July 2023

In my 35-plus years with Northwestern Mutual, I have had many meetings. Many are memorable, but one stands out as pivotal. That pivotal conversation made me realize how people view their financial plans, as well as the misconceptions many have about the advisors they trust for guidance.

Let me explain. Years ago, I met with a young, bright professional. She was a connection of an existing client, and told me she had an advisor and was “all taken care of.” I asked about her advisor and the planning they had done. She had anticipated the question, and shared a recent investment statement. I took a look at it and again asked her if she could tell me a bit about her plan. Looking a little bewildered at my question she replied “It's right here...” as she pointed to the colorful pie chart on the first page. That's when I realized what was going on. She was interpreting a pie chart as a plan.

This confusion is somewhat self-inflicted by our industry. There are titles such as Financial Advisor, Wealth Management Advisor, Financial Representative, etc. that can all sound the same. The reality is, like many professions, there is a spectrum of advisors out there. On one part of that spectrum are advisors who are really money managers or a pie chart managers. Their role is to focus on making sure their client has the appropriate pie chart. There is a lot that goes into this role, often more than people realize. These advisors need to make sure investors are appropriately diversified among stocks, bonds, and the asset classes (and plethora of options) within those categories. They also need to monitor the assets and oversee the strategy. Good managers will also incorporate strategies around ideas like asset location (keeping less tax-efficient securities in qualified accounts to ease potential tax impact). Money managers have a lot to juggle; their role is not easy and it is critical. However, by itself, money management is not a plan. Money management is one piece of a plan.

A plan is something that is much more broad. It is the whole puzzle, not only one a piece of it. Financial plans are created by professionals that take the time to get to know you personally. They want to know not only what gets you excited to get out of bed in the morning, but what keeps you up at night. They want clarity on what’s important to you: your goals, your dreams, your vision for your best life. By taking the time to ask a lot of open ended personal questions, their objective is to put together a plan that help give you an opportunity of accomplishing those things that are important to you. And yes, one important piece of the plan is having the appropriate pie chart but there are so many more considerations that go into a plan.

For example, a plan will tell you not just what pie chart to have but how much money to invest into that pie chart to hit each of your financial goals. Those goals may be paying for undergraduate education for two children at Northwestern University, retiring at 62 with a lake house in the mountains, buying your first condo in the city – or all of the above. If you have the best pie chart ever, but never fund it at the right level you may not accomplish your objectives. Conversely, if you are funding your goals beyond what is necessary you are possibly denying yourself the enjoyment those dollars could be providing you today. A plan can also tell you where to hold that pie chart given your specific situation. Should it be in a Roth IRA, a 401k, a taxable investment account, a 529 college savings plan, a 529 pre-paid plan, a SIMPLE IRA, a Variable Annuity, etc.?

A strong, well thought out plan can also help protect the dreams you have for yourself and your family from a defensive or risk management perspective. What if you die pre-maturely? Do you have the right amount of life insurance protection? There are a number of different types of life insurance on the market and your planner can help you understand and determine what which is best for you. What if you became sick or injured and could not work for a period of time? What is covered by your employer plan? Do you have an employer plan? What impact might that have on your saving for college, retirement, or simply paying the day-to-day bills. Or what if that sickness or injury was not during your working years but when you are retired? Does your plan have a built in contingency to help cover the ever increasing costs associated with needing care as you age? Simply put: a good plan can help have these contingencies covered, a pie chart won’t.

When you do retire at that lake house in the mountains you now need your plan to pivot and help you plan for all of the things you have put together (401ks, IRAs, non-qualified investment accounts, Roth IRAs, liquid cash, stock in your company, etc.). A good distribution plan can create a base of income that will help cover essential expenses for the rest of your life regardless of market conditions. It can help you determine (based on income tax brackets and other factors) which bucket to distribute from first, or perhaps what combination of buckets to pull from during a given year. A good plan can also help you analyze the best time to take your Social Security. It can also help you understand your options to help mitigate the risk of outliving your assets. It can help tell you if your desired level of retirement income is feasible. A plan can also include different ways of gifting money - whether that's to your favorite charities, children, or grandchildren.

There are many more components to a comprehensive plan. As I said earlier in this article, and have said for years: a well thought out pie chart is not a substitute for a well thought out plan. My belief is that the folks that are best at managing the pie chart are not necessarily the folks that are best at managing the plan, and vice versa. I encourage everyone to find a good planner that has a strong team behind them. We at Beyond Financial Advisors whole heartedly believe in this team approach. If you have a pie chart but are not sure you have a strong, well thought out plan, feel free to reach out to us and we’ll schedule a conversation.

The opinions expressed are those of John Roland as of the date stated on this material and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance and are not a guarantee of future performance. Diversification does not assure profit or protect against loss. John Roland is a financial advisor with the northwestern mutual wealth management company.