Financial Tools: Knowing When to Use a Pliers or a Wrench

In the course of helping families with their investment planning at Secured Retirement Advisors, the discussion often turns towards specific investment product trade-offs. In fact, as a financial advisor, that may very well be the greatest value that I offer: Helping families weigh the trade-offs of the many retirement investment tools offered. In other words, should we choose one product over another. Should we pay more tax today and do a Roth Conversion, or hold off only to potentially pay more tax on our retirement assets in the future? Knowing which financial tool is best suited to their retirement goals is very stressful for people because of the potentially significant impact on their savings, so the families we help are very relieved to have a trusted financial advisor to guide them through the maze of trade-off decisions.

I remember that when I was growing up, my grandfather had a garage with every tool you could possibly imagine.  He had hundreds of tools, some quite specialized, some more common. My grandfather knew each tool’s specific meaning and purpose. No one tool was better than another but each was best suited for a specific task or purpose. Now, occasionally someone will use the wrong tool for the wrong job. When any tool is used incorrectly, the tool cannot be blamed. Using a pair of pliers to tighten a bolt would be a good example of using a tool for a purpose other than what it was designed for, achieving a less than optimal result. While many of us have probably tried this trick at one time or another, we’ve all found out that by using the pliers to tighten a bolt we ended up causing damage and stripping the bolt.  The primary purpose of a pliers is not to be used as a wrench. Similarly, hammers have a different but no less important purpose then the pliers. A hammer can be used to build a house or destroy a house, but how that hammer is used is not the hammer’s fault. The effectiveness of the hammer depends on the person swinging that tool not the hammer itself.

Similarly, families are confused about the intended purpose of various financial products or tools.  My belief is that, much like the tools in my grandfathers garage, no one tool is better than another and incorrect application of a financial tool does not make it a “bad tool”. Yet many of us have been told this product is good, and that product is bad.  The financial investment industry is really good at trying to promote those specific products, or tools, that they offer in their inventory so it’s not surprising when a mutual fund company says that an insurance product is bad, or conversely, the insurance product companies say that investment products can be bad.  There is no such thing as a “bad” financial tool but you have to understand that every tool has its primary purpose.  It’s no wonder that many consumers find themselves confused by all of the contradictory comments.

In my experience, all investment products fall into one of three primary purposes:

1. Capital preservation with the trade-off being growth potential.
2. Growth potential with the trade-off being investment safety.
3. Between preservation and pure growth potential, offering better returns with the trade-off being liquidity or level of access to the entire account balance for a longer period of time.

Understanding how each of these financial tools work together is imperative. Making sure that you’re working with a trusted financial advisor like those at Secured Retirement Advisors who understand the different tools and how they are best used is crucial.  No one tool or category can be used 100% of the time. A retiree that comes into our office with 100% of their money in CDs is making a mistake just as a family nearing retirement that has 100% of their money in aggressive growth mutual funds is making a mistake.  Most retirees’ plans need a balance of both, and because families are often looking at safety and growth, it often makes sense to look at putting aside investments that could require more time.

All financial products have one of three primary trade-offs: safety, growth or liquidity. Understanding how the investment tools are used and how they fit together within your unique, personalized retirement plan is important.  Working with a comprehensive advisor like those at Secured Retirement Advisors in St. Louis Park, will ensure that all the investment tools are considered.  We start with the overall plan, not the product. This customized plan will tell us which financial tools are the right ones for you.

If you would like a complementary “3 Step Review” of your own retirement plan, call Secured Retirement Advisors at 952-460-3260.