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What Your Financial Advisor Isn’t Telling You

Liz Davidson, What Your Advisor Isn't Telling You

With Liz Davidson, CEO of Financial Finesse, Author of What Your Financial Advisor Isn’t Telling You

Steve speaks with Liz Davidson, the author of What Your Financial Advisor Isn’t Telling You, and founder and CEO of Financial Finesse which provides financial education to over two million employees nationwide.  She also publishes a column on Forbes.com on employee financial issues.

Liz’s book is written to speak directly to the average person who may be very good at his/her job but lacks important financial knowledge because financial advisors typically focus on insurance and investments and do not delve into life’s other aspects, such as managing our employee benefits or our relationship with life partners, which often impact our wealth more than anything an investment advisor might pitch to you.

The Dot-Com Train

In What Your Financial Advisor Isn’t Telling You, Liz Davidson says she saw how a lot of really smart and wealthy people in the dot-com crowd weren’t being smart about financial decisions outside the narrow scope of investments and founded Financial Finesse to address the gaps she saw.

$1 million In Lost Employee Benefits

Employees gain a lot of their financial wealth through employee benefits, and Liz believes the average employee could be leaving as much as one million dollars on the table over the course of their career by not taking full advantage of company benefits.

For instance, millions of employees do not contribute enough to qualify for matching employer contributions in retirement plans and are essentially foregoing tens of thousands in free money.  In addition, employees have a host of subsidized benefits at work that they may not even know about, such as tuition reimbursement, adoption assistance, and legal support.

HSA Tax Benefits

Liz Davidson points to Health Savings Account (HSA) which offer sizable tax benefits but aren’t fully leveraged by employees who do not realize that any extra money rolls over and can be invested and used for the long term.

Unlike other kinds of accounts which disappear every year, the HSA continues on if you don’t spend it, and, in addition, you get a tax deduction, adds Steve.

Financial Independence Day

In her book, What Your Financial Advisor Isn’t Telling You, Liz Davidson proposes a Financial Independence Day where employees implement a checklist of everything they should be doing to maximize benefits and automate finances, such as investing up to the match in their 401(k), signing up for contribution auto-escalations, or committing a portion of the annual raise towards savings.

The Value Of A Financial Advisor

Liz believes most of us do not have the discipline, objectivity, or expertise to successfully grow our wealth through volatile financial markets and cites studies which show that retail investors who go it alone lose 3% in annual performance relative to advisor-driven portfolios.  That said, she wants investors to be wary of bad financial advisors and scam-artist money managers.

Your Worst Financial Enemy

In What Your Financial Advisor Isn’t Telling You, Liz Davidson dedicates an entire chapter to why your life partner may be your worst financial enemy.  She believes if you cannot speak to your partner about finances and financial weak spots, both before and after you enter into a relationship, you are doing yourself a huge disservice.  Liz lists five things that a partner should know from the other partner, such as their level of debt.

While saving and investing is critically important to wealth creation, make sure you arrange all aspects of your professional and personal life so they’re aligned to make the most of every financial opportunity available to you.

Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.

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Steve Pomeranz: Liz Davidson is the author of What Your Financial Advisor Isn’t Telling You and founder and CEO of Financial Finesse which provides financial education to over two million employees nationwide. She also publishes a column on Forbes.com around employee financial issues. Hey, Liz, welcome to the show.

Liz Davidson: Thanks for having me.

Steve Pomeranz: You know, Liz, your book is written to speak directly to the average person who may be very good at their job but lacking in important financial knowledge. What kind of education do you think is missing?

Liz Davidson: I think there’s so much that is missing because financial advisors typically focus on insurance and investments and they’re working with people that have usually sizable investible assets and that’s made them serve the business model that most advisors have. The reality is we save, spend, borrow, and invest money all day long and there are so many things from how we manage our employee benefits to how we manage our relationship with our life partner that are going to impact our wealth more than any singular investment an advisor might pitch to you.

Steve Pomeranz: Yeah.

Liz Davidson: So I wrote the book with that perspective. We as an organization provide financial wellness programs that are strictly educational to employees all over the country and these are the issues we see come up day in and day out that aren’t necessarily talked about in the world of financial advice.

Steve Pomeranz: Right, right. It’s all those other issues that maybe aren’t talked about because advisors can’t make any money on that stuff.

Liz Davidson: Exactly. Exactly, and it’s not their responsibility. I have a line in the book, “Your advisor is not going to pop up in your living room and mediate an argument you have about money with your spouse.”

Steve Pomeranz: Well, that’s true.

Liz Davidson: That’s not their responsibility, that’s yours.

Steve Pomeranz: I stay away from that as far as I can. Well, you ran a hedge fund, you’re not just a financial writer, so how did that shape your views?

Liz Davidson: Well, yeah, I don’t run a hedge fund anymore. I’ve been out of the business for 17 years, but when I did I was talking to all sorts of prospective and current investors and began to really take an interest in how they were managing their money even outside of investing in the fund. This was in the late ’90s. We were value, Warren Buffet, [crosstalk 00:02:40] –

Steve Pomeranz: Oh, so you weren’t very popular at the time.

Liz Davidson: -in the late 1990s. When everyone else was looking at .coms and all of that. I saw the train coming,, so to speak, and these very, very smart people were doing some very, very not smart things. I started to realize, wow, if people at this level of wealth lack the knowledge or even the emotional control to invest their money properly, what about the rest of us? What about all those other decisions that are way outside of investing? I left the hedge fund to start Financial Finesse and have not looked back.

Steve Pomeranz: Financial Finesse is the name of the company. So, let’s start where most people have their money and get most of their financial wherewithal and that’s employee benefits. You say that the average employee could be leaving as much as one million dollars on the table over the course of their career by not taking full advantage of company benefits. Give us some examples.

Liz Davidson: Yes, we see this all the time. Employees, for example, not investing up to the match in their retirement plan and you know, I understand, obviously, if you have a tremendous amount of debt or you’re barely making ends meet that might not be possible. But that money is free money.

Steve Pomeranz: Yeah, wow.

Liz Davidson: Your employer is giving you extra money, so think about if your employer said, “I’m going to give you a 6% raise.” Would you say, “No, no, no. I want the company to keep that money.” The answer is no which it would be for everyone I’ve ever known. You really want to do what you can to take advantage of that math.

Steve Pomeranz: Right.

Liz Davidson: There’s also all sorts of subsidized benefits you have at work that you may not even know about.

Steve Pomeranz: Subsidized benefits?

Liz Davidson: Subsidized or, for example, tuition reimbursement.

Steve Pomeranz: Okay.

Liz Davidson: We talk to people putting themselves through school not aware that their company might help with part of that bill. Adoption assistance, all sorts of legal support you can get for employee assistance programs. Obviously, your HSA, your Health Saving Account, which can be a very good tool, huge tax benefits and a lot of employees think, you know, I need to only invest what my expected health care costs are when they don’t realize that any extra money rolls over and can be invested and used for the long term.

Steve Pomeranz: Yeah, well unlike the other kinds of accounts which disappear every year, the Health Savings Account continues on if you don’t spend it and that’s pretty important, so that could be a big one.

Liz Davidson: Yeah.

Steve Pomeranz: And you get a tax deduction on that too, so if you have the money why wouldn’t you fund that to save taxes and then when you spend it and you use it for medical purposes it comes out tax free.

Liz Davidson: Yes, ripple taxation benefits and because of a Flex Spending Account, which operates differently, it’s use it or lose it. People often think that Health Savings Accounts operate on that same principle and they don’t. They’re missing opportunities to really grow their money pretty significantly.

Steve Pomeranz: That’s very good. You know, you also write in the book this catchphrase of reaching financial independence and for me a phrase like that which may sound good the first few times you hear it, about the 100th time you hear it, you don’t even hear it anymore. But you’ve created the Financial Independence Day checklist to get people on track. What does that include?

Liz Davidson: So, let me take a step back and explain what that is. I hope employers actually implement this as an extra day of saved time off but for now, obviously, that’s not the case. It’s taking one of your days off, one of your PTO days and going through and doing everything you can. We provide a full checklist to do everything you can to set yourself up and automate your finances to grow the way you need them to grow. So, for example, if you’re not investing up to the match in your 401k this is the time to change that or go see on that or sign up for auto-escalations where you automatically invest one or two percent more every year and that happens for you.

Steve Pomeranz: Or if you get a raise, you take a portion of that raise and you commit it to saving more.

Liz Davidson: Exactly. You can set all this up. You can set up from your paycheck, in most cases, most HR departments will allow you to split that money. Some of it can go for emergency savings or savings for other long-term goals. You can make sure your beneficiaries are correct in all your different accounts. So you’re not going to solve every financial problem you have or become financially independent in a single day. I mean, that’s absolutely insane, but it’s a starting point of these important decisions that people just put off.

Steve Pomeranz: Yeah.

Liz Davidson: They think they’re going to get to it at some point or in the back of their mind but it’s not a priority. One of the best things you can do is just sit down, go through this checklist, get it done, and then you put yourself in a much better position.

Steve Pomeranz: Yeah, I really like that idea of taking a day or a half a day, whatever it is to sit down and get organized and figure out where you can automate some of these financial savings plans or debt reduction plans. Something that gets out of your hands because your busy schedule is going to take you away from all that. If you leave it to you remembering and you executing it’s probably not going to happen. So if you can set these up in an automatic way that is really the best way to do it. I applaud you for that. My guest is Liz Davidson and she is the author of What Your Financial Advisor Isn’t Telling You. It’s not a book about how bad financial advisors are and they’re not telling you some secret or something.

It’s just that financial advisors don’t generally give advice in these areas that we’re speaking about today, so you’re going to need to do your own research and go to Financial Finesse, which is the website I guess that supports this. Let’s talk about financial advisors for a minute. I mean, there’s a lot of controversy about whether, number one, people actually need them or not. I mean, there’s a lot of talk with regards from the media and other sources that you know, you can really do it yourself. You can be a do-it-yourself investor and not pay fees and that you can do your own financial planning. Is this necessarily the right approach, Liz?

Liz Davidson: It really depends and if you look at it from a pure mathematical perspective you can make an argument that, “Wow, you can do it yourself and save fees that you would otherwise spend to pay for an advisor.” Here’s the reality though. Most of us don’t have the time or to be quite frank, and I include myself in this, I have a financial advisor myself even though I’m in the business, most of us don’t have the discipline with our own money to really stick to a plan. When markets go crazy, it’s very tempting to make changes simply out of a sense of fear when that’s not the right thing necessarily for your longer-term plan. You know, the benefits of going with an advisor where you can get all sorts of guidance around how to save taxes and how to look at your overall portfolio. That’s something that’s going to be very hard for you to research and do at the same level as a very strong financial advisor.

Steve Pomeranz: Yeah.

Liz Davidson: So, you know, if you really have the passion for it, the time for it, and the discipline to stick to the plan you put together, yes, you can do this alone but most of those people are already financial planners.

Steve Pomeranz: You know, you cited a study in your book that I had never seen before but it said that those who had investment help, and I’m quoting here, “earned over three percentage points more on average per year than those who did not.” Why do you think that is?

Liz Davidson: There’s a lot of studies. That particular one comes from Financial Engines and Aon Hewitt, but there’s a lot of studies that show retail investors that go it alone versus those that have help and it’s interesting, it does consistently come down to that 3% difference. What it seems to be is emotional decision making. So when you do it yourself, you know, you’re in-depth kind of fixated on day to day swings in the market and so forth and end up actually selling at the wrong time and buying at the wrong time.

Steve Pomeranz: Yeah, we’re seeing that now by the way.

Liz Davidson: Yeah, absolutely. Plus, you may miss a lot of again, the tax efficiencies that would really make a big difference. You know, the returning fee on your statement is not necessarily what your actual return after taxes is, so there’s a lot there as well that I think plays into that 3%.

Steve Pomeranz: You know, in a bull market, everybody’s a genius. Right?

Liz Davidson: Yes. I remember that from the hedge fund.

Steve Pomeranz: I bet you do, but as Warren Buffet says, “You only know who’s been swimming naked when the tide goes out.” So I think that says it all. Now, so how do you pick a good financial advisor? How do you spot a bogus financial advisor? I think that’s a better question.

Liz Davidson: So as cliched as it is, if it sounds too good to be true, it is too good to be true. Take out probably. It is too good to be true. Bogus advisors play off our hope that there is something out there, some strategy that no one’s ever heard of that can give long term and short term, high returns with little or no risk, I mean it just does not happen. We see the market volatility right now. It is not something that can be done reliably year after year like Madoff did it with these outsized returns and with the pitch of, “Hey, you’re safe. You’re safe and you’re going to get these high returns.” There’s a risk-return trade-off and that’s the way it is. There is no free lunch, so to speak, so you hear that pitch.

Steve Pomeranz: The interesting thing about that is that Madoff’s nefarious genius was not to offer exceptionally high rates of return, so that is one red flag, but he offered consistent rates of return. And being in the market we all knew that that was impossible. Nobody can do that year in and year out so that was another red flag, but again, he used another bogus idea to trap investors thinking that, “Hey, there’s really very little risk here.”

Liz Davidson: Yeah, and we have a chart in the book that shows his returns versus Warren Buffet, you know one of the best-known investors and I think personally one of the best investors out there and the S&P 500. You look at the consistency that Madoff had as well as the generally strong level return, but you’re right, he was not saying to people, “I’m going to get you 100% returns.” He was basically saying, “You can have a very decent rate of return with very little volatility over long periods of time.” And that really, both of those are red flags.

Steve Pomeranz: It is. It’s a red flag and it’s something to look out for. Let’s change gears here because one chapter in the book deals with why your life partner may be your worst financial enemy. You were telling me earlier before the interview that this is the chapter that gets the most attention. Tell us about that.

Liz Davidson: Well, I think it’s something that we think is very unromantic is to have financial conversations with our prospective partner or a partner in that really finding your life partner is all about love and that connection. And it is, but the reality is part of that partnership is financial in nature. If you want to talk about what’s really unromantic, it’s fighting over the level of credit card debt you have or how you’re going to spend the money that you make and not being on the same page and not growing your wealth together but instead bringing your wealth. It’s really important that you find the right partner that is aligned with your values and that you know what you’re getting into. Is this person bringing a lot of debt into the relationship? Do they have a gambling problem? Do they have a spending problem? It doesn’t necessarily mean that you don’t move forward with the partnership, but that gives you information that you can protect yourself and then make a decision with information as opposed to going into it and finding those things out later.

Steve Pomeranz: Yeah, this point of with information, I mean, I know a few people with relationships where they don’t talk about money. That for some reason one person keeps everything close to their vest and really recently we’ve seen, you know these are friends of ours that it turned out to be a disaster because the person who was not revealing had reasons to and everything really blew up and fell apart. I think a lot of women find that to be true. I’m not excluding men here, but I do think it’s mostly on the women’s part.

Liz Davidson: Yeah, there is such a thing called financial infidelity. I think what that is is when someone withholds information that is going to impact your finances as a couple or make purchases or investments that they’re not sharing with you that are very large in nature or high risk. It can devastate your finances, and I think, in many cases, I think it’s more painful than traditional infidelity.

Steve Pomeranz: What do you think you need to know? What five things do you think that a partner should know from the other partner?

Liz Davidson: They definitely need to know income and, believe it or not, it’s certainly in cases where people are not married, that’s more common they may not know that. If you’re in a very serious relationship looking towards spending your life together, income, they need to know their level of debt, I would say credit score because that’s going to impact, obviously, the ability to borrow. Past history with money and financial goals as well as priorities. For me and my husband we have the same financial goals but our priorities are a little different.

I talk about this in the book. He loves cars and electronics. I love experiences. So we have separate accounts that we use for the things that are really more for us and our joint account is used for the shared goals. That way when he’s spending money on things that I don’t think are particularly important in life, that’s fine by me because it’s not my money and vice versa.

Steve Pomeranz: Right and it’s not impacting you in some surprise way in the future where you’ll wake up one day and you could be in financial trouble. My guest is Liz Davidson. She is the author of What Your Financial Advisor Isn’t Telling You, founder and CEO of Financial Finesse. Is that Financialfinesse.com Liz?

Liz Davidson: It is. Now, there are a bunch of resources free of charge to start your own Financial Independence Day.

Steve Pomeranz: Okay.

Liz Davidson: And it’s Financialfinesse.com/FID. That may be more relevant for a lot of your listeners because they can get immediately to those resources. Financialfinesse.com is more for our corporate clients.

Steve Pomeranz: Okay, and is that backslash F-I-T like fit?

Liz Davidson: No, F-I-D stands for Financial Independence Day.

Steve Pomeranz: Okay, F-I-D as in Dave. Okay, great.

Liz Davidson: Yes.

Steve Pomeranz: All right, Liz. Thank you so much for joining us. That was terrific.

Liz Davidson: Thank you for having me.