The Biggest Financial Planning Mistakes Clients Make: Advisors’ Advice

I work with a lot of teachers in the 403(b) space, so I have high-fee retirement accounts. It's not limited to 403(b)s though. I see 401(k)s with really high fees too. It can be so devastating. An extra 2% per year in fees adds up to hundreds of thousands less in savings when folks go to retire. Here's what we do to overcome it:

1. Review all the fees they're paying in the accounts (annual fees, mortality and expense charges, sales charges, fund expense ratios, and any other account maintenance fees).

2. Review all the options they have. Are there other providers available through their work? If not, are there lower cost investment options within the provider that align with their investment strategy?

— Andrew Katz-Moses, founder, Katz-Moses Financial, Washington, D.C.

I recently spoke with a soon-to-be retiree who didn’t completely understand how their pension would work in retirement. It would have caused significant pain as they misunderstood by a few years when their pension could start, and also how much the pension would pay.

It wasn’t due to an inability to understand. It’s that the pension had multiple components and the plan documents were quite lengthy. Their primary information had come from conversations with their co-workers.

Reading the plan documents and understanding the benefit formula wasn’t too complicated, but it was a struggle to get them to accept the reality of their misunderstanding. Telling them they were wrong was clearly going to cause them to bottle up, so I re-focused the conversation in terms of thinking of tweaks we could make to improve the outcome. It helped them “realize” the situation on their own instead of me just telling them.

— Brandon Renfro, owner, Belonging Wealth Management, Hallsville, Texas

I work with foreign-born individuals who are either citizens, green card holders or immigrants on work visas. The biggest mistake I see them make again and again is not hiring an advisor versed in the unique issues they face. Most of them end up asking their friends for financial advice, which can sometimes be very detrimental.

Two examples of some of the issues I see: Questions around the tax implications of being a U.S. person [and] not understanding their tax filing status.

The solution again and again comes down to me understanding what country they are coming from, what assets they have in that country, what their immigration status is, where they intend to be long term and, based on those answers, I’m able to advise them accordingly. A part of the process is to bring in other professionals, especially a CPA versed in international tax matters.

— Jane Mepham, founder and principal advisor, Elgon Financial Advisors, Austin, Texas

Working with millennials, often their biggest mistake is wanting to skip the financial planning basics such as building an emergency fund and jump straight into the "sexy investing.” It's my job to educate them on the importance of creating a foundation before earning the right to invest, and then also showing them how boring (low cost index funds and ETFs) have proven to be successful over longer periods of time. The "sexy investing" (day trading, crypto, meme stocks, etc.) have their role in the financial plan as well, but it's not where they should begin.

— Justin Green, founder and financial planner, Assist FP, Mansfield, Massachusetts

The biggest mistake I see my clients make is having a lack of direction or intentionality around their finances.

Most of the time, clients come to me and when we dive in they have no clarity as to where they are or where they are going. It is as if they are running a ball down the field, not knowing which endzone is theirs, or where it is. Because of this we find a huge set of inefficiencies in their investments.

How I help is by getting a clear understanding of who they are and where they want to go in life. I find that [saying], "this is what you have said you value, and this is a crystal clear picture of where you are right now, therefore here are the best ways to get you from A to B" allows my clients to see it and creates buy-in.

— Leland Gross, founder and CEO, PeaceLink Financial Planning, Virginia Beach, Virginia

The biggest mistake that we see people make is actually something that they do before they hire an advisor. The biggest ally in financial planning is time. Those who wait to start saving for their goals, especially retirement, have a much steeper hill to climb. The sooner you start, the more time you allow your growth to compound and the less you have to save overall.

As it relates to our clients specifically, the biggest mistake they can make is focusing too much on performance and allowing their emotions to control their decisions. A lot of time clients get very concerned with their performance and want to chase recent gains or sell after recent losses. These emotional-based decisions can really hinder a long-term plan, so we try our best to calm the client's emotions and reassure them that the long-term plan is still on track.

— Zachary Bachner, investment advisor representative, Summit Financial Consulting, Sterling Heights, Michigan

One of the biggest mistakes I see people make is they don’t start saving early enough. We show them the impact of saving earlier and how the compounding adds up over time. Another common mistake people make is they get too conservative with their investments too soon. They look at retirement as the finish line when really it’s the starting line. Retirees don’t like the volatility of the stock market. We show them that they need a rising income stream in order to outpace inflation over 30 years during their retirement. Having some of their money in the stock market is going to provide this. It’s a big “aha” moment for people. We show them the insidious effects of inflation and the reduction in purchasing power it creates. This helps them to understand the need to get growth throughout retirement.

— Bradley Lineberger, owner, Seaside Wealth Management, Carlsbad, California

Unfortunately, next to their children, money can be the most important thing in someone's life. But, we are human and we all make irrational mistakes. And a lot of investing mistakes are tied to greed and fear. I see fear as being more dominant in most decisions with money. We are terrified to lose what we have, which makes total sense to me. But this has caused a lot of mistakes over the years of investing. So I usually start a new relationship with clients by educating them on a few things on the front end. One is I tell them at some point in our relationship, you will call me and ask if it’s time to sell due to a downturn in the market. Of course, I tell them I am going to say no. This allows clients to prepare a bit better emotionally when the first downturn happens.

— Ashley Folkes, financial advisor, director of marketing and growth strategies, Bridgeworth Wealth Management, Birmingham, Alabama

While many moves in financial planning are water under the bridge if missed, there are a few memorable things we have caught and have corrected for the client. Some of these items have saved them thousands of dollars in tax or fixed an error that if left as is would cost the client thousands in taxes.

1. Making contributions to a SEP by mistake when they have 30 employees and intended to make the contribution to a regular IRA.
CORRECTION: Had to distribute the entire contributions and pay tax on the "excess contributions" made to the SEP by mistake.

2. Missing depreciation deduction.
CORRECTION: Work with CPA to recapture all prior year depreciation expense they missed.

3. Missed step-up in basis.
CORRECTION: Recompute all the depreciation based on stepped-up basis and recapture all that deduction on a form used to correct all missed items on their tax return.

— Marianela Collado, CEO, co-owner, senior wealth advisor, Tobias Financial Advisors, Plantation, Florida

Clients who make big purchases without consulting with their advisor first is a big mistake clients make. Sometimes they are correctable, sometimes they're not. More often than not, the conversation starts with "so I made a purchase you may not be so excited about….”

Sometimes we can make a return/cancelation if it's a part of the contract such as a timeshare. Sometimes we may need to sell something they purchased such as a vehicle. Sometimes I make no changes and the client sees over time that they can't afford the purchase they made and they sell or let go of that impulsive purchase such as a home that was too expensive or a toy like a boat.

— Jacqueline Schadeck, financial advisor, director of financial planning, Jacqueline Plans, Atlanta, Georgia

Thinking that asset management is financial planning. FP is having a goal and plan to reach it while dealing with all of the interconnected aspects that play a role.

[The mistake can be fixed] by explaining the significance of setting [a] goal. Then, identifying factors to play a role in achieving that goal: cash flow from various sources, savings needed to supplement cash flow, expenses in retirement, when to claim Social Security, how medical insurance and Medicare planning are incorporated, what level of risk should be taken with investments, and how to plan for the unexpected.

This involves a review of insurance coverages, various additional expenses to be factored in as well as considering the possibility of long-term care planning.

All of this is colored by the individual spending and savings patterns of the individual as well as their financial habits. — Daniel J. Galli, principal owner, Daniel J. Galli & Associates, Norwell, Massachusetts

The biggest mistake is not to [do] financial planning at all. The second one is probably doing it on wrong or not verifiable facts, suppositions and justifiable expectations, and believing that past results predict the future. Last but not least, it is procrastination, or not following up on insights gained and decisions taken during the planning process.

Additionally, maybe they believe in accuracy of predictions since [they] involved "experts" and tools like sophisticated calculation tools and machines. The results are as good as the underlying presumptions and information.

How to fix mistakes mentioned? From my experience it is “never giving up” to help clients to understand the advantages of “doing” as opposed to “not doing” (financial planning, implementation, follow-up, etc.), which has a lot to do with empathy/trust. Otherwise they will not even bother to listen much less pay for [advice].

— Tobias Maag, partner and senior advisor, Avalon Capital, Zurich, Switzerland