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Make Better Financial Decisions - (6 of 9) Seek Counsel: Build a Circle of Advisors


Better Financial Decisions-Conclusion


Why should we seek advice or counsel? Essentially, it means soliciting input, which can help us avoid financial mistakes and provide a valuable second opinion. This process includes both formal and informal sources of guidance. Although acting on the advice received is optional, the goal is to acquire diverse perspectives from respected individuals who are not emotionally or financially tied to our decisions, offering invaluable insights.


Seeking counsel can help us with a multitude of financial challenges many of us face:


  • Staying Current: The financial landscape is ever-evolving, making it challenging to stay informed without guidance.

  • Blind Spots: Managing finances on our own may lead us to overlook potential risks or opportunities that an external perspective could reveal.

  • Biases: Our decisions are often influenced by cognitive biases; advisors help us validate our logic and assumptions.

Implementing this principle is arguably the most challenging due to its subjective nature. The simplistic binary distinctions of "yes" or "no," "black" or "white," "good" or "bad" are not as applicable. It's crucial to understand the nuances involved—knowing almost enough to discern advice, recognizing clearly unsound advice, and differentiating between formal and informal counsel. Although challenging, mastering this principle holds the potential for significant benefits.


Advice


To appreciate its worth, effective advice, as Charlie Munger once said, requires a foundation of understanding in the recipient. This is especially true in financial matters, where advice is most useful when it matches the individual's current knowledge and willingness to act on suggestions. This applies to various financial decisions, such as buying life insurance, leveraging benefits, contributing to an IRA, evaluating a timeshare, or the myriad of other financial decisions we face.


Additionally, advice becomes less valuable when an individual has already made a strong emotional investment in a decision. In these cases, the possibility of a "yes" or "no" answer becomes irrelevant, as the decision is already set in stone. This often occurs in my role as an advisor, where clients may seek advice but only accept it if it aligns with their predetermined choices.


Many people struggle to effectively leverage the Seek Counsel principle, as they fail to see its value. In my observation, one of the reasons is that the industry has simplified the individual steps to the point where a person can and likely should be confident in an individual decision or step, making advice to see the big picture seem trivial or less important. Essentially, each step may appear and feel right, but the person might not be connecting the dots and understanding how each decision impacts other aspects of the plan.


Bad Counsel


A famous cautionary tale involves King Rehoboam, the son of Solomon, who faced a critical decision and sought counsel from individuals who may not have had the necessary experience or wisdom for sound decision-making. This story highlights the importance of listening to advice from individuals with diverse perspectives, more experience, and aligned values. Rehoboam's inability to discern good advice from bad led to dire consequences, underscoring the significance of seeking guidance wisely.


Recognizing good counsel is just as crucial as identifying bad counsel. Many people freely and, at times, loudly offer their opinions. Even though they may be leaders in their respective fields, their advice can often be shockingly poor and misguided.


A whole book could be dedicated to this topic alone; bad financial advice is pervasive. Advertisers pay a lot for financial content because it gets views. This is a warning sign. Financial advice is among the most lucrative in the advertising world. For instance, on YouTube, content creators focusing on finance and investing are paid more than those producing educational content. This means that most advice on YouTube is sponsored and, as a result, is likely biased. In some cases, very biased, yet it is not at all obvious. While this might be acceptable in some contexts, it's crucial for you, the viewer, to understand that the advice is biased and likely not tailored to your individual needs.


Relying on financial advice from articles, television, radio, or books can be ineffective because they provide general guidance or, in the case of radio shows, advice tailored to an individual caller, with the expectation that the audience will apply it to their own situations. From my experience working with clients and building their plans, I've learned that each individual or couple's situation is unique.


In my opinion, it’s essential to be wary of accepting advice from someone who isn't advising you specifically. This includes advice from:


  • Celebrities

  • Social Media

  • Politicians

  • Real estate gurus

  • Brother-in-law, or family in general

  • Neighbors, etc.

It is likely that this advice does not adhere to the core principles of wealth management. Therefore, it’s wise to either disregard such advice or approach it with a healthy dose of skepticism.


Fundamentals of Wealth Management


When seeking counsel, insights should ideally be grounded in widely accepted, proven wealth management strategies—the fundamentals. These principles are universal across many disciplines, yet they are particularly noticeable in sports. It's almost universally acknowledged that top-tier athletes excel in the fundamentals, dedicating themselves to continuous practice throughout their careers. For instance, in basketball, it centers on free throws; in golf, on putting; in swimming, on technique; in soccer, on ball control; and in tennis, on the serve. This concept is also fundamental to building wealth, which involves having a plan, being diversified, and seeking counsel.


Wealth management is intended to be methodical and unexciting—a gradual and consistent journey. I have a client who is also a close friend, and our discussions often veer towards the latest exciting investment ideas—what to buy or sell. Although these conversations can be stimulating, I frequently find myself needing to remind him that investing is not about entertainment; it should be a measured, thoughtful process. Tuning into business news channels can be captivating and engaging, yet the content is rarely directly relevant or useful for serious wealth management. In fact, I often find it challenging to distinguish between a morning business show and an NFL pre-game show.


Building Your Circle of Advisors


Let's delve into how to enhance the 'Circle of Advisors' you likely already have. You may engage with these advisors on both informal and formal levels. Formal interactions, typically paid for, should follow disciplined, proven strategies such as living within your means, maximizing retirement accounts, investing in appreciating assets, and steering clear of high-cost investments. These are strategies you're probably familiar with, and it's expected that your financial advisors, tax professionals, and lawyers will recommend them too.


On the flip side, informal advice—though invaluable—must be weighed differently. It often comes from personal experiences and lacks the depth of insight into your specific financial situation. Formal advice, contrastingly, brings a comprehensive view. For instance, as a financial advisor, my formal recommendations are based on a thorough analysis of your entire financial landscape. When addressing financial decisions, my approach often starts with "Yes, but...", leading to an exploration of how the decision fits within your broader financial plan. This provides a well-rounded perspective, considering my detailed understanding of your financial status.


Both informal and formal advice play crucial roles, albeit in distinct ways. Acknowledging and understanding this difference is key.


Formal Counsel


When you receive formal input and advice, it's essentially a service for which you pay in some manner. Therefore, it's crucial to understand how the advisor is compensated and under what regulations they operate. Are they receiving a commission paid by the insurance company, or is the payment structured like in a real estate transaction where the seller might be paying? Perhaps it's a fee-for-service model, similar to what some financial advisors and attorneys utilize. There is no right or wrong way to compensate for this advice. It largely depends on your needs and what you're looking for that determines the most suitable model. However, to make an informed decision, you must know how the advisor is compensated.


Financial advice is increasingly structured and provided on a fiduciary basis. The practice of offering fiduciary advice dates back to the 1800s and is known as the 'Prudent Man Rule.' This rule establishes a legal guideline requiring a person managing assets on behalf of others to invest with the care, skill, prudence, and diligence that a prudent person would employ. It includes considering the needs of the beneficiaries, the need to preserve the estate, and the amount and regularity of income. The aim of this rule is to protect investors from risky or speculative investments and serves as a standard for trustees and guardians administering assets on behalf of others.


I mention this because, as you can see, there are very specific expectations and guidelines that advisors are legally and ethically required to follow. The advice can seem sterile and textbook-like, lacking the personality and emotional connection found in other types of advice, especially when compared to informal advice. Therefore, it is easy to give more weight to informal advice, which can be a mistake. This is one reason why seeking counsel can be more difficult, as it is not as clear and straightforward as the other two.


Individuals often act in accordance with their incentives. Therefore, as you build these relationships, it's crucial to understand how they are compensated. While it's likely they have your best interests at heart, trusting and engaging with this group requires a clear understanding of their compensation and incentives. PlanAssist® offers two compensation models, both common in the industry and designed for transparency.


First, with a monthly subscription fee, you receive a financial plan, diversification strategy, and the opportunity to seek and receive advice. You have the autonomy to act on this information as you see fit, maintaining control throughout the process. In the second model, you pay a percentage of the assets you hold with us. Under this arrangement, we assume a more active role in the management of your assets.


The key point is that these are standard models in the financial industry. When interviewing an advisor, clarity is essential. Make sure you fully understand how their compensation works and decide which model suits your current situation best.


Informal Counsel


These relationships can include friends, coworkers, mentors, or vendors with whom you've established connections. Essentially, this encompasses advice for which you're not paying. I would also categorize learning from those close to you as a form of this informal counsel.


Learning from others might not always involve advice that is directly aimed at you. However, if you have a close relationship with someone who is implementing a strategy from which you might benefit, observing and learning from their actions can also serve as a form of informal advice and provide valuable insights. For example, you might observe a financial strategy or a situation you wish to avoid or perhaps emulate, and then use this observation as a template for your own decisions.


Nevertheless, we must exercise caution without becoming cynical. I highlight this because informal advice can sometimes carry an underlying conflict of interest, of which you might be unaware—a regrettably common scenario. However, let's assume that the input or advice genuinely has your best interests at heart, offering suggestions based on the information available to them. While their intentions are likely good, this advice often stems from their personal experiences and current life situation, which may not be entirely unbiased.


To illustrate how informal advice from well-intentioned individuals can be more reflective of their position in life rather than yours, I'll share a personal experience. Throughout my 30s, 40s, and most of my 50s, I valued a particular relationship. In the 1990s, while working as a stockbroker at Charles Schwab, where our primary role was to process client orders for buying and selling stocks without offering advice (essentially, a customer service role), I met one of our clients who was 25 years older than me. He frequently visited the office, and due to our shared interests and family dynamics, we developed a close friendship. We attended auto races together, took day trips to the Chicago Commodity Exchanges, and I helped him with bookkeeping for his projects. Over the years, he became not just a close friend but also a confidant in financial decisions. I trusted him because I knew he had my best interests at heart, was financially knowledgeable, and possessed significant financial resources.


As time passed, he offered me investment, financial, and business advice. Looking back, I didn't realize at the time how valuable his advice would become years later. Much of his guidance was based on his own experiences, and I was trailing 25 years behind him. For instance, he would suggest investing all my extra money in the S&P 500 to become wealthy. However, I reminded him that, although this was sound advice, it wasn't the method by which he had accumulated his wealth. A common phrase you'll hear from an advisor is, 'Concentration creates wealth; diversification preserves it.' My point is, in my early 40s and aiming to build significant wealth from scratch, I needed to adopt a more concentrated approach and then hope I was making the right decisions. His advice was always worth pondering, though, and interestingly enough, it became more applicable as I got older and had accumulated some wealth. He was also full of one-liners that I remember to this day, many of which turned out to be incredibly valuable and applicable to me in later years.


The point I am trying to convey is that informal counsel is more fluid and not as straightforward. It's very valuable, but again, this person does not likely know everything about you. They are giving you heartfelt advice based on the limited information they have about you, and even then, it is likely what they would do at that time. So, if you are receiving advice from someone, they are sharing very valuable nuggets of information, though it might not be aligned with where you are in life.


In summary, among the three principles, seeking counsel is the most challenging to implement effectively due to its somewhat subjective nature. The other two principles, having a plan and being diversified, are relatively straightforward and objective.


You'll likely only encounter slightly different outcomes when employing a plan and diversification strategy, whether through a professional or online software. These principles are pretty uniformly accepted across the industry. The challenge lies in the order in which you implement them and the sense of urgency you apply. This is what leads to dramatically different outcomes, which is where seeking counsel has an impact.


Navigating the uncertainties and combinations when obtaining counsel involves many variables. Ultimately, it's about finding your own voice in making financial decisions. Counsel assists us by offering perspectives to consider, but in the end, you and your spouse must believe in and commit to the strategies and decisions.


There should be diversity among your financial professionals in terms of expertise, age, and organizational affiliations to ensure checks and balances. Your circle of advisors might include trusted family members and friends who have your best interests at heart and possess sound personal finance management skills. However, I use "might" because, for some, there may not be anyone in their immediate circle from whom they should take financial advice.


Summary


Whether the relationship is formal or informal, the process of seeking counsel when making financial decisions remains the most challenging aspect of wealth building from my experience. The US has a large percentage of self-made millionaires. The estimates vary widely, though it is clear that those in this group or those on their way to achieving this status, there exists a strong sense of independence and a tendency to go it alone, making the act of seeking counsel feel unnatural. To leverage this principle, it is likely something that will need to be deliberately incorporated into our decision-making processes.


Trust seems to be the biggest challenge, or if not the biggest, it is high on the list, with this principle. And trust takes both time and effort to build. Knowing this, and to summarize this chapter, seeking counsel is not about having others make decisions for us but about ensuring we aren't making decisions in isolation. Having a circle of advisors to get input from, even if we do not follow it, the different perspectives over time are invaluable. From my experience, the willingness to seek and evaluate advice from others marks a significant distinction between those who simply earn money and those who effectively grow and maintain their wealth. Remember, Making Money ≠ Having Money, and seeking counsel is a big part of the latter.


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Freequentl Asked Question(FAQ)


1. What is the importance of seeking advice for financial decisions?

   - Seeking advice provides diverse perspectives and valuable insights from individuals not emotionally or financially tied to your decisions, helping you avoid mistakes and uncover opportunities you might not have considered on your own.


2. Can seeking counsel help with the evolving financial landscape?

   - Yes, staying current with the ever-evolving financial landscape is challenging, and seeking counsel can provide guidance and information that help you navigate these changes more effectively.


3. How does advice help with financial blind spots and biases?

   - Advisors can offer an external perspective that reveals potential risks and opportunities you may overlook. They also help validate your logic and assumptions, mitigating the influence of cognitive biases on your decisions.


4. What's the difference between formal and informal advice?

   - Formal advice comes from professionals and is paid for, often following structured proven strategies. Informal advice, although invaluable, often comes from personal experiences and might be tailored to something other than your specific financial situation.


5. Why might some people undervalue the importance of seeking counsel?

   - Many people may need help seeing its value because the industry has simplified steps to financial decision-making, making individual decisions seem straightforward without the need for broader guidance.


6. What is an example of lousy counsel and its implications?

   - The article mentions King Rehoboam's story as a cautionary tale, where he sought advice from inexperienced advisors, leading to dire consequences. This highlights the importance of discerning good advice from bad.


7. Why should one be wary of financial advice from celebrities or social media?

   - Such advice often needs to adhere to the core principles of wealth management. It may be tailored to something other than your individual needs. It's wise to approach it with skepticism or disregard it altogether.


8. What are the fundamentals of wealth management mentioned in the article?

   - The fundamentals include having a plan, being diversified, and seeking counsel. These principles are likened to continuous sports practice, which is crucial for athletes and individuals aiming to build wealth.


9. How can one build a circle of advisors, and why is it important?

   - You can build a circle of advisors through formal interactions with professionals and informal advice from trusted individuals. This diverse circle offers comprehensive perspectives and advice essential for robust financial planning.


10. What are the two compensation models mentioned for financial advice, and how do they differ?

    - The article describes a monthly subscription fee model, where you receive a financial plan and advice with the autonomy to act as you see fit, and a percentage-based model, where the advisor takes a more active role in managing your assets. The critical difference lies in the level of involvement and control.







DISCLOSURE - All written content on this article is for information purposes only. Opinions expressed herein are solely those of Core Wealth Consultants. Material presented is believed to be from reliable sources, however, we make no representations as to its accuracy or completeness. Core Wealth Consultants, LLC a Registered Investment Advisor in the States of Florida, Indiana and Michigan. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Diversification and asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss.

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