Financial Planning

When Should I Engage a Financial Advisor?

Financial planning is a professional service that’s often misunderstood. Some people assume wealth management is only for the wealthy or that advisors are only out to sell them something. But a fiduciary advisor helps you make the most of the money you have—they coach you through financial decisions that fall in line with your goals.

As financial planners, it’s our job to understand what you want to accomplish; educate you about potential roadblocks, setbacks, and opportunities to build your wealth; and help you achieve your financial goals in the most effective way possible. In short, a good advisor helps you optimize your financial world so it supports the life you want to live—and we do it all by putting your needs and desires above our own.

That said, not all financial advisors are created equal. Some advisors aren’t required (and/or don’t have the desire) to give advice that’s solely in your best interest. Depending on the organization they work for, licenses they hold, or what their planning ideology is, some advisors may suggest strategies or products because they receive higher compensation for them or have proprietary product requirements from their employer to recommend them—this means the product could be “suitable” or appropriate for you, but not necessarily in your best interest.

That’s why it’s incredibly important to do your research before engaging a financial advisor. Ask your friends, family, or colleagues for recommendations and find out if the advisor they work with is a fiduciary. If they are, it’s important to clarify whether the advisor is a fiduciary solely for the account they are managing or if they are required to give fiduciary advice regarding your entire financial situation. (You can also visit BrokerCheck.com to see if the advisor has any disclosures on their licensing.) Advisors working in a fiduciary capacity are required to serve your best interest, so you can trust their recommendations will be genuine and beneficial. (And yes, we at Strata operate in a fiduciary capacity!)

So, working with the right kind of advisor can be highly beneficial—but how do you know if you’re ready to engage a financial planner in the first place? Here are some indications you should hire a professional to help manage your wealth:

You have an ambitious financial goal (like buying a second home) and you’re unsure how it will affect your finances.
Your children are about to start college and you’re trying to determine the best way to fund their education.
You’re thinking about retiring in a few years.
You just experienced a significant liquidity event (e.g., your company was bought out, you received an inheritance, you sold property, or your stock options vested).
You feel uncertain about a specific financial decision or your finances in general.
You want a practical plan to prepare for the future and you’re not sure where to start.

If any of these scenarios sound like you, you’d likely benefit from talking to a financial planner. That said, we know people sometimes still have doubts about whether working with a professional is necessary, so we want to address those concerns. Here are some common questions people have about hiring a financial advisor.

What do financial advisors do, exactly?

Essentially, we help you achieve your financial goals. For some, that’s early retirement; others may want to buy a second or even a third home. We start by getting to know you as a person; then we discuss your hopes and objectives. From there, we review every aspect of your finances and look for ways we can improve your strategies or help protect you from unnecessary risks. Whatever your financial dreams are, it’s our job to show you what steps you can take to achieve them.

Can’t I just do financial planning myself?

Yes, but consider this: most people only retire once, but we as advisors have “retired” dozens of times. We’ve walked multiple clients through multiple scenarios, and we’ve seen what works and what doesn’t. A 2019 Vanguard whitepaper says an investor could increase their net returns by 3 percent by working with an advisor. And Vanguard isn’t the only one—Russell Investments estimates that the value gained in working with a dedicated financial partner could mean as much as a 3.75 percent increase in returns.

So you can take a DIY approach, but you likely won’t reap the same benefits you would when working with an advisor. Just like you can go to court and represent yourself in matters of the law, you can manage your wealth without the help of a professional—but you’ll lower your chances of getting your desired outcome. When you engage the help of someone who specializes in wealth management, you’re more likely to achieve your goals and enjoy the process.

Many people also don’t realize the time they can save when working with an advisor. Engaging a professional allows you to focus on things that matter to you, rather than worry about financial details.

I work in finance for a living—why would I need help managing my own money?

More than half of our clients work for a financial institution, and they value our guidance. One reason is that not all financial professions are the same—just like you wouldn’t go to a podiatrist for heart surgery, an accountant or financial analyst won’t necessarily understand all the intricacies involved in personal (or business) wealth management.

For example, here’s something people–even those adept in financial concepts–often misunderstand: life insurance is not always completely tax free. Life insurance benefits are exempt from income tax, but not from state or federal estate tax. Depending on where you live, if you purchase a life insurance policy under your name rather than having your trust purchase the policy, you may subject your estate to estate taxes because the death benefits would be included in the calculation of your estate—potentially putting you over the limit for estate tax exemptions. If you live in a state like Massachusetts or Oregon, where the state estate tax exclusion is a mere $1 million, this could potentially affect your heirs.

Something else to know is that many people who work in finance are subject to restrictions or pre-approval when making investments. But if you sign over your investment discretion to an advisor, you can avoid that compliance hassle and benefit from the knowledge of someone who specializes in professional money management.

Am I too young to work with an advisor?

If you’re worried an advisor won’t agree to work with you (some do have minimum net worth or assets-under-management requirements), know that there’s an advisor out there for everyone—the key is finding someone you feel comfortable talking to and sharing the details of your life with.

Beyond that, “young” is a great time to start financial planning because you have so much time to save for your goals. And the more time you spend in the market, the less that you need to save.

For example, if you start saving $5,500 a year beginning at age 25 and continue until you’re 65, you’ll end up with $1,174,852 after those 40 years (assuming a 7% net rate of return). If you start saving the same amount at age 35 and get the same return, you’ll only earn $555,901.

Remember, you don’t get time back. We’ve met too many people who reach retirement and regret they didn’t start planning sooner. The best time to start planning is now, because the earlier you visualize your goals, and the earlier you take those goals to a financial planner, the better chance you’ll have of accomplishing them.

Is there ever a time someone shouldn’t work with an advisor?

If you feel overwhelmed by all the financial decisions you have to make, worry you might be missing something, or simply want greater confidence about your future, talk to an advisor. In our experience, this is the number one reason people seek financial guidance. Not only can an advisor help you clarify and prioritize your goals, but they can also show you the impact of financial decisions before you make them, so you don’t end up further from your goals.

That said, for a financial planner’s advice to be effective, you’ll need to keep an open mind and be willing to change—so if you’re not ready to make adjustments, it might be best to wait.

If you have more questions about what it’s like to work with a financial planner, please don’t hesitate to contact us. In the meantime, you can learn about various financial topics on our blog.

¹ https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf

²https://www.thebalance.com/should-you-hire-a-financial-advisor-4120717

³https://money.usnews.com/money/retirement/aging/articles/states-with-estate-and-inheritance-taxes#:~:text=State%20Estate%20Tax%20Thresholds&text=Massachusetts%20and%20Oregon%20have%20the,million%20and%20%245.9%20million%2C%20respectively.

Optimizing Your Benefits During a Job Transition: Part II

Starting a new job is exciting—it usually means opportunity for growth, often in more ways than one. One of the challenges of transitioning jobs, though, is determining how to maximize your benefits—both those from your previous job and those at your new place of employment.

There are lots of factors to consider when reviewing your benefits, which is why we recommend talking with your advisor during the process. Someone who knows your long-term goals and values can help you see the bigger picture and decide what’s best when it comes to keeping old plans or leveraging new ones.

For now, let’s review some potential benefit options when transitioning jobs—specifically, what you can do with a 401(k), a pension, stocks, and other investment opportunities.

401(k), 403(b) or other ERISA plan

If you leave a company where you have a 401(k) or other employer-sponsored retirement plan, you can do one of three things with the money in your account:

Leave the balance in your previous employer’s plan
Transfer the balance into your new employer-sponsored plan (if you have one)
Transfer the money into an IRA, where you’ll have diverse investment options like stocks, bonds, ETFs, mutual funds, annuities, CDs, and more

One thing to note about company contributions is that some or all of the money your employer contributed may not be yours if you leave the company. Companies often have vesting schedules tied to their contributions, so the money they add to your account isn’t considered fully “yours” until you’ve been with the company for a certain period of time. So if you leave before the end of the vesting period, they’re entitled to take some or all of their contributions back.

The most common arrangements are three-year cliff vesting (where an employee is fully vested after three years) and gradual vesting (where an employee gains more benefits over a period of time), typically between two to six years.

So, if you worked at a company with a three-year cliff vest and decided to move on after four years, you’d be able to keep all their contributions. But if that same company had a five-year equal percentage graded vesting schedule, you would only be able to keep 80 percent of their contributions when you leave.

Pensions

The two most common pension plans companies offer are defined benefit plans and cash balance plans, and depending on which one you had (or have), you’ll have different options when you move to a new company.

Cash Balance

Cash balance plans allow you to keep your pension plan as-is or roll over your account balance into an IRA. If you’re considering transferring the balance, there are a couple steps you should take first:

Request an analysis that shows the estimated value of your plan at the age you plan to retire. (So if you’re 55 and want to retire at 65, request an estimate of what the value would be in ten years.)
Once you have this value, you can compare those estimated returns to what you might earn if you invested in different vehicles through an IRA. Then you can decide whether it makes sense to keep your plan as-is or transfer it to an IRA.

Whichever way you’re leaning, we recommend reviewing your options with an advisor to determine which strategy will best support your overall goals.

Defined Benefit

Unfortunately, there aren’t any rollover options with defined benefit plans, so you simply have to focus on managing your current plan as effectively as possible. We suggest keeping a record of this plan year-over-year and requesting an estimate of what your monthly payment will be when you retire. Ask your company or plan provider when you can start withdrawing income from your account—some plans specify an age when you have to take distributions (e.g., 65) but others let you take them whenever.

Stock Options

If your current company offers stock compensation, you’ll likely have a few different options when you leave the company. It’s important to reference your specific plan documents before you make any decisions, since the rules regarding stocks vary from company to company. Generally speaking, though, employees have up to 90 days after termination to exercise their vested stock options; after that, unvested options are typically forfeited.

Stocks are one of the more complicated benefits to navigate when leaving a job. Every company has different rules, and your options might vary depending on how long you’ve been at the company. If you have the flexibility, it might make sense to delay your departure until all your stock options are fully vested. There are many factors to consider, which is why we recommend discussing your options with a financial planner who’s well versed in this area.

Restricted Stock Options

Just like other stock options, restricted stock and restricted stock units (aka RSUs) can get tricky when you leave a company. Typically, an employee can keep the vested portion of their restricted stock or RSUs when they leave a company, but they’ll have to forfeit any unvested shares. Again, it’s vital that you reference your plan documents because the rules vary from company to company. From there, you’ll want to talk to a financial professional about the best way to leverage your particular benefits.

Have Questions?

There are lots of things to consider when you change jobs, and navigating your benefit plans can be complicated. That’s why no matter what benefits you have, it’s best to lean on a financial professional so they can help you make the best decisions for your unique needs. If you’re changing jobs and have questions about your finances, we’d love to help—our goal is to help you protect everything you’ve worked for and make the most of your new opportunities.

Optimizing Your Benefits During a Job Transition: Part I

Starting a new job is often as stressful as it is exciting—not only are you learning new systems and developing relationships, but you also have to reevaluate your financial situation—specifically whether and how to leverage your employee benefits. If you’ve changed jobs recently or plan to soon, you’ve probably asked yourself:

Should I take advantage of my new employer’s insurance plan or search for other options? Should I consider my spouse’s plan?

Can I keep my current plan?

How do I know if I have enough coverage?

If you’re looking for answers to these questions, we’re here to help! In this blog, we’ll discuss your options for changing benefit plans and the factors you should consider to make the most of what’s offered to you. And of course, we’re always happy to answer additional questions you have—just give us a call or send us an email!

For now, let’s review a few types of benefits and what you need to know about each when leaving a company or changing jobs…

Health Insurance Coverage

When you transfer to a new company, make sure to review the health insurance plan it offers and compare it to what you had at your previous job—if it provides less coverage or comes with much higher premiums, you may want to consider an independent plan or supplemental coverage. If you’re married and your spouse’s employer offers a health plan, you should also consider the cost of joining his or her plan and the coverage you would receive.

With any employer-offered plan, remember to check whether your preferred physicians are in network—if not, you might want to seek an independent plan.

Health Savings Account (HSA)

A Health Savings Account is almost like an IRA for medical expenses, and it can be funded by you, your employer, or both. HSAs are only available to individuals with high-deductible health insurance plans, but the good thing about these tax-advantaged accounts is that they belong to you, not your employer, so you have several options when you transfer jobs:

HSA Transfer: If your new employer offers an HSA, you can transfer your current HSA funds into the new account. Your new employer will need to provide the paperwork to complete this transfer.
HSA Rollover: Similar to a 401(k) rollover, with an HSA rollover, you’re issued a check for your HSA balance, and you have 60 days to deposit the funds into your new HSA account. Just note that if you don’t deposit the funds within the 60 days, those funds will be taxed and you’ll be penalized.
Maintain Current HSA: You can also keep the funds in your current HSA. But if your previous employer has been paying administrative costs, you will now be responsible for those costs.

Flexible Savings Account (FSA)

Unlike an HSA, an FSA is owned by your employer, and you don’t need to be enrolled in a specific health plan to be eligible for it. If you have an FSA at your current job, your best option when you leave or change jobs is to check your account balance and try to spend the remaining funds before your last day at the company. These accounts can’t be transferred from one company to another, nor can they be owned by an individual, so the money remains with the employer if you don’t spend it before you leave.

Group Life Insurance

If you have a group life insurance policy with your current employer, you should check and see whether your benefit is portable or if it can be converted to an individual policy. Here’s how those options work:

Porting Your Policy

If your policy is portable, that means you can continue your current group policy as an individual. However, your rates will likely be higher than your original premium because group plans often calculate rates based on generic health classifications. That means that under a group plan, you might be classified under a rate that applies to a generic unisex smoker (which could elicit a high premium)— even if you’re a young, fit female who would typically pay lower life insurance premiums.

Converting Your Policy

Most group plans are term life insurance policies, but you might be eligible to convert your plan to a permanent individual policy. This offers more comprehensive coverage, but it will likely increase your premiums.

Other Options

You should also explore any benefits your new employer offers for life insurance. Most companies offer a low-cost term policy that applies while you’re employed at the company. These premiums typically increase every five years.

Depending on what your new company offers and what you need, it might make sense to enroll in a completely new policy independent from your employer. Choosing an individual life insurance plan would mean you don’t have to rely on your employer (or your employment, for that matter) to protect your family in the event of your death. This option can also be very cost effective because you can lock in your rates.

Evaluating the advantages and disadvantages of each plan can be overwhelming, but it’s important to review the details of the policies available to you. That’s why it’s a good idea to discuss your options with a professional—your advisor should help you understand what each plan offers and how they could affect your overall goals.

Group Disability Insurance

Unlike group life insurance policies, group disability policies (both short- and long-term), are generally not portable. So when you transfer jobs, you’ll want to see if your new employer offers disability coverage and exactly what the plan covers. If your new employer doesn’t offer a disability plan, you should consider purchasing your own, especially if you’re the sole (or majority) provider of your family’s income. If they do offer a plan, you’ll want to review how much of the premium the company pays and whether you have the option to supplement your coverage by paying out of pocket.

For example, your employer might offer to pay for a long-term disability plan that covers just 40 percent of your salary*; but they might allow you to buy an additional 20 percent of coverage for which you pay the premium—giving you a total of 60 percent income coverage if you were to become disabled.

You could also consider purchasing an individual policy to supplement what you have through your employer—this is one of the best ways to maximize disability benefits. That said, there are lots of long-term disability plans available and multiple ways to customize them, so it’s wise to discuss your options with your advisor. They’ll help you sort out the details and determine what options best support your goals.

*It’s important to note—any portion of a benefit from a plan that is paid for by your employer is taxable. If you pay the full premium, the full benefit is tax-free. If you pay a portion of the premium, whatever percentage of the premium you pay is the percentage of your benefit that will be tax free.