It is no secret that the financial planning industry has been undergoing some significant changes in recent years. From new rules and industry regulations to changes in tax laws and investment practices, the future is always in flux for financial planners, individual advisors and wealth managers.
If you are the proud owner of a financial planning practice or wealth management firm, you have a solemn responsibility to look out for the best interests of every client you serve. But you also have a responsibility to yourself. Even as you put the best interests of your clients first and help them prepare for retirement, you need to think about yourself, the future of your practice and your own retirement plans.
Many financial planning professionals put so much time and effort into building their practices and serving their clients that they neglect their own needs and financial futures. They reinvest the proceeds of their practice into making the firm bigger, better and more successful, but not necessarily to the advantage of their own future plans.
If you are a financial planning professional, it is important to take a step back and take your own advice.
As a financial advisor, you warn your clients about the dangers of asset concentration. You work hard to develop an asset allocation that works well for each of your clients, carefully adjusting the balance of stocks, bonds and other assets as your clients get closer to their retirement.
The advice you provide your clients is extremely valuable. That is why they have been with you through the years. Your clients have watched their portfolios grow over the years, and they value your advice. As a result, they are prepared for their retirement years, due in part to your counsel on asset allocation and the dangers of too much concentration in any one area.
That's great, but what are you doing to avoid your own asset concentration trap? Have you developed your own balanced portfolio of individual stocks, mutual funds, bonds, real estate and other assets, or is the bulk of your wealth tied up in your financial planning practice?
The danger of asset allocation is just as acute for financial professionals, and sometimes even more so. Many financial advisors work so hard to build their practices and invest in its growth that they hazardously concentrate their own wealth.
One of the biggest dangers of concentrating wealth in your practice is that it can be difficult to determine how much the practice is worth. If you are deep into the succession planning process, you may have determined a fair market value, but if retirement is still years away you are probably less sure about the value of the firm.
If your practice represents a significant percentage of your financial assets, it is a good idea to place an accurate value on the practice. Even if you are not planning to sell, knowing what the practice may be worth on the open market will help you gauge your current asset allocation. If you find that your portfolio is well balanced between different asset classes, you can rest easy and focus on serving your clients as you always have. If you find that your practice represents the bulk of your wealth, you can work on reallocation and diversification, in essence taking your own sound advice.
Concentrating too much of your wealth in real estate and business assets has its risks, but the financial planning industry is subject to some very specific dangers. For instance, a single piece of poorly thought out legislation could send the value of a financial planning practice plummeting.
The passage of the new Department of Labor fiduciary rule should serve as a wakeup call to financial planning professionals everywhere, from individual advisors to the owners of large stock brokerage companies and wealth management firms.
That new fiduciary rule is a shot across the bow, and a possible sign of things to come. While the rule currently applies only to retirement planning advice, there is no guaranty that it could not be extended to cover all advice clients receive.
The extension of the fiduciary rule, and additional rules to come, could have a significant impact on the value of financial planning services, and on the value of financial planning firms. The risk of future regulation is just one more reason to avoid concentrating too much of your wealth in your practice. If you have not already considered this risk, now is the time to do it. Building the value of your business and reinvesting in the firm is a smart thing to do, but not at the sacrifice of the bigger picture of your overall investments.
Future changes in tax laws could also affect the value of your financial planning practice, and the advisability of concentrating your wealth there. Even if the tax laws remain as they are, your heirs could face significant expenses if they are set to inherit the practice.
A high tax liability could greatly affect their future plans, and even the future viability of your financial planning practice. Sound estate planning can mitigate these risks somewhat, but even the best planning cannot eliminate them entirely.
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