovative product and strong initial sales, but poor cash-flow management led to a liquidity crisis, which nearly shuttered the business. By implementing weekly cash-flow forecasts and identifying areas to optimize cash flow—like renegotiating payment terms with vendors and improving inventory management—they turned the corner and safeguarded their financial stability.

Another critical piece of advice is to integrate tax planning into business decisions. For example, a manufacturing client wasn't taking full advantage of tax-efficient strategies. By working together to conduct a thorough tax review, we identified multiple avenues to reduce their tax burden substantially, including leveraging deductions for capital equipment purchases and using deferral strategies. This led to a 15% reduction in their tax liability, freeing up capital that was reinvested into scaling their operations.

Finally, I always emphasize the significance of conducting regular financial plan reviews. One client, a service-oriented business, initially set a static financial plan and overlooked periodic adjustments. After shifting to quarterly reviews, they became more agile and could respond quickly to market changes. This dynamic approach helped them align short-term actions with long-term goals, ultimately leading to an increase in annual savings within the first year. Regular reviews and adjustments are crucial for maintaining alignment with evolving business landscapes and personal financial goals.

Russell Rosario
Russell RosarioOwner, Russell Rosario

Maintain Liquidity and Assess Payment Terms

One key piece of advice for avoiding common financial pitfalls is to maintain a constant view of your cash reserves. Regularly monitoring your liquidity ensures that you are prepared for unexpected expenses or financial emergencies. By keeping a clear picture of your available funds, you can make timely adjustments, such as cutting back on discretionary spending or reallocating funds, to ensure you always have an adequate financial cushion.

In addition, understanding the cumulative effects of payment terms on your cash flow is essential. Make sure to assess how different payment schedules impact your overall financial health. This proactive approach helps prevent the stress and financial strain that can come from being unprepared for sudden financial needs, ensuring long-term stability and peace of mind.

Omër Güven
Omër GüvenCo-Founder & CEO, Fintalent

Focus on Comprehensive Tax Strategies

One common piece of advice I've given to clients is to maintain a sharp focus on comprehensive tax strategies to avoid major financial pitfalls. For instance, I advised a client in the real estate sector to utilize Section 1031 exchanges, which allowed them to defer capital gains taxes when selling a property by reinvesting in similar properties. This strategy not only saved them significant amounts in taxes but also facilitated the expansion of their real estate portfolio, ultimately boosting their long-term investment returns.

Another critical piece of advice is the importance of staying disciplined with cash flow management. I recall working with a young couple, Marcus and Nicole, who were struggling despite a strong income. A detailed analysis revealed that they were spending an excessive portion of their income on dining out and unnecessary insurance premiums. By illuminating where their money was going, they were able to redirect those funds into investments and savings, setting themselves on a much firmer financial footing.

Additionally, avoiding the trap of greed is crucial. During my tenure, I've seen investors hold out for higher profits and end up suffering significant losses, as experienced by a client during the 2007 financial crisis. The client rejected a good offer on a property, anticipating further gains, but the market crash left him owing millions. The lesson here is to always weigh the potential risks and stay true to your financial goals rather than chasing speculative gains. By sticking to a disciplined investment strategy and avoiding the allure of quick profits, you can build a more stable and prosperous financial future.

David Blain, CFA
David Blain, CFAChief Executive Officer, BlueSky Wealth Advisors

Avoid Consumer Debt

Consumer debt is a plague. Avoid it like the plague. Debt for a car, house, or school is one thing, but debt for anything else is wrong. Sometimes, it might be unavoidable, and sometimes even useful, but if you are at the bottom, consumer debt is cancer.

Lyle Solomon
Lyle SolomonPrincipal Attorney, Oak View Law Group

Start Saving for Retirement Early

Don't wait too long to start saving for retirement is something I always tell people. When a 20-something says, “I haven't started saving for retirement yet—I'll have plenty of time to worry about that later,” I get disappointed, honestly.

This is a really bad way to think. You can actually make your money grow the fastest when you are younger, because interest builds on itself over time. If you save $100 a year and earn 7% a year, that $100 could grow to almost $1,500 by the time you're 65 and ready to retire. If you start with $35, that $100 might only grow to about $50.

The lesson here—starting early can make saving for retirement a lot easier than if you delay.

Eric Croak, CFP
Eric Croak, CFPPresident, Croak Capital

Maintain a Diversified Investment Portfolio

One piece of advice I frequently give to clients to help them avoid common financial pitfalls is to maintain a diversified investment portfolio. Diversification is crucial because it spreads risk across various asset classes, sectors, and geographic regions, reducing the impact of poor performance in any single area on the overall portfolio. By investing in a mix of stocks, bonds, real estate, and other assets, clients can mitigate the risks associated with market volatility and economic downturns.

Additionally, I emphasize the importance of regular portfolio reviews and adjustments in response to changing market conditions and personal financial goals. This proactive approach helps ensure that the portfolio remains aligned with the client’s long-term objectives while adapting to short-term economic shifts. This strategy has helped many clients navigate through turbulent markets with minimized losses and optimized growth potential.

Rose Jimenez
Rose JimenezChief Finance Officer,

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