A Good Portfolio Is Not the Same as a Good Financial Plan

This episode explores the critical differences between a strong investment portfolio and a comprehensive financial plan. Wade Lopez and Gary Aiken discuss how to align investments with broader financial goals, including taxes, estate planning, and risk management.

Transcript

SPEAKER_01 0:00

Views expressed are solely those of the speakers and do not represent this show or its team. A real financial plan is going to cover a whole lot more than just the investments by themselves. And when we think about what our financial objectives are, you know, what we want to do with our lives and how our finances are going to contribute to that. It's more than just what stocks and bonds we own. It's got to be a much deeper discussion that goes way beyond just, you know, whether I'm going to buy this stock or sell that one.

Wade Lopez 0:35

Welcome to Built to Last Conversations on Wealth, Work, and Life. I'm Wig Lopez. I want to start with something we see all the time. People come in proud of their portfolio, and they should be. They've saved consistently, stayed invested through difficult markets, and they built something meaningful over a long period of time. But somewhere along the way, people can begin treating the portfolio as if it's their entire financial plan. It is not. In fact, a portfolio is a collection of investments. Financial plan is the strategy for your entire financial life. A portfolio can perform extremely well and still leave you with a tax problem, a spending problem, an estate problem, or an insurance problem. Gary, that's what we're talking about today. Why a good portfolio is not the same as a good financial plan.

SPEAKER_01 1:30

Yeah, that's absolutely true, Wade. And I was thinking about that exact uh idea, you know, when I was in Minneapolis meeting with some of our clients up there last week. And um, you know, I made the point with the advisor sitting right there saying, hey, as good as we're doing in the markets, as well as uh as well as we're doing on portfolio construction, uh, that's only one piece of a financial plan. And that enables, and that's uh we're enabled to outperform and do the things that we're gonna do on the investment side because of all of the other pieces of that financial plan being in alignment.

Wade Lopez 2:04

Yeah, I agree. You know, or I uh when we look at the account balances that they when they go up, you know, it feels like proof of everything's working. And and when we sit down with clients, in one sense it is the investments are doing their job, but the statement tells you what the investments are worth. It doesn't tell you whether you know they're paying more than in income taxes than might be necessary. It doesn't tell them whether the retirement income is going to last throughout their lifetime, whether your estate will transfer the way you intend, or whether, you know, an unexpected event can disrupt an entire plan. So, Gary, those are separate issues, and a better investment return does not automatically solve any of those, right?

SPEAKER_01 2:47

Yeah, that's correct. You know, performance matters on the investment side, but the achieving of goals has to do with a lot more than just investment returns. It has to take into account other risks that are besides investment risk. It's got to take into account taxes, it's got to take into account the actual long-term objectives of the client and whether we're able to meet those in all facets of their financial life.

Wade Lopez 3:12

Let's talk about taxes. Let's start with that one. That's everybody's favorite topic, right? So we're going to start there because this is one of the easiest places to confuse what I call investment management with financial planning. You can outperform every benchmark and still give away more than what you need to in taxes because of where the money is held and how it comes out. Gary, the same investment can sit in a traditional IRA, Roth IRA, or a taxable account and create three very different outcomes.

SPEAKER_01 3:43

Yeah, that's true. And uh that's why when we uh look at investment proposals for clients, we're always taking into account a number of different tax strategies that we can employ on the investment side to optimize uh the the portfolio. Right. You know, among those are things like asset location, uh making sure that uh, you know, ordinary income assets are in you know, tax-advantaged accounts and and uh you know accounts that are subject to a lot of tax or maybe going to experience only long-term capital gains and that kind of thing. And of course, another strategy that we use is tax loss harvesting, which I spent uh my August insight piece talking about.

Wade Lopez 4:24

When we stand on the tax side, let's talk about you know, required distributions can create taxable income whether you need the money or not. The income can offset your tax bracket a little, but you know, it it also can upset Medicare premiums and how much Social Security is taxed. So a good portfolio grows the money, a good plan decides where that growth should occur, when the money should be used, and how to manage taxes over your lifetime, not simply this year, right? So let's talk move into the next part, what I'm gonna call potential spending or maybe potential spending problems. Gary, I've met with a lot of people with excellent portfolios who can't answer a basic question. How much can I safely spend every year without running out?

SPEAKER_01 5:14

Yeah. And uh, you know, I think a lot of people um maybe uh rightly and maybe wrongly, you know, think about uh their their financial goals for retirement as just one number. And as long as they achieve that number, then everything is gonna be okay. But I think the benefit of working with a real financial planner is once you get to that number, understanding what spending really looks like in retirement, uh, and all the different ways to maximize spending, minimize taxes, all of those things. The circumstances of that person are going to change over time, the tax law is gonna change over time. Uh and so uh, you know, uh it it's not as simple as just one number, right?

Wade Lopez 5:59

Right. And that I think you know, the sequence of events that can happen also matters. And that's the you know, when we talk about retirement income needs a structure behind it, and we think about, you know, we need to know how much income is required. You know, we need to know where it's going to come from, what the tax impact's gonna be, and what we'll do when the market's down. Social Security, pensions, rental income, cash reserves, portfolio withdrawals all have to work together. The goal is to know where the next month's paycheck is coming from without having to react every time the market moves. So let's move into the third issue. I'm gonna call it the estate plan. An account can perform beautifully. It can do fantastic for 30, 40 years and still end up in probate and become tied up for months, or pass the wrong person because a beneficiary designation or an account title was never updated properly. Gary, your portfolio doesn't need to know that you know someone's remarried, or that you know, one child needs an additional protection, or maybe a business partner depends on you, or that you want to support a charity that you clearly endear. You know, those are the things that matter that don't really have anything to do with portfolio performance, right?

SPEAKER_01 7:20

The investment manager often doesn't know uh who the beneficiaries are, you know, and we certainly don't have the uh the skill set to to make sure that uh the beneficiaries are changed according to what the client wants. You know, that's not our our uh primary uh area of expertise. And uh so we, you know, rely on the financial planner to do all those things and to know their client better than we do.

Wade Lopez 7:44

Yeah, that's the point, right? The portfolio is the asset. The plan makes sure the asset goes where you want it to go and when you want it to go, and in the way you really kind of intend it, or the way you really want it to. In fact, you know, making sure that the estate plan is part and an integral part of the financial plan. Let's talk about insurance. That's a dirty word, right? Which usually is the part people don't want to discuss. Um, you know, a portfolio built over decades can be disrupted by one event that you know no one ever really designed it to absorb. Sometimes it can be a disability, long-term care need, an unexpected death, or a loss that leaves a family or a business without enough liquidity. Gary, I know as our investment officer, those things aren't really something you think about too often, is it?

SPEAKER_01 8:37

No, it's not. And because insurance is there for uh low probability but high impact events. Um things that that don't occur very frequently, but when they do occur, it's a big financial burden. And and uh investment returns are are usually focused around you knowable risks based upon history that you know are are likely to occur again and again and again, not exactly the same way, but but in a similar way that helps us to manage manage investments. But insurance is there for a completely different uh completely different risk aversion uh methodology.

Wade Lopez 9:20

Yeah, and I like to say, you know, some people think of insurance, you know, like it's it's really not about expecting the worst. It's about making sure that one event doesn't undo 20 or 30 years of discipline, right? So that that's I think that's missed a lot. And and I think it gets missed because performance is easy to see. You know, you can you can look at your statement and it gives you a number. You can compare it with last quarter, last year, or a market index. The other part of the of of the plans are much quieter, right? When you a financial plan is not something that's you're gonna open up and look at on a quarterly statement. It's a part of it. But sometimes people, you know, they don't feel like the plan might have got outdated or you know, and and they they need to live in it more, especially at death, right? If someone dies, you don't feel like you know, you're missing long-term care strategy until it's needed. You may not see the next tax problem until you know you file your taxes. I mean, to me, those are opportunities that have already passed, and it's hard to react to something like that. Do you agree?

SPEAKER_01 10:34

Yeah, I agree. It it really is a timing issue more than anything else. And uh, and uh insurance is a great way to solve for a timing issue because you don't necessarily want to have to have to use your investment portfolio, let's say, with with markets being down, when you'd be a better buyer than seller to cover some expense that could have been covered by uh an insurance strategy.

Wade Lopez 11:01

One thing is, you know, and you get it, portfolios give you constant feedback, right? Oh yeah. Oh yeah. Every day, every minute.

unknown 11:11

Yeah.

Wade Lopez 11:11

It's a little different than than you know, financial plan. So what does a real financial plan do that a portfolio cannot do on its own? I think it coordinates how many um, you know, how you use an account, right? It it looks at taxes over several years instead of focusing on this year's return. Make sure beneficiaries are designated properly, counselor title properly, wills and trusts all work together. Gary, it also asks what happens if you cannot work, need long-term care, lose a spouse, or face major expenses at the wrong time at the wrong time.

SPEAKER_01 11:47

Yeah, a real financial plan is gonna cover a whole lot more than just the investments by themselves. And when we think about what our financial objectives are, you know, what we want to do with our lives and how how our finances are going to contribute to that, um, it's more than just what stocks and bonds we own. It's gotta be a much deeper discussion uh that goes way beyond just, you know, whether I'm gonna buy this stock or sell that one.

Wade Lopez 12:18

I think that's perfect. You know, the portfolio is there to support that. And the difference is really, you know, plan tells us what the money needs to do. The portfolio is one of the tools we use to help it get there. So, Gary, I mean, it's you know, I wanted to bring in this discussion of financial planning because I think a lot of our clients see you as a chief investment officer, but they don't realize that a lot of things you do for us is designed around their financial plan. And I think it's important that they know you're you're a financial planner as well, you're just mostly a chief investment officer.

SPEAKER_01 12:49

Yeah, and I think I think it's also understated, you know, the extent to which you know advisors and me as CIO are working behind the scenes to make sure that the investment proposal reflects the goals and objectives of the client, um, you know, and is coordinated with those those uh those financial planning techniques that have nothing to do with investments. So that we're creating a a full uh a fully understanded uh picture of the client, what their needs are and how the investments are supposed to work uh in in congruence with uh with the financial plan.

Wade Lopez 13:33

Yeah, and I think you you've done a great job of helping us do that. And and you know, we don't have a cookie cutter cutout, everybody's in the I mean, I think you've done an excellent job when it comes to helping the clients, you know, with you know, tax loss harvesting, cash reserves. You know, I'm kind of a I'm kind of anal about the proper amount of cash reserves in my portfolio. So, you know, but I think it's it's important that people understand that you're not just the chief investment officer, you're also you know, a financial planner for the financial planners delivering the advice. So I appreciate that. Gary, this is the part of the program where I put you on the spot as always, right? And it's gonna be a little different for you as the financial planner part. So what's the one thing that matters most right now for someone who believes a strong portfolio means the rest of the plan is just handle no-cay?

SPEAKER_01 14:24

Yeah, I think the the most important thing for that uh is to know that you know the portfolio is just one piece of a financial plan. And uh it it only works when it's in congruence with all of the other financial planning pieces and the objectives of the client.

Wade Lopez 14:41

I think that's a good answer. And um I want to move on to the next question, is that's a little more difficult. What do you think people should be watching over the next six to twelve months within their plan?

SPEAKER_01 14:54

You know, uh as we're getting closer to the end of the year, I think uh clients should be focused again on what their objectives are uh for this year, how they've uh planned it out, and is it going according to what they wanted to do? Are there financial planning tasks that he need to tick off uh before we get to December? Because once we get to December, it's gonna be a mad rush to the finish. And that includes tax planning. And then uh thinking ahead, you know, what are what are the things that they want to accomplish in the next year and over the next five years? And that's a good uh there's never a bad time to have that discussion with their financial planner.

Wade Lopez 15:31

Well, I think as part of this last question, you just answered it. You know, what should they be looking for down the road, good, bad, or somewhere in between? Is there anything in particular that you you kind of have your eye on from a planning perspective next year?

SPEAKER_01 15:43

You know, I I think that most people realize that uh the that the portfolio is not the end-all be all. And uh and so I think that you know they should be focused on other things besides the stock market, to take the stock market out of their out of their immediate day-to-day lives and uh and focus on the things that uh that are that are able to be um managed as well.

Wade Lopez 16:09

Yeah, it's a great answer. I think a good portfolio tells you whether your money grew. Uh, a good financial plan tells you whether that growth is actually doing what you need it to. You got to answer questions like, will you keep more of it after taxes? Will it provide you income, the what you need, will it go where you intend? And can the plan survive the unexpected without forcing you to make a bad decision under pressure? I urge people not to mistake a strong investment statement for a complete financial plan. The statement only tells you one part of the story. Gary, another great conversation, a little bit more out of your comfort zone. I think you did think you did a great job, by the way.

SPEAKER_01 16:51

Thanks, Wade. You know, it is out of my comfort zone, and man, that's what I need a financial planner for for all the things that I don't get. Yeah, I I I I know one.

Wade Lopez 17:01

I know a couple of them that are pretty good, by the way. So me too. They might be the same people. They might very well be the same people. I hope they are anyway. So but if y'all enjoyed today's conversation, please like the episode, share with a friend or colleague, and subscribe so you don't miss what comes next on Build the Last. We'll see you next time.

Announcer 17:22

This podcast is produced by Cox Wealth Partners, LLC, an investment advisor registered with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Information presented is for educational and informational purposes only and should not be construed as personalized investment financial tax or legal advice. Nothing discussed should be considered a solicitation or offered to buy or sell any security or investment product. All investing involves risk, including the potential loss of rental tax performance, is not a guarantee of future results. Individual results will vary based on personal financial circumstances, risk tolerance, and other factors. Conquered Wealth Partners does not provide tax or accounting services. Tax accounting services are offered through Conquered Fitness and Tax Advisor, an affiliated CPA for. For more information about Conquered Wealth Partners, including our Form ADB Part 2A and Forms CRS, please visit ConcordWealthpartners.com or contact us at 800 838 4370.