I was recently speaking with a client who was telling me that their accountant was questioning some of the financial strategies they were doing and they didn’t know how to answer him. The client knew he was doing the right thing but was not sure because he felt he was being questioned by a professional, and they were supposedly knowledgeable about financial matters.
This is a classic case of a person who has an accounting background deciding to become an expert in financial planning and wealth building. When they leave their area of expertise they become incompetent about financial decisions. Many accountants are micro thinkers who love to get people who are uneducated in the financial world to do things that are not logical. Accountants are great in doing what they do best and that is accounting, but when they step out of their area of expertise they can hurt people financially.
In this case he wanted my client to give up putting money in an area that has no losses and no risk, to put it into a 401k program that was driven by the financial markets. The purpose was so he could look good in front of my client when he did his taxes. He could create a temporary tax reduction through the 401k that would cause my clients taxes to go down in the current year. But, my client would pay income tax on the distributions when he took it out later in life, not knowing what the tax liability would be in the future. He also was putting my client at risk of losing money if the economy did another downward cycle.
Most people who put their money in markets end up losing in the long run. I have been working with clients for 35 years and have seen most people get nice gains, but also huge losses that offset the gains. Many people who recently went through the economic downturn lost major amounts of money, never to recover their loss. Putting your money at risk is not necessary if you don’t have to, but the financial people seem to think that using financial markets is the only way to build wealth.
There are many ways that a person can build wealth and do it risk free but they have to look at their financial picture from a macro grid, and not a micro plan. Most end up listening to someone give them financial advice which ends up being someones opinion, which cost many people large losses. In all cases the financial person who recommended the particular strategy loses nothing. Not Fair!
If you are looking for a way to understand your financial world better tune in to my radio show every Monday Morning at 9:00 AM EST to Financial Freedom Radio. You can either listen live or later. I would love to have you.
Dr. Raymond Jewell