Financial Planning Red Flags and How to Avoid Them

Whether you're a seasoned investor or just starting out, there's always a chance you're not taking certain aspects of your financial planning into account without the aid of an experienced, fiduciary financial advisor. There are a number of things we see commonly as advisors that can keep clients from reaching their financial goals and living the life they wanted to.

In this episode of Capital Conversations, financial advisor Cherry Ohms and portfolio manager Ryan Potts discuss some of these red flags, and how you can make smarter decisions and avoid common financial planning pitfalls.

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Below is the transcript for our most recent podcast, "Financial Planning Red Flags and How to Avoid Them."

Ryan Potts: Hey everyone, welcome back to another episode of Capital Conversations. I am your guest host, Ryan Potts, and with me today is Cherry, one of our new advisors. Cherry, how are you doing?

Cherry Ohms: Pretty good. Excited.

Ryan Potts: Absolutely. I'm glad that we could have you on.

For all of you that watched the last episode, Colin is actually back in town. But, it is a new day, I'm wearing the same shirt, and the world is beautiful.

Today we get to talk about kind of a fun topic. It's going to be around financial red flags. And really just what Cherry, [I], and the other advisors at the firm have noticed when we talk to new oncoming prospects and also clients that we have that maybe work with multiple advisors.

So, how does that sound?

Cherry Ohms: Sounds good.

Ryan Potts: Awesome. I think we'll start – just based on some of the things we've talked about already – with financial planning red flags, and then we'll move on to more maybe “professional” red flags.

What we mean by financial red flags – I think first and foremost, we always want to start with just a disorganized client. Could you maybe talk to us a little bit about what a disorganized client or prospect looks like when they come into the firm?

Cherry Ohms: Yeah, it is really not uncommon that people come to disorganized, don't know where everything is, which can cause issues because the data is not organized and we don't know the big picture of where assets are, and people usually do not have a budget. Even if sometimes people have a budget, they [don’t take] time to track their budget, track their spending.

So it’s easy to [live] beyond means, which would cause credit card snowballing and things can easily get out of control. The thing is that the more disorganized, the more you just feel like [you] don't know where to start. The more you don't know where to start, the more you tend to procrastinate.

The thing is that the more people put up with doing things, the worse their situation could be. So it really can be a vicious cycle.

Ryan Potts: Yeah, absolutely. And I think it's a huge deal because when we're talking about financial planning specifically, obviously we're talking about taking someone from point A to point B and giving them the road map, or the guardrails to get them to point B.

But if they come in the door and they don't even know where they are at today, or we don't even know where point A is, how are we supposed to look forward and kind of move towards point B without a stable structure?

So I think that that's always good and you used a good example as budgeting being one of those things. Some people we talked to don't have their budget in wraps. Obviously in a financial plan, it's important with cash flows to know how much money is coming in versus what's going out. And if we're talking about retirees, it's really important because we're trying to figure out how much of the portfolio are we going to be sending to you on a monthly or [annual] basis? And is it a sustainable rate?

The other thing about disorganization, I know we've talked about before too, outside of the budget is just really disorganization in the sense of just their entire portfolio. Maybe what's going on from the sense of what accounts do you have and where are you putting dollars either from a savings perspective or with your employer?

Do you have any good examples or maybe can you think of something that would be a red flag from the sense of just the portfolio being out of sorts, or maybe it's not being aligned with the financial plan from the get go.

Cherry Ohms: The things I've seen sometimes their assets are not in the right location. For example, [a Roth IRA is not the place to be holding munis]. That's not appropriate. Or for a taxable account, you have mutual funds which have distributions, and then we have capital gains. So it's not tax efficient. Sometimes you can see that the client's portfolio allocation is not really in line with their time horizon, their time to retirement or to achieve their goals. So there is a disconnect as well. And other times you see that, just overall, the portfolio strategy is not optimized based on the asset allocation or asset location.

Ryan Potts: It's a great example with the muni bonds and the Roth account or just having assets “dislocated” as we like to call it. I know we've talked about in the past the bucket approach, the short term, mid term, long term, or cash income growth.

But what I'm getting at is, when you are looking at a portfolio for a client and you're talking about financial planning, it's always important to have your assets allocated either to a time horizon because you have short term, long term, mid term goals, or your risk tolerances. If you're a younger individual, you need to have money set aside that's going to be invested for 10, 20, 30 years to reach your long term goals.

And sometimes we see people that come in and they might have a goal to buy a house in the future in the next five years, but all their money is invested to go towards this house where we need to be having a conversation about “Well, some of the money can go towards this house, but the rest of it really should be talking about these long term goals.”

So yeah, not having the allocation, in an appropriate manner. I think that's a good one.

I think in that order too, though, just to kind of go back to the disorganization. It's important that we start with organizing the client's scenario or the snapshot of where they're at today, because that's really how we should be striving to find portfolio recommendations.

A lot of times, I know a red flag from my perspective as a portfolio manager, we'll see an account or an investment lineup, and then go back and do a financial plan and realize that however this investment was put together, it did not start with the financial plan. It probably started with investments first and then moved to a financial plan So that's always a good one.

I think the biggest thing that we see that's the most challenging for people to understand is – not just investing but financial planning – there's time constraints. And a lot of what we're doing requires us to have as much time as possible to kind of plan for things ahead and also plan for things that we don't see on the horizon.

So maybe what would be a good example of a red flag of maybe someone starting too late. So i.e. someone coming in after retirement, or maybe after an inheritance is met. What are some good examples? Or why would that be a red flag?

Cherry Ohms: Sure. A lot of times people do not know the true value of working with a financial advisor until they actually work with one. For example, recently, I had a client come to us. They had inherited [an] IRA from their relatives, and then they wanted to know how to spend the money in the most optimal ways. So I ran our planning portal, right? And then gave them several different scenarios and laid it out, and basically told them pros and cons of each scenario and some of the tax implementations. And they really liked it, because without the planning, for example, they were just thinking they're going to withdraw all the money from the inherited IRA and pay down all the student loans at once. But when we ran into the scenario model, we found out, well, that may not be. Because you're going to have a huge tax bill to pay all at once. So that may not be ideal, optimal.

I've also seen a situation where the husband or wife work with different financial advisors and end up with having too many advisors and have assets in multiple locations. So these multiple advisors, sometimes they work in a silo, not talking to each other. So they end up not making recommendations truly from the holistic planning perspective, so it's really not the most sound plan for them.

Ryan Potts: And I think the first example about the client who inherited some wealth from the family, had they not worked with us to figure out the most optimal spending strategy for those new inherited dollars, they could have made a decision to go out and just pull everything out of this account, pay off their student loans or whatever the case may have been, and not known that they would have just got hit with a huge tax liability. And obviously once you do it it’s really hard to go back. Most times you can't just go back and kind of run the clock backwards and not do it. So it's important that people are working with advisors to make really just educated decisions, but also trying to figure out what's the most optimal strategy for their scenario.

And a lot of people rely on the, “We're going to do it ourselves,” but then after they do it, they might realize, “We maybe didn't make the right decision.” [They] go back and talk to an advisor. Well, unfortunately, it's too late then. You've already made the decision. So it's always important to rope in a financial advisor when you're having those conversations.

I think you were bringing up another great point, talking about clients of ours, but also just people that we talk to every day, who say that they're comfortable working with multiple advisors, and they would rather not have only one or two, but maybe they're looking at three, four, five, six advisors, or even more than that, potentially.

I think that's a red flag as you were alluding to because now you've lost the holistic approach of one advisor willing to offer you because they're working in a silo or they don't have the ability to see the rest of your accounts or your situation.

I think there's some other things that we could talk about too around the conversation and multiple advisors, but also just some people not working with the right professional in general. Some of the things we talk about, obviously not all the time, are people who work with non-fiduciaries. Are you comfortable laying out why it would be a red flag not working with a fiduciary? And why working with someone like us who is a fiduciary isn't in your best interest?

Cherry Ohms: Right. You want to make sure to ask the right question to the advisors. How are they paid? If their fees are all from the client, then the advisor truly works for the client. The client is the the boss and we serve for the best interest of a client's needs. If other times their compensation is from commissions, for example, then there they would be conflict of interest where they are thinking about selling the product more than what's best for the client, right?

Ryan Potts: Yeah, absolutely. I think alluding to that as well, sometimes advisors might give recommendations that they're not implementing within their own personal wealth. And obviously everyone's situations are different, so you don't want someone just handing out cookie cutter advice to you. But I would always argue that an advisor who is eating their own cooking or following their own recommendations is moving in the right direction. If someone is pushing a product or is making a commission on a transaction I think it's always prudent [to ask], “Are you doing this yourself? Is this something that you've implemented within your own wealth?” A lot of times what we're doing for our clients here, a lot of our advisors are implementing within their own personal wealth as well. So that's always a strong one.

I know this one touches home for you just because I know you do a lot with these types of clients. It's a really great niche. But talk to me a little bit about the red flags of advisors not being willing to work with both spouses in a relationship or not being adamant about working with both spouses.

Cherry Ohms: Yeah, so, the red flag for that is that one spouse can be – usually the husband – can be really financially knowledgeable. But the [with] spouse, wife being left out, the downside of that God forbid anything were to happen to the husband the widow would be left with a bunch of assets and not knowing what to do. At that point, you really need more so than not an advisor to help them to consolidate everything in one place and provide a holistic view. Also even to educate our clients, how to invest, especially for a client who does not have such a background.

Ryan Potts: I think good examples of that – we see it all the time. Maybe not a client of ours, but someone we ended up working with. They had multiple advisors in the past and they also didn't have the spouse involved in the conversation. So, upon the passing of whoever was the decision maker, spouse is left now dealing with multiple professionals, a scattered portfolio, and not a financial plan that is encompassing all of these things.

And they're usually the ones with the most questions. Because they weren't involved with the decision making for a while, they don't really understand the strategy that's been implemented. And they come to us looking for clarity and advice and really just having someone be an advocate for them to help make things make sense. So I think those are all really good things.

In summary today, we've talked a little bit about being disorganized from a financial planning perspective. We've talked about how disorganization can lead to, we call them investment “blind spots,” or making errors in your portfolio. We've talked about the importance of starting early – and obviously it's never too late to start, but the earlier you can, the better off typically you are. We've talked about working with multiple professionals. Not always a bad thing, but it could be in some points. We've also talked about making sure the professional that you are working with is working in your best interest and has the client’s interest before theirs, and how important that could be.

And then ultimately, just making sure both of the parties involved, the spouses, are involved with as much of the decision making and strategy as possible, so they're not left in the dark, unfortunately when stuff happens, right?

So with that being said, is there anything else on your mind, from a financial red flags perspective?

Cherry Ohms: I just want to leave with a quote from the French author, Antoine de Saint-Exupéry, and he talked about, “A goal without a plan is just a wish.” So, I would encourage people to start early, have a plan, and work with a financial advisor. It's never too late. So, I'll just leave it there.

Ryan Potts: Very well said. As for us, thank you for joining another episode of Capital Conversations. This is Ryan signing off. Enjoy the rest of your day.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.

As always, please remember investing involves risk and possible loss of principal capital. Please seek advice from a licensed professional. Correct Capital Wealth Management is a registered investment advisor. Advisory services are only offered.

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We hope you found our discussion on financial red flags both insightful and helpful. From managing disorganized budgets to avoiding the pitfalls of working with multiple advisors, a well-structured financial plan is essential for success. It’s never too late to start making informed decisions that secure your financial future. If you're interested in speaking with a financial advisor, you can schedule a meeting with a member of our advisor team, contact us online, or give us a call at 877-930-401(k). It only takes 15 minutes to understand if we’re a good fit.