The Most Important Reason to Use a Financial Advisor

On this episode of The Long View, financial advisor Cody Garrett discusses his approach to financial planning, target-date funds, and more.

Here are a few excerpts from Garrett’s conversation with Morningstar’s Christine Benz and Jeff Ptak.

‘Give Every Dollar a Job and a Use-By Date’

Benz: You mentioned one size fits all and one area where that sometimes comes up, is in the context of target-date funds. I hear financial advisors mainly say “one size fits none” for what they think are lousy products because they don’t address individuals’ circumstances. What’s your take on target-date funds?

Garrett: I think looking at target-date funds and target-risk allocation funds—one is based on risk tolerance and the other is based on an assumed risk capacity—it’s one of those things where it’s a net positive. I think choosing a target-date fund is definitely going to be better than the alternative—you either staying in cash for the long term or, maybe in a form of naive diversification, choosing a little bit of everything. Ironically, by educating a lot of plan participants, I’ve seen employees actually elect to have 5% in every target-date fund, which is, again that naive diversification. I think there’s an assumed risk capacity, which I don’t think is well aligned and personalized to the employee. As you’ll know, target-date funds usually aren’t used as much in individual portfolios outside of a retirement plan.

I think they’re great automatic enrollment place to be in a 401(k), 403(b), and so on. But once you have that personalized education, I think that you can shift away from that and build your own target date but aligned with the phrase I use: “You want to give every dollar a job and a use-by date.” A target-date fund gives your money an assumed target date of when you’re going to spend that money. But I think it’s important that consumers and individual investors think for themselves, when am I going to spend this money and how can I align my risk and return expectations with that timeline?

On Financial Planning Approaches

Benz: I’m curious from your planning practice, are there areas where you find people really struggle to get stuff done? Are there pain points that where you say “you need to do this,” where repeatedly you notice that clients just don’t do the job that they need to get done?

Garrett: I think those actions, the forms of implementation that are hardest to do in terms of the clients I work with, families I work with, is actually things that they want to make sure they don’t mess up. It’s not that they’re just kicking the can and procrastinating. It’s actually, like “Cody, you mentioned this idea of tax-loss harvesting or Roth conversions. I want to make sure I don’t convert everything; how do I do this?” So the way I help in terms of the implementation that they’re anxious about doing themselves, we simply screen share. As an advice-only financial planner, what I love about my job is I can do everything an AUM advisor does, except that the person clicking the buttons on the screen is the client, not me.

I can guide them to learn about their custodian of choice, whether Vanguard, Fidelity, M1 Finance. I can help them understand their own online dashboard. I can show them how to make trades, how to review their cost-basis information. Again, it’s a very empowering method of doing financial planning. I always say clarity precedes confidence. Before somebody can have the confidence to implement financial decisions, they need the clarity. So, I think that our job is to provide clarity and then provide confidence for them to implement, not just by themselves, but also to create a collaborative approach.

Ptak: As you practice financial planning and teach concepts to others, are there areas where you find you diverge from conventional wisdom?

Garrett: One of the one of the trademarks of my brand Measure Twice is keep finance personal. I take a really personalized approach, just as we mentioned, with the Dave Ramsey approach versus the personalized approach. I think where I diverge is I completely avoid rules of thumb. I don’t talk about three- to six-month emergency funds, or this percentage in bonds and things like that. I think once you’re providing personalized education and advice, you can move away from those rules of thumb. A big miss from financial advisors that I’ve seen is advising on whether or not, especially for 401(k) participants, to contribute to a traditional or a Roth 401(k). In terms of tax-rate arbitrage, I think that’s one of the biggest issues, is they make the decision usually based on their current marginal tax rate rather than thinking about their future, sometimes even effective or average tax rate, depending on their future sources of income and expenses.

Where Advisors Can Best Add Value

Benz: I’d like to get your take on where you think you add the most value? I guess if we were to cluster financial planning matters into a few key areas—investments, taxes, retirement planning, household financial management, including debt reduction—in which of those areas would you say that you add the most value?

Garrett: I would say tax planning 100%, like drop the mic. Tax planning is everything. Nearly every movement of money you can imagine either has a tax consequence, involves a tax consequence, or has a specific exception or exclusion. Since nearly every movement of money has a tax consequence, whether it’s through investing, whether it has to do with employee benefits, whether it’s buying insurance or claiming insurance. Since every movement of money involves a tax consequence, after the CFP [certified financial planner] designation, I would tell every financial planner to go for the EA [enrolled agent certification], just not even necessarily to file tax returns. But I think every financial planner needs to understand how to review a tax return and understanding asset tax location is huge, especially for early retirement—that balance between taxable pretax and tax-free accounts.

We talked about the accumulation order of operations for which accounts you are going to contribute to in which order. But a huge job of mine is to help people create what I call a distribution order of operations: Which account am I going to take from, in which order? And, as you know, there’s over a dozen variables involved there, but I think creating retirement spending plan, like taxes, is everything.