Common Money Mistakes That Clients Go To Financial Advisors For Help

Financial health entails more than just revenue or retirement planning, but many individuals and businesses fail to consult experts before making critical financial decisions.

That oversight frequently sends clients rushing to their financial advisors for assistance in correcting a mistake after they have already incurred losses or taken irreversible steps.

It’s never the wrong time to pick up the phone and talk to your financial advisor, but it’s usually best to do so before making any financial decisions with long-term impacts. Some some common financial mistakes that bring personal and business clients into their offices looking for help in picking up the pieces.

1. Making Uninformed Decisions That Impact Tax Liability

Mistakes including missing a required distribution or exercising stock options without realizing the tax impact come up frequently and sometimes can be too far along to fix. This is why it’s important to seek tax and financial guidance early on. Just as you visit your doctor, you should be meeting with a professional to assess your financial wellness long before tax season.

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2. Improperly Completing Beneficiary Designations

One of the biggest financial mistakes people make is not filling out beneficiary designations properly when estate planning, especially when a trust is involved. Too often, people pay an estate planning attorney thousands of dollars to put together a trust but then forget or are not told to change the beneficiaries to list the trust. – Christopher Berry, The Castle Wealth Group | Estate, Tax & Retirement Planning

3. Procrastinating When It Comes To Retirement Planning

Many people who come to us have made the mistake of procrastinating when it comes to planning for retirement. Suddenly, they wake up and see retirement is around the corner, and they have no idea if they are prepared or not. It is a challenge helping them play catch up to achieve the level of income they need to match their expectations of retirement.

4. Overloading On Financial Services/Products

I commonly see people who are confused after having “loaded up” on several different financial products and services as though they are going through a buffet line. They often don’t understand how most of these products actually work, haven’t organized them within a larger strategy and haven’t determined how these services interact with one another. This results in confusion, mistakes, missed deadlines and more.

5. Investing On Impulse/Without A Plan

The most common mistake I see from individual investors is making investments without having a plan. Their portfolios consist of small biotech stocks that “their friend told them about” along with some extremely volatile technology companies that “people were talking about at work.” It is often some version of that. In order to have great returns, one needs a clear, well-thought-out plan.

6. Thinking A Retirement Portfolio Is All There Is To Financial Planning

People often forget that “a portfolio is not a plan,” and they make the mistake of thinking just having an investment account is doing enough. Portfolio allocation is important, and saving early and often is key, but factors such as taxes, legal planning and insurance protection are all part of the holistic picture. Without the help of a professional, most people do not put these all pieces together on their own.

7. Deciding 401(k) Allocations Without Guidance

The most common misstep I see clients take is allocating investments in their 401(k) plan on their own. Clients tend to chase performance and only select 401(k) allocations with recent positive performance. This recency bias often hurts clients’ long-term returns and can lead to big asset allocation problems with their nest eggs.

8. Looking At Margin Percentages Rather Than Margin Dollars

You can’t deposit a percentage into your bank account! Many business leaders fall into the trap of looking at margin percentages rather than margin dollars. For example, when trying to rationalize a product or customer, they often point to an amazingly high gross profit percentage. However, that 95% margin may translate to less than a dollar in gross profit.

9. Not Having A Strategy For Stock Options

A common mistake I see is not having a strategy for your stock options, equity and restricted stock units. Employees at tech companies commonly have equity packages, but the company isn’t allowed to give them advice on how to manage their equity. So, they end up DIYing and overpaying in taxes or making a costly mistake.

10. Failing To Test Credit Markets

A common mistake for mid-sized businesses is failing to test credit markets every few years to compare loan terms to market rates. This is compounded by soliciting bids from lenders referred by advisors rather than running a data-driven process. By soliciting multiple term sheets using a data-driven process, I have seen interest rates drop by 17%, fees reduced by 37% and loan sizes increased by 25%.

11. Spending Money You Don’t Have

I’ve seen plenty of businesses spend money they don’t have. Usually, they either have money in the bank and spend it without taking future obligations into account (such as upcoming payroll), or they mistake booked revenue and sales for cash before it is collected. Either causes a company to have an immediate cash crunch, which if not addressed can put them into bankruptcy.

12. Raising Personal Spending Alongside Income Level Increases

A common mistake by many is raising their cost of living as their income level increases. As people start to make more money later in their careers, many start to spend more. This new lifestyle becomes a part of who they are, and when it comes time to retire, many are left to decide between their new lifestyle and retiring. Relearning how to live on a retirement budget is extremely difficult for many.

13. Trying To Hang On To The House During A Divorce

Many people going through a divorce insist on keeping their marital home, not realizing that the upkeep costs are no longer sustainable. There are now two households to be maintained on the same income, so keeping the house at all costs is not always the financially wise choice for a post-divorce future.

14. Failing To Plan For Increased Expenses In Retirement

Many fail to plan for both certain and potential increases in their expenses in retirement. This failure is usually twofold. First, the hours that were spent generating and accumulating wealth during their careers are now hours spent consuming those assets. Second, unexpectedly needing to support a child, grandchild, parent or other relative(s) may significantly impact their spending needs. The latter seems to be the most common oversight.

15. Conflating Revenue Or Profit With Cash Flow

One common financial mistake I’ve seen clients make is to conflate revenue or profit with cash flow. A customer or M&A target could look highly accretive on paper but may be untenable from a cash flow perspective. For example, imagine a business with a big order from Walmart. That business pays for the cost of goods sold up front; it gets paid in 120 days but runs out of cash and has to close operations on day 100.

16. Waiting To Reconcile The Books

It’s a mistake for a business to wait for the end of the year to have the books accurately reconciled. Many businesses function without having timely and reliable financial reporting, mostly because they have good margins or good credit to carry the load. At some point, you will want to grow your business, and you need to be able to trust your data to make strategic decisions. Your accounting file will provide the ultimate truth.

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