By Raoul Rodríguez
This is the first of a series of articles on personal financial planning that will cover topics related to the U.S., Mexico and the complexities of cross-border planning. And believe me, the interplay between disparate tax, legal, insurance and investment environments can make for complicated planning! My goal is to provide accurate and actionable information that can lead you to make informed decisions and increase your financial wellbeing.
Let me start by defining the term “financial planning”. I am going to use the updated definition provided by the Certified Financial Planning Board of the U.S.:
Financial Planning is a collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of a client’s personal and financial circumstances.
From my perspective there are three big takeaways. First, financial planning is not defined as providing investment brokerage services or selling any type of financial products. We may provide advice on investments and the firm we work for may even manage assets, but investment advice, per se, is only a fraction of what we advise on. The second is that planning is not a thing, it’s an ongoing process that in the best of circumstances evolves over time as life circumstances, laws, and economic environments change. And finally, in the center of this process we find what in the end truly matters: you!
Now that we know what personal financial planning is, what exactly can it do for you? Most people will first think of investment advice, and as individuals we can use a hand. As consumers of financial products, we are not very good at investing. An organization called DALBAR (dalbar.com) has for decades been tracking individual average annual investment performance and comparing that to market performance. The 2021 report showed that the 30-year average annual rate of return for individuals in equity funds was 7.13% compared to the S&P500 average of 10.65%. Even worse, the average income fund investor had an annual return of only 0.34% vs the Bloomberg Barclays Aggregate Bond Index of 5.12% during the same period[1].
Financial planners can help. Organizations such as Vanguard[2], Morningstar[3] and Russell Investment Canada[4] have conducted research that shows that clients that work with advisors have better results above and beyond what the sole individual has historically been able to achieve. That does not mean that advisors or even professional asset managers can consistently beat market returns on a risk adjusted basis. Legends such as Warren Buffet (he significantly underperformed in 2019 and 2020) and Bill Miller of Legg Mason have had off years.
But it is more likely that by partnering with a financial planner you will make better financial decisions overall which in turn leads to higher returns over time. Consider the statistic from Dalbar regarding the average rate of return for income investors above. A person may look at their US$500,000 nest egg and the 0.34% return and feel safe in that their conservative approach did not result in a loss over 30 years. Au contraire, they more than likely suffered a significant loss in purchasing power over time since average annual U.S. inflation in that period was over 2%. He could have a loss in real terms of well over $200,000 or about 40%!
In other words, partnering with a professional in the process of financial planning can be used to affect a paradigm shift in how we interact in the financial world. There is a lot more going on than just investment returns. An influential financial author in the industry, Mitch Anthony, tried to define the value proposition that personal financial planners bring to a relationship by coining a new term, “Return on Life (ROL)” and suggested six value propositions:
· Organization
· Accountability
· Objectivity
· Proactivity
· Education
· Partnership
The tools of the trade and that help craft your ROL are all the technical stuff: tax rates, qualified accounts, insurance contracts, investment strategies, estate planning techniques, and so forth. And it is these tools and techniques, that we will be exploring in this series of articles. Hopefully by delving into some of the intricacies of planning, and cross-border planning in particular, you will gain information that you can use to increase your own ROL. I look forward to partnering with you on this journey.
Raoul Rodríguez is a Certified Financial Planning professional™ and an Enrolled Agent with the Internal Revenue Service in the U.S. He has over 20 years of experience working the intricacies of U.S.-Mexico cross-border planning. He can be reached at raoulro@gmail.com
[1] https://rgb-prod-public-pdfs.s3.us-east-2.amazonaws.com/-Bv_OJsWvn7_nfnkVgfUMmrvz4g.pdf
[2]https://www.ifa.com/articles/advisor_alpha_view_from_vanguard/
[4] https://www.advisor.ca/my-practice/conversations/advisors-add-2-88-in-value-study-finds/
