BUSINESS STRATEGIES
Trusting the planning process
The beginning of 2021 has introduced some interesting challenges for financial advisors . Much of the traditional asset classes overall were relatively stagnant in the first half of the year and the potential for further rising interest rates looms . The fed is predicting a strong recovery , but a retirement investor has to face not only the risk that the recovery won ’ t continue but also the possibility that a recovery could mean a rise in interest rates , hurting the value of fixed income investments .
Joe Elsasser , CFP
Joe is founder and president of Covisum , a financial tech company focused on creating software that improves lives through better financial decisions . Covisum helps financial advisors serving clients in or near retirement and powers some of the nation ’ s largest financial planning institutions . Contact Joe at jelsasser @ covisum . com .
Mixed Market Messages
34 % Worldwide market decline in February and March 2020
16 % Worldwide market increase from January through December 2020 per MSCI index
High-flying opportunities
Some investors are feeling the pull of the big trends of the year – cryptocurrencies , Reddit forum suggestions , or other high-flyers . It can be tempting to relinquish the plan and move toward the exciting new opportunities . Reflecting on last year it ’ s become clear that the process of planning , stress testing , building contingency plans , and executing against the plan works — even during a pandemic !
We can look back at annualized returns for 2020 and see that those who had a plan in place and stuck to it likely fared much better than those who tried to navigate based on whatever headline was on their phone at the time .
Transactional versus planning
Highly transactional advisors likely had many conversations about going to cash and waiting out the storm or possibly buying technology companies expected to post huge gains as a result of the pandemic . Planning-oriented advisors fielded some calls also , particularly from clients whose assets were barely enough to support their desired lifestyle given normal market conditions , much less in an ugly market environment .
Either way , it was a year where practice and planning paid off . Advisors who established contingency plans with their clients in advance were able to execute on those plans .
Stress testing for tax changes
When considering your process , a key consideration for the balance of 2021 is the likelihood that our tax system is in for a change . We don ’ t know exactly what form , or timeline will eventually materialize , but we do know that none of President Biden ’ s proposed tax plans include tax cuts for wealthier clients . In the same way you might stress test for a bad market , consider stress testing for tax changes . What happens to your clients if tax rates overall rise ? What happens if capital gains , and qualified dividends are no longer afforded preferred tax treatment ? What happens if the estate exemption is lowered to pre-Tax Cuts and Jobs Act levels ? Explore how you might implement a stress test for these possible futures into your planning process .
The same model holds true now with clients preoccupied by cryptocurrencies or Reddit forum suggestions . Maybe some additional risk makes sense — maybe it doesn ’ t . The best way to determine whether action is warranted today is by starting with a plan , aligning investments to the plan , stress testing the plan and building contingency options around those stresses . Most importantly , committing to the plan even when fear or greed would otherwise push us to go another direction is critical to success for the remainder of 2021 and beyond .
24 Perspectives Q2 2021