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Friday, August 27, 2021



This is the question you should be asking your financial advisor(s). If the answer you receive is singularly focused on investment returns, keep reading. Studies have shown comprehensive advice can add 2.00% to 7.00% in monetary value annually and some advice is essentially priceless! When considering the value an advisor provides, there are a number of areas some of which you may not often think about. In dollar terms, comprehensive advice can equate to an added $20,000 to $70,000 per year for a client with a million dollar investable portfolio. Over the years, we’ve analyzed many actual client cases and compared them to these studies. Here is a sampling of what we’ve found


Portfolio tax strategies and income sourcing can add .50% to .70% annually to your bottom line. Of course, maximizing Social Security benefits can add thousands of dollars of value over time. But, determining when you can stop working can be truly priceless. Case in point – we were advising a married couple on their overall financial plan. The husband was the head of emergency medicine at a large Midwestern university hospital and the wife was a nurse practitioner. They had been financially responsible, but were having trouble understanding if and when they could retire. As we reviewed the financial analysis with them and shared the fact that they reached financial independence, the wife began to cry. We knew they had two special needs adult children. She shared that from the day they were born, she never thought they would have enough money to leave them. We had just shown them that even if both of them passed away that day, not only would their children be taken care of, but their portfolio would continue to outpace projected expenses. We gave her something she never thought possible - financial peace of mind.


It’s no secret that having estate documents, such as a will or trust, is very important. Dying without a will leaves decisions about your assets to someone else, typically a judge. With estate tax exemption amounts at $11.7 million per individual in 2021, most people believe there isn’t any need for this type of planning. That’s simply not true. Avoiding probate can equal avoiding thousands of dollars in settlement costs and attorneyfees, not to mention time savings. Two areas we audit with our clients are estate income taxes and ensuring that assets go where they are intended. We recently disbursed a seven figure IRA because of the death of the owner. The beneficiary designation recommended by legal counsel resulted in roughly $100,000 more being paid in income taxes. While certain beneficiary designations can make sense in some situations, it is important to review the estate plan in the context of each client’s overall financial situation. This includes considering the heirs’ tax brackets and family dynamics. In this case, the choice of beneficiary designation cost each heir approximately $11,000 in taxes.


Many advisors believe they are great stock pickers. Experts have taught us that many are not. So where do we get value in investment planning? There are the obvious places. For example, selecting lower cost investments can save 0.45% to 0.82%. Tax loss harvesting, which is strategically selling securities at a loss to offset a capital gains tax liability, can add as much as 0.20% to 0.80%. Rebalancing regularly can add another 0.35% to 0.44%, while appropriate diversification reduces risk. But what happens when emotions run high? Average investors often make decisions that impair returns and run counter to their long term objectives. Emotions, fear or unchecked enthusiasm can undermine a disciplined approach which is essential to successful investing. Financial advisors who take a long-term and comprehensive approach are essentially your emotional circuit breakers. Taking a dispassionate approach in service to your overall goals, risk tolerance and risk capacity is crucial. Emotional decisions however, can lead to speculation rather than sound investing.

Another important aspect of investing is asset location. Asset location refers to where you strategically keep the money you're investing – allocating it amongst tax-advantaged, tax-free and taxable accounts in order to maximize after-tax returns. It’s not the same as asset allocation, which addresses the type of assets selected in proportion to the overall portfolio. For example, putting high tax investments in tax-deferred or tax-exempt accounts rather than taxable accounts can potentially improve the overall tax efficiency of your investments. Experts suggest up to 0.75% in value can be added annually. We recently employed an asset location strategy and reduced taxable income for a client by over $20,000 annually, resulting in a $4,400 reduction in taxes.


A proactive advisor who focuses on your comprehensive needs will consider tax strategies tailored to you and potentially generate significant savings. We recently began a relationship with a client who was not aware of tax loss harvesting or Roth conversion strategies. Depending on the size of your portfolio, it can mean thousands to tens of thousands of dollars annually. After some serious conversations about income needs, upcoming required minimum distributions (RMDs), goals for estate planning, analysis of income taxes and Medicare premium brackets and a discussion with the client’s CPA, we determined a $150,000 Roth conversion over three years was a valuable strategy for this client. Using a static tax rate we determined that over 10 years this strategy would return approximately $55,000. That amount will grow if tax rates increase and the client lives more than ten years. Additionally, it will increase further if the heirs maintain the Roth for an additional 10 years. This strategy also reduced first year RMD distributions by $6,000, which resulted in $1,320 less taxes. Finally by employing an asset location strategy, it allowed us to accelerate the Roth conversion to two years, down from three.


In its simplest form optimizing insurance coverage can mean hundreds or thousands of dollars annually. Taking it a step further, eliminating financial catastrophes is priceless! We have a client who held an immediate annuity, suggested by a broker, to cover lost pension income upon the loss of a spouse at some point in the future. In fact, the annuity would not offset future lost income and it was wildly expensive. Working with our team we found an effective solution and reduced the cost by 66%.


Time is a finite resource. Financial planning can enhance your and your family’s situation monetarily by tens of thousands of dollars annually. Investing in an advisor frees up time and leads to emotional wellbeing. Furthermore, actually completing financial tasks is priceless! Recently we received a call from a gentleman who lost his mother earlier in the year and his father was not doing well. He knew from speaking with his father that probate and income taxes were potentially a problem. We immediately scheduled a meeting. Unfortunately, his father passed away before we could have a discussion, much less rectify any of the issues. While we can’t pinpoint the exact costs to this family, we know there were costs in terms of taxes, probate fees and their time. Additionally, was the estate divided the way their father wished? If you are not tackling these important matters, find someone to help you get there before life events eliminate the ability to make strategic decisions.

Our research and more importantly, our actual client experiences support the studies and the value of an advisor. We could share numerous other examples. In short, the results are clear. Methodical analysis, a dispassionate, disciplined process and careful implementation of tailored strategies will lead to value beyond investment returns, all of which are at the core of the advice we provide. When you work with First Merchants Private Wealth Advisors, we provide real, quantifiable value in support of your life goals and peace of mind.

Michael A. Tomaw
Wealth Manager