They’re everywhere, automated tools that tell you how much to save, and how often, using various mutual funds that might be suitable to accomplish your goals. However, disruptive life events or complex tax situations may require human rather than machine oversight of financial decisions.
When heading to a financial crossroads, many newbie investors head for the easy calculators found on any consumer friendly websites. Type in your income, desired savings rate, and hopeful rate of return, and get a projection of how much money you may have saved in a defined number of years.
For low risk goals this approach may be fine. Calculators found on for instance can help you decide how much to save at any given rate of return to come up with the down payment necessary for a car payment. The calculators can even show how much you may end up paying for a car with a given set of financing terms.
A goal that is 3 to 5 years away may require less due diligence because the standard deviation of error is less pronounced and rates of return more predictable for a shorter time horizon. This is especially true for cash investing, where you plan to use the principal and just want some modest interest on the amount saved.
When a goal is further away, such as a goal to fund a child’s college fund or to finance retirement 20 years later, then the risk of using automated tools becomes heightened. Disruptive events could complicate this analysis further. For instance, illness, or the death or divorce of a spouse may introduce new variables requiring attention. A fully automated projection tool may not adjust for these changes. And of course the tool itself may not remind you to make adjustments in any planning assumptions, to recalibrate your investment decisions going forward. Don’t forget that you, not the machine, need to make the funding transfers to keep the plan to track.
Now don’t get me wrong. Financial planners do use software supported planning tools to make the job of forecasting investment outcomes a little easier. But the tools are just that, tools. Keeping people on the track they have chosen for a goal is another matter.
Couples particularly have a hard time staying on the same page to realize goals over a long period. Many couples don’t like to discuss finances and keep information about their retirement plan balances and investment choices as private matters. Worse yet, spouses neglect to share passwords to their various online accounts. If one spouse is no longer able to access an account, due to forgetfulness or illness, the other spouse may not realize that valuable data or account information is no longer being communicated.
Automated tools and accounts can be a godsend until such a lockout occurs. Many spouses assume that banks or other online providers will provide access to their spouse’s account information upon proof of death. This may not be the case. Entitlements for account access can be shared and passwords communicated, or not. If they are not shared, the surviving spouse may not be able to access information for an online only account until an attorney writes a letter on his or her behalf.
During tax season, this problem can be quite troublesome if 1099 reports, for instance, are sent only by email or online. The inability of one spouse to access the online account due to loss of memory, illness, or death, may cause the other spouse great inconvenience and possibly late penalties for a tax filing.
Some of the online advice websites will aggregate access to credit card, banking, and brokerage accounts as well as reporting for a 401K or other employer plan. The concentration of information can place the user at risk for identity theft if the website is hacked. Use of such an aggregation site, coupled with online only access to the various interconnected accounts, makes estate settlement more difficult in the event of untimely death if no passwords are left for the spouse, or executor or successor trustee to use.
–online advice can provide useful advice to the small balance investor who wants to get pointed in the right direction.
–using an online site may establish a discipline of financial monitoring that can carry over to budget and plan for longer periods of time.
–regular visits to such as website may heighten awareness of the need to save, along with the choices that go along with investments.
–risk tolerance conversations about marital assets like employer matched 401K plans might be prompted if couples share responsibility in the monitoring.
–The websites won’t know about life changes unless the user, you, revises the starting data.
–The websites may not remind clients, you, of the need to update starting assumptions, beneficiary information, and savings rates as tax brackets, life relationships and salary compensation change.
–The websites cannot factor in assumptions around complex tax reporting that may affect your investment decisions.
–The websites are usually limited to assumptions based on mutual fund and ETF investing, rather than actual stocks, bonds, insurance products, or closed end funds. They also do not consider how to best manage real estate or tax situations arising from its disposition.
–The websites alone cannot weigh the relative importance to each client of the various measures of risk, including liquidity risk, security risk, inflation risk, or market risk as measured by volatility.
Not sure which way to go? All the more reason to check in with a professional. Someone who knows your situation will be more proactive in calibrating your investments to stay on the right track, no matter changes in circumstances.
A certified financial planner such as myself is held to a fiduciary standard when deciding upon the best recommendations for each client, after consideration of immediate as well as contingent factors. These can include assumptions about family security, or continued family income under a variety of circumstances. Tax and legal professionals can also be useful in advising you about the tax consequences of various types of investing alternatives, or the proper titling in which to hold assets. Even beneficiary designations for account can create tax and legal headaches. Careful updating and review is always necessary.
Kathleen Nemetz, MBA, CFP®
415.472.1445 x 306