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The one constant we have in life is change. This is especially true in the financial services world. Tax brackets, contribution limits, income limits and more can change from year to year. Do I memorize these? Nope. I have a handy cheat sheet with all the numbers. If you would like a copy, just click here.
Why is my financial planner asking me all these personal questions?
As a financial planner, I have to ask many personal questions. It helps me do my job. I may ask the following:
- Risk tolerance
- Net worth
- Other investments
- Tax rate
- Investment time horizon
- Liquidity needs
- Investment experience
- Height, weight, health history
Why would I need to see a 401(k) statement if I’m not managing it for a client? I want to make sure that the whole portfolio, including what I manage and what I do not manage, is properly balanced. Without seeing the 401(k) investments, the portfolio could be overweight in one area.
Risk tolerance, income, net worth and tax rate are all useful in creating a portfolio for the client. Some people can handle market volatility, others can’t. Do we need to use investments that are tax sensitive to help reduce taxes?
Your investment time horizon can differ between accounts. You may have some money for a child’s college education that will be needed in a few years, while your retirement accounts won’t be touched for much longer. This may mean we want to be more conservative with the investments that will be used soon.
Your health history is also important when calculating retirement needs. We want to make sure you don’t run out of money in retirement! You will be asked about your height, weight, and health history if you are applying for any type of life insurance. This information is used to generate proposed insurance quote. However, this quote is not guaranteed and is subject to approval by the life insurance company’s underwriters.
Gathering this information is also part of the industry rules. The Financial Industry Regulatory Authority (FINRA) as created a rule to help planners and their supervisors determine the suitability of an investment. Without this information, it may be tough to determine if an investment or investments are right for the investor.
For example, if we put $10,000 into a risky investment, is it suitable for the client? If the client is young or has $1,000,00, it could be suitable for the client. If the client is 80 and only has $15,000, then it is definitely not suitable.
Most transactions are reviewed for suitability to protect the investor. The collected information helps the supervisors determine if the transaction is suitable. If the investment is not found to be suitable, the transaction can be rejected or more information may be required.
Yes, a financial planner can ask many personal questions. It may even make you feel uncomfortable. However, your answers are kept confidential. In the end, the better your financial planner knows you, the better job he can do for you.
I hear this frequently:
"Mike, what is with all this paperwork that I get?"
Investments come with all kinds of paperwork. You will see it flooding your mailbox. Some people don’t even bother reading the mail. Instead, they wish it would go away. It comes to you because the law says it has to.
What are these different types of documents that you will be getting? They can be:
- Statements – a statement tells you how much your investment is worth. It may come monthly, quarterly, or annually depending on the company and how active you are.
- Confirmations – a confirmation is generated when you add money or take money out of an investment. It usually tells you the amount and execution date. Often, the confirmation will not tell you how much your investment is worth. Unless you understand the purpose of the confirmation, you may wonder why there is not account value.
- Prospectus – a prospectus gives you information about your investment. It discusses the risks and strategy of the investment. It usually comes on very thin paper and is often difficult to read. Many people wonder why these are sent out. The law requires the prospectus to be sent to every client.
- Tax information – You will get Form 1099 or K-1 from your investments. This is needed to prepare your taxes.
Do I need to keep all of this paperwork? Fortunately, the answer is no. Much of this information is available on the internet. Investments have the current prospectuses available for download at any time. Most companies will have a way to log in and view your account, statements, and tax forms.
Do I need to keep any of the paperwork? I highly recommend keeping your year-end statements and tax forms. Year-end statements are usually a good summary of what transpired during the year. Your tax forms are essential for preparing your taxes or during an audit.
How do I get less paperwork in the mail? Many investment companies look to reduce costs and one way to do it is to send the information electronically. If you sign up for electronic delivery, you will save your investment money which in turn benefits the investors. I have created a special e-mail account just for my statements. This way the investment communication is easy to track and doesn’t get lost in my regular email. You can easily sign up for an extra e-mail account at any of the free e-mail companies, such as Google’s Gmail.
Paperwork can seem like a never ending battle. Knowing what to keep can help you save file cabinet space. Cleaning out the old, unneeded documents will also save space and really help your estate executors out when they have to deal with the records.