Why You Might Want A Professional to Manage Your Investments

Block Woman wears a green visor or eyeshade while sitting next to a desk.

Or “Why just putting all your money in the S&P 500 isn’t enough.”

(Okay, probably isn’t enough. I’m not allowed to say much that is definitive about investing.)

Recently I spoke with a woman who asked, “Can you tell me why I want a financial planner to manage our investments? We just put everything in the S&P 500.”

I acknowledged that, yes, an S&P 500 fund can be a great place to put a lot of your money. Good job! I then proceeded to quickly trip and fall down a rabbit hole (it’s really hard to not do this when talking about investing) describing just a single tactic we can use to improve our clients’ investments beyond picking good funds. (It was the concept of asset location, if you’re curious.) She almost immediately responded, “Oh, I didn’t know about that.”

Whiiiiiich prompted me to write this blog post!

Because while I am happy to observe that many people, especially in the tech industry, have drunk deeply of the “low cost, broadly diversified” waters, I have also observed that many of these same people aren’t aware that way more goes into managing investments well. As a result, they simply aren’t aware of the ways in which an investment professional can be valuable.

I believe that most people can benefit from having someone manage their investments. Call me biased. (‘Cause I am.)

In my opinion, there are two reasons to hire someone to manage your investments:

  1. You don’t want to manage your investments…but you want them to be managed. (Enter stage left: Meg)
  2. A dedicated professional—someone who has been educated in, trained in, and experienced in managing investments, strategizing about how investments interact with other parts of your financial life, and managing human behavior—can do a better job than you.

Let’s dig in.

Reason #1: You don’t want to do it yourself.

Let’s assume for a minute that you have all the knowledge, time, and self-awareness you need to manage your investments well (assumption to be revisited later).

Maybe, just maybe, you want to do other things with your time, energy, and brain power.

Maybe managing your investments isn’t fun, while other things really are.

Maybe your life is busy enough with job and family and obligations, and piling Yet One More Important Thing on top of that fills you with anxiety.

Maybe you’re in a couple, and you think it’d just, well, work better if someone else did this stuff for you both, instead of one or the other of you either taking on the task for the whole family.

Wouldn’t it be nice to develop a relationship with a financial planner, a person whom you trust to have the skill and integrity to do well by you, and then know that they will take care of it all for you?

Hell, I’m a financial planner myself, and I’m already looking forward to my newly hired financial planner taking over investing our portfolio. Because that’s just one more piece of my brain I can free up for other things, including just sitting there, staring at the wall…but contentedly staring at the wall, not in some sort of anxious, paralytic panic.

So, yes, maybe you can do a perfectly good job managing your own investments. It is entirely reasonable to simply choose not to.

Reason #2: An investment professional can likely do better than you can.

What I don’t mean by this is that I can pick better stocks or mutual funds or ETFs than you can.

In a meaningful way, that part of investing has been commoditized. Whether you use a roboadvisor (ex., Betterment), invest it yourself at Vanguard or Schwab or Fidelity, work with a different financial planner, or work with me, you’ll likely end up with very similar funds. This simply reflects the broad acceptance that no one can beat the market, reliably, over a long period of time. The best bet is to “own the market” at low cost and then Don’t Touch It.

But my, there is So Much More to investing than just “security selection.” That’s the easy part! Thirty years ago, maybe it wasn’t: before ETFs existed, and most funds were actively managed and expensive. But nowadays, you have easy access to inexpensive, broadly diversified funds of all sorts.

I’ve seen a lot of ways in which we help our clients better manage their investments.

Remember the above assumption that “you have all the knowledge and self-awareness you need to manage your investments well”? Now we’re going to test that. I’m going to describe below many of the ways in which I (and many other financial planners) improve our clients’ investments.

Do any of these strike you as, “Oh, didn’t know about that. Wouldn’t have thought of that. Yep, I’ve been suffering from that for a while, and not doing anything to fix it.”? If so, then that is a good reason to hire a professional to manage your investments.

We make sure you’re invested in the right thing.

This is a big topic. It’s probably the most important category of investment work we do for our clients.

You might not know what you’re invested in. We make sure you do.

If you’ve been investing for a while in a 401(k), IRA, and a taxable investment account (or several), all while not really having a strong grasp on investing principles, you can easily default your way into a pretty interesting portfolio. (Yes, “interesting” as the universal euphemism for “f*cked up.”)

The most common “interesting” thing we see in new clients’ portfolios is that they are absolutely dominated by tech stocks, both individual tech company stock and tech-heavy funds.

Clients have never thought about the fact that they own few to no:

  • Small and medium size companies US companies
  • Companies outside the tech industry
  • Companies outside the US
  • Bonds

Sometimes, all it takes is pointing this out, and the client is all, “ooohhh…that’s probably not ideal, is it?” (And to be fair, sometimes I point it out, and the reaction is, “….and?”)

You might not know *why* you’re invested in what you’re invested in. We make sure you do.

I want to know why you own the investments you do.

Most of the time, the answer is the equivalent of shrugged shoulders. “…’Cause? I dunno.”

There are a lot of reasonable investment portfolios out there, even for the same person. But that doesn’t mean any portfolio can be reasonable for you. You gotta know why you’re investing in order to know whether a portfolio is right for you.

Once we figure out why you’re investing this money (your kid’s college in 17 years? retirement in 10? to buy a home in two?), then we can make a plan for investing that is targeted at those goals.

Maybe your existing investments are already doing that job. In which case, great, we don’t have to change much, if anything.

Maybe they’re not. In which case, not as great, but fixable!

In practice, this means we make a sell/keep/donate decision for each holding you already own. That way, each investment that remains in your portfolio is a deliberate part of your portfolio, not there because of inertia.

Make sure cash actually gets invested.

Having too much cash that should instead be invested is common.

Usually, you have a ton of cash in your bank account (or in your stock plan account, from selling RSUs) that you simply have no plan for and therefore…just sits there. And sometimes you did in fact move the cash into the investment account…but then don’t invest it.

You know what gives you a better chance of growing your money than letting it sit as cash? Investing it. Crazy, I know.

We regularly scan our clients accounts for extra cash that could be invested…and then pull it into their investment accounts and invest it.

We manage risk.

I’m using “risk” to mean the chance you won’t have enough money for your goals when your goals come due.

So, how do we manage risk? First, we start by identifying your goals and, importantly, how long you have until those goals start and how long they last. You want to buy a home in five years? We’re going to invest that money way differently than for your goal to retire in 20 years and live off of your portfolio for the ensuing 40 years.

We then choose a reasonable balance of:

  • stocks (high growth potential but high chance of losing money in any given year)
  • bonds (lower growth potential but also lower such chances)
  • cash (lowest growth potential but guaranteed to not lose dollar value)

in your portfolio. Say, 70% stocks/30% bonds/0% cash if you’re 10 years from a retirement that could last 40 years.

Okay, that’s the initial risk-management step.

The ongoing management usually involves “rebalancing” your portfolio. As your investments grow or fall in value, that 70%/30% can easily become 80%/20% or 60%/40%. Rebalancing means we’d buy and sell things to get it back to 70%/30%.

Rebalancing conveniently reinforces the investing best practice to “Buy Low, Sell High.”

We try to minimize taxes across your lifetime.

Our goal is not to try to minimize your taxes in any given year. It’s to minimize the taxes you pay over your lifetime. And yes, sometimes that can mean opting in to higher taxes this year to have even lower taxes in the future.

Here are some of the tactics we use to minimize your taxes:

  • Asset location: Putting certain investments with certain characteristics in certain types of accounts with complementary tax characteristics. (Learn more about asset allocation and how we implement it.)
  • Tax loss harvesting: When the stock market tanks (March 2020, anyone?) this can be an easy way to get a tax break for that year (and possibly for the next several). That said, we might choose to not tax loss harvest if we don’t think it’ll help lower your taxes over your lifetime, even if it helps now.
  • Tax gain harvesting: Sell at a gain in low-tax-rate years, and then immediately re-buy the investment. Now, admittedly, usually when people have low-tax years, we focus more on Roth conversions, or doing nothing in order to preserve eligibility for free or reduced-premium health insurance. But it’s a possibility we evaluate each year our clients have low-income/low-tax-rate years.
  • Replace tax-inefficient investments with more tax-efficient investments: Usually we find tax inefficiency in certain mutual funds, held in taxable accounts.
  • Identify and help you donate “appreciated securities” (investments that have grown) to charity. If you have investments in taxable accounts that have gained in value, it’ll probably save you taxes to donate those investments instead of cash.

We provide pretty pretty reports.

Reports can help you more easily understand what your portfolio looks like and how it’s performing.

We get the administrative work actually done, not perpetually hanging over your head.

The administrative side of managing your finances…well, I don’t need to tell you, it can really suck sometimes. So. Many. Lumbering. Bureaucracies.

It’s our job to help you get through them, sometimes even to get through them on your behalf.

We help you to:

  1. Open the necessary accounts
  2. Set up ongoing contributions to your accounts from your paychecks or bank accounts
  3. Roll your old 401(k) into your IRA. How many old 401(k)s you got out there, just..sittin’ there?
  4. Roll your IRA into your current 401(k) (to enable a backdoor Roth IRA contribution)
  5. Convert your IRA to a Roth IRA (aka, a Roth conversion)
  6. Make your annual IRA contribution. In the correct amount. To the correct IRA. And only when you’re eligible to do so. Including the ever-popular backdoor Roth IRA contribution.
  7. Change investment selections in your accounts that we don’t manage for you but that we advise on, notably, 401(k)s and HSA.
  8. Change beneficiaries on all your accounts, when necessary.
  9. Move your taxable investment account into your trust (i.e., “fund” your trust).

We help you behave in a productive way vis-a-vis your investments.

Pretty much all industry surveys say that clients don’t hire financial planners for behavioral or emotional coaching.

At the same time, we financial planners are all “It’s a super valuable thing we do for our clients!”

So, I mention it here…hesitantly.

In a nutshell, when an investment (stock, fund, etc.) is going up up up, all of us humans naturally think that it’ll simply continue to go up up up. So, hodl! And maybe even buy more?

The role of the financial planner is to say yes, it certainly is tempting, isn’t it? Whoo! That stock, it’s on a tear! Now, let’s revisit your Investment Policy Statement, which tells us why we’re investing and how we’re investing to achieve that goal. Are these changes you’re proposing consistent with that plan? If not, tell me more about why would you want to vary from that plan? If yes, sure, let’s discuss further.

And we’ll do the same thing the next time your portfolio drops a bunch in value, or your company stock, which you own tons of, goes down in value.

It’s not that we planners are special human beings devoid of emotion. It’s that we (ideally) have been trained to have processes that take us out of our emotional brains and into our rational ones when managing investments.

We do all of this, over and over.

There is great value in doing all of this work once, to set up a good investment portfolio.

There is at least as much value in revisiting this regularly, to ensure than the plan is still the right one, and the investments are still serving the plan.

Financial planners (should) have a process for this. At Flow, we incorporate an investment review in each Annual Renewal Meeting. Nothing should ever get too far off track without us noticing it.

So, girls and boys, that is why you might want to have a professional manage your investments.

Do you want someone to do all this for you…and your investments? Reach out and schedule a free consultation or send us an email.

Sign up for Flow’s twice-monthly blog email to stay on top of our blog posts and videos.

Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.

Should You Roll Your Old 401(k) into an IRA? Maybe. What Else Might You Do?

Pink Block Woman looks at plastic toy dog on its back with a green question mark above it.

Do you have an old 401(k)? Or possibly four?

The best time to make a decision about an old 401(k) is shortly after leaving the company. The next best time is—say it with me!—now.

What can you do with your old 401(k)?

  • Keep it there, i.e., do nothing.
  • Roll it into an IRA.
  • Roll it in your new job’s 401(k).
  • Roll the pre-tax part into your IRA and the after-tax part of it into your 401(k).
  • If you have company stock inside it, roll that to a taxable account.

Once you get to a certain age (> 59 ½ years old) and stage (retired) of life, the plan is to start taking money out of your 401(k) to spend, not just to move it into a different retirement account. So, that’s technically another option. But for people still in their earning years, this is generally a bad idea.

How do you decide what to do with your old 401(k)?

Choose Between a 401(k) and an IRA

The first step is to figure out if you want your money in an IRA or 401(k). If you want it in a 401(k), then you can decide whether to leave your money in its old 401(k) or roll it into your current 401(k).

401(k)s and IRAs operate by different rules, which can affect you meaningfully. Your specific life circumstances can make either an IRA or 401(k) a more appropriate place to hold your money.

Take a look at the advantages of each kind of account (no promises that it’s a complete list; this stuff is complicated) and see if any of them would be particularly important to you.

Advantages of 401(k)s over IRAs
Advantages of IRAs over 401(k)s

You can often take loans from your current 401(k) (not from old 401(k)s or IRAs).

401(k)s have higher protection from creditors than do IRAs.

If you have any pre-tax money in an IRA, you cannot get the full tax benefits of a backdoor Roth IRA contribution (which requires a $0 pre-tax balance).

You can withdraw money from your 401(k) if you leave the associated job after turning 55, without penalty. You usually have to wait until age 59 ½ for IRAs.

The fee you pay your financial advisor might increase if your IRA balance—but not your 401(k) balance—goes up.

You won’t be required to take Required Minimum Distributions from your 401(k) starting at age 73 as long as you’re still working. You will, from an IRA. (I know, I know, this is a Very Long Time From Now.)

You usually have a broader selection of investment options in an IRA. (This can sometimes be a “con,” what with analysis paralysis and some very inappropriate investment options available to you.)

You can withdraw money from a Roth IRA more easily (tax- and penalty-free) than from a Roth 401(k).

You can take penalty-free withdrawals to buy your first home, or to pay for qualified education expenses. Rules are different for a 401(k).

You can get more value from your financial advisor: Here at Flow, we can manage money in an IRA more easily as an integrated part of your total managed portfolio, which can open up some tax-optimization tactics (ex., asset location). We can also help with account administration (ex., setting beneficiaries, taking required minimum distributions, Roth conversions, etc.).

Your Choices for Your Old 401(k)

For each choice, I discuss pros and cons. When I’m evaluating each choice, I’m thinking about simplicity, fees, investment options, features, protections, and ease.

Keep it there, i.e., do nothing.

The pros? You don’t have to do anything! Also, possibly it’s a really great plan (low expenses, broadly diversified investment choices, good customer service and website interface). A lot of big tech companies’ 401(k)s are like this.

Also, 401(k)s can provide benefits that IRAs don’t, like higher protection against lawsuits.

Cons? If it was a “meh” kind of plan, leaving it there keeps your money in a “meh” place. And you’ll want to check with your former employer’s HR to see if you’ll be restricted in any way now that you’re a former employee. Does your access to the website or customer service change? Are you charged more fees now that you’re no longer an employee?

Also, you now have to keep track of one. more. account. One more account you have to manage investments in, manage paperwork for, set beneficiaries for, etc. This might not seem like that big of a deal when you have only one old 401(k) or when there’s not much going on in the rest of your life. But as life goes on and you start collecting a trail of 401(k)s from all former employers and you’re got career and family and health and friend demands on your time and energy…simplifying your financial life is gonna get real important, real quick.

Lastly, you might not be allowed to leave it there. Maybe your old employer gets acquired or goes out of business or changes the 401(k) providers. If the balance is too low (< $1000), they can just cash it out and send you a check. With balances under $5000, they might forcibly roll it into an IRA. Not ideal!

My “favorite” story about a client who didn’t roll a 401(k) over when he left his job: He didn’t just leave it there for a little bit, he left it there for over 10 years, during which time the company went through some changes, and the 401(k) plan provider changed…twice? I think. He had a vague notion that he had money in this 401(k) but didn’t have many details. We eventually tracked it down…to the state’s unclaimed property division! It is proving challenging to extract it.

Roll it into an IRA.

You can roll your 401(k) into an IRA at Schwab or Vanguard or Fidelity, or a “roboadvisor” like Betterment or Ellevest.

Pros? You can do this every time you leave a company and their 401(k), so instead of having a trail of 401(k)s, you have one 401(k) (your current one) and then one IRA (into which you have rolled all your old 401(k)s).

In an IRA at a regular ol’ “custodian” like Schwab, Vanguard, or Fidelity, you have access to the “universe” of investment options. Pretty much any stock or fund you can think of. Now, this “pro” can easily turn into a “con” or “information overload” or “analysis paralysis” or “what the hell am I supposed to invest in?” That’s where roboadvisors (or target-date funds) can come in really handy: they more or less do all the investing choices for you.

As a financial planner who manages her clients’ investments, I find it valuable (on behalf of my clients) to have more money in IRAs because that gives me more opportunity to use an “asset location” strategy to maximize after-tax returns over their investing lifetime.

Cons? If you roll your money into a pre-tax IRA (i.e., not Roth), you have made it impossible to do a backdoor Roth IRA contribution.

If you are working with a financial advisor, putting more money into your IRA might increase your fees. (This happens in my firm. Not immediately, and not always. But it’s generally in that direction.) Now, in my opinion, if you’re getting value in return for your fees, this isn’t a problem, but I think it’s important to be aware of how much you’re paying so that you can make that assessment.

Lastly, rolling 401(k)s into any other kind of account anywhere is often an exercise in bureaucratic pain. Sorry. It just is. Financial institutions apparently hate to lose your money (strange!) and so often make it really hard for you to move your money away.

Roll it in your new job’s 401(k).

The biggest pro here? Again, simplicity. Having only one 401(k) at any given time. I can’t emphasize enough how valuable it is to “fight for simplicity” in your finances.

Also, if you end up leaving your job after you turn 55, you can start withdrawing without penalty from that job’s 401(k). You cannot, and this is the point, do the same with old 401(k)s. (Penalty-free withdrawals from 401(k)s usually start at 59 ½. You have to work a lot harder to get such access to your money in an IRA before that age.)

If you stay in your job, you won’t be required to take Required Minimum Distributions from the 401(k) at that job. (Now, this isn’t relevant until you are 73 years old. So, uh, we’re talking long-term planning if you’re our typical client.)

Lastly, though I don’t like seeing people take loans from their 401(k) (that money is for retirement, woman!), it is actually a possibility. By contrast, money in an IRA or an old 401(k) can’t be borrowed.

The cons? The bureaucratic pain of moving your 401(k) anywhere, as mentioned above. Also, maybe your new 401(k) isn’t that great. Maybe it’s expensive or has a crappy user interface that makes it hard for you to access or understand how your account is invested or get tax paperwork or or or.

(If you’ve just been laid off, you likely don’t have a new 401(k) yet. So, you might keep the 401(k) where it is for now, with the plan to roll it into your future job’s 401(k).)

Roll the pre-tax money into your new job’s 401(k) and the after-tax money into your Roth IRA.

This is starting to be the “icing” of personal finance, instead of the essential “cake,” but it is kind of a cool thing to do, so let me mention it.

Let’s say that you don’t want to roll money into your pre-tax IRA because you want to maintain your ability to do a backdoor Roth IRA contribution.

You might still want to roll your Roth money into a Roth 401(k). (Yes, you can send your pre-tax money one place and your Roth/after-tax money another place.)

Why?

The rules that govern when you can withdraw what money from Roth accounts without penalty or tax are very complex. Oftentimes the rules are the same no matter which kind of Roth account you own, IRA or 401(k). But! Roth IRAs do give you some access to tax- and penalty-free withdrawals that Roth 401(k)s don’t, especially before you turn 59 ½ (the magic year after which you can withdraw from retirement accounts penalty-free).

It’s more complicated than that, so in general I think it’s just helpful to remember that Roth IRAs are slightly better than the 401(k) equivalent for getting money out of them.

Roll Your Company Stock into a Taxable Account and the rest of your 401(k) into another Retirement Account.

This strategy is called “Net Unrealized Appreciation.” It is pretty rare, is only relevant when you own company stock in your pre-tax 401(k), and usually only makes sense if that stock has grown a lot in value. In fact, I’ve only ever seen it for people who have worked at one of the “old school” tech companies (ex., Microsoft) for many years.

It involves rolling that stock into a taxable account, paying ordinary income taxes on the original purchase price of that stock, and rolling the rest of your 401(k) into an IRA all normal-like (which isn’t a taxable event).

This can get complicated, so I mention it here only to put a bug in your ear just in case you end up with a 401(k) chock full o’ highly appreciated company stock.

I was tempted to write something like “Don’t sweat the details too much” because I hate how stressed out everyone gets about what should be little items like moving a single old 401(k) to a new home. But good lord if I haven’t seen enough horror stories of old 401(k)s gone wrong to know that attention to detail will actually save you a bunch of hassle in the future.

And on that note, good luck!

Do you want help dealing with your old 401(k) (and all future old 401(k)s) from someone who will take a holistic look at your life and finances? Reach out and schedule a free consultation or send us an email.

Sign up for Flow’s twice-monthly blog email to stay on top of our blog posts and videos.

Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.