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Get Financial Advice First, Investment Advice Later

A friend’s son, in his mid-20s and working in his first “real” job, emailed me a few weeks ago looking for recommendations for a financial advisor.

I replied to ask what type of guidance he’s looking for. I remembered that he started investing in stocks when he was in high school, so my guess was that he wanted help with something investment-related.

His response surprised me, in a good way. Rather than seeking investment guidance, he was thinking big-picture. He said he’d like to go to graduate school, but he was also contemplating buying a rental property as an investment and living in one of the units. He wanted some advice on his portfolio, but that was secondary to wanting to talk through the financial implications of the other, broader decisions on his mind. I gave him the names of two of my favorite hourly, fee-only financial-planning firms in the Chicago area, and he was off and running.

Many people, in contrast to my friend’s son, think financial advice automatically equates to investment advice. And for people who are older, wealthier, and more settled in their lives, guidance on investments is probably going to be the main thing a financial advisor assists them with. But for most people in early accumulation mode, investment decision-making should be secondary to big-picture decision-making. And people could use help with big-picture decision-making, and putting some math around those decisions, more than they might think.

That exchange got me thinking about how your life stage–and specifically your human capital/financial capital ratio–should influence your financial priorities and the type of advice you seek. While Morningstar has long asserted that human capital should play a role in how you position your financial capital, assessing your personal ratio of human to financial capital can help you figure out where to concentrate your precious resources. By precious resources, I mean the time you spend thinking about your financial affairs and any money you spend on financial guidance.

What’s Your Human Capital/Financial Capital Ratio? 
Morningstar has written extensively about the human capital/financial capital relationship, mainly as it relates to the asset allocation of your investment portfolio.

If you’ve just emerged from school with an advanced degree in a lucrative field, for example, you’re long on human capital. Your financial capital is probably scarce or even negative if you racked up debt to pursue that degree. Because you’re looking forward to a long and mostly uninterrupted string of great earnings, you can afford to take more risk in your investment portfolio that you’ve earmarked for retirement; you’re a long way away from tapping it.

At the opposite extreme, let’s say you’re 64. You still like your job, and you’d like to keep going for as long as you can, maybe all the way to age 70 or beyond. But your spouse has had some health setbacks, and you know that you may have to pull back from work in order to help care for him. In that instance, your human capital–your ability to garner earnings from your job–has declined and isn’t fully within your control. Because you may not be able to earn a paycheck much longer, you’ll need to make sure your portfolio, and income from other sources like Social Security, can pick up where your salary leaves off. You’ll also want to make sure you own enough safe securities that you can tap in the near term, if and when your earnings stream is interrupted.

It’s Not Just for Investments
Just as it can help influence your portfolio positioning, an assessment of your personal human capital/financial capital ratio can help determine where to concentrate your financial priorities and where to get financial help.

When you’re young and just starting out in your career path, your human capital is extensive and your financial capital is likely small. It’s a given that once you start earning a paycheck, you should invest in the highest-returning portfolio you can stomach. But your contributions to your investments–not the gains on them–are going to be the biggest share of your portfolio’s growth at that life stage. The best way to bump up your contributions is by enlarging your earnings and/or making sure that you’re living within your means and not overspending. At this life stage it’s also crucial to think through what I call “primordial asset allocation” decisions, such as your savings/spending rate and whether you decide to pay down debt, such as student loans, or invest in the market. If you get those big-picture decisions right, your investments and your financial capital will take care of themselves.

By extension, if you’re going to spend on advice at this life stage, it stands to reason that you could go the cheap and efficient route: Buy an inexpensive target-date fund or use an inexpensive robo-advisor and call it a day. After all, it’s a rare young accumulator whose goals and risk tolerance would be radically different from another young accumulator’s: Enlarging the portfolio is the name of the game, and the best way to do that is to contribute regularly, go heavy on stocks, and not get rattled by periodic market downturns.

Because other decisions, such as whether you invest in additional education or buy a home or continue to rent, will be more impactful, it’s wise to concentrate your advice “buy” on someone who will make such issues their central concern–a financial planner. That’s not to say most investment advisors won’t be holistic in their assessment of your situation; the good ones most certainly will. But consulting on other aspects of your financial life may not be central to what they do. There’s also a logistical issue: With a very small portfolio, it may be difficult to find an investment advisor who’s willing to work with you, whereas hourly or per-engagement financial planners are much more readily accessible to people at all portfolio levels.

As you move through your life, and your human capital declines and your financial capital rises, you may have already plowed through most of your make-or-break primordial asset allocation decisions. You may have purchased your home and paid it off, paid for college for your kids, and advanced as far in your career as you’re going to go. You might still need financial-planning guidance, to be sure. But with an enlarged portfolio, it also makes more sense to focus more of your energies–and more of your advice “buy”–on it. Your tax rate may have gone up, and you will have likely accumulated assets in multiple accounts. You may be getting close to retirement and wondering whether your portfolio is sustainable and how to draw from it. In other words, getting some investment advice that’s specific to you and your situation is more appropriate than it was when you were a young accumulator.

This article lays out some of the key questions to ask yourself when seeking a financial advisor. At the top of list is “Are you seeking help with your whole financial life or your investment portfolio?” Thinking through your human capital/financial capital ratio can help you make the right call, and figure out where to concentrate your own energies, too.

Published June 7, 2018. But a message never out of date.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

No investment strategy, including asset allocation, assures success or protects against loss.

The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time including at the target date.

Morningstar is a separate entity from Cornerstone Wealth Management and LPL Financial.

LPL Tracking # 1-742861

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Fed Move Suggests Economy Is On Track”

The first quarter of 2018 is wrapping up, and it’s time to spring forward and look ahead to what we could expect in the coming months. After a large market drop kicking off the month of February, March has been relatively calm for stocks so far. The biggest event of the month was the Federal Reserve (Fed) meeting held on March 21—the first with new Fed Chair Powell at the helm.

As anticipated by the markets, the Fed raised the fed funds rate by 0.25% (25 basis points), bringing its target interest rate to 1.50–1.75%. The Fed also upgraded its outlook on economic growth and kept its inflation projection unchanged.

So what does this latest step forward mean for markets overall? Although sometimes markets react negatively to rate hikes, these increases tend to signal the Fed’s confidence in the U.S. economy. The Fed’s dual mandate seeks to balance the often-competing goals of maximum employment and low, stable inflation. With the economy growing above potential and job growth steady, the Fed’s attention has been increasingly focused on finding a rate hike path that does not lead to any bubbles in markets or cause the economy to overheat.

One of the contributing factors to the market decline in early February was the January employment report, which showed a surprise uptick in wage growth. As a result, this increased concerns regarding inflation and whether a faster path of rate hikes was on the horizon. Since then, fears of escalating inflationary pressures may have faded somewhat, although price pressures could continue to build in the coming months. LPL Research continues to believe the Fed will need to see a sustained pace of higher inflation, and potentially a wage growth number as high as 4% annually, before becoming significantly more aggressive.

In addition to the Fed and inflation, there are a number of factors that could have meaningful implications down the line, including:

  • Economic growth: Market participants generally expect the U.S. economy to get a boost from the new tax law, which supports both consumer spending and business spending.
  • Earnings: Corporate America produced the best earnings growth in several years during the fourth quarter of 2017, while 2018 has seen the biggest upward revision to S&P 500 Index earnings to start a year since these data have been collected.
  • Trade policy: LPL Research believes trade policy is among the biggest risks facing stocks right now. The recently announced tariffs may have limited immediate economic impact, but the big concern is China’s intellectual property trade practices.

Although there may never be a dull moment when watching the markets and economy in this day and age, the latest action by the Fed was taken in stride. However, it is important to acknowledge the possibility for further volatility, given geopolitics and trade protectionism. Overall, LPL Research’s outlook remains positive for the remainder of 2018, as continued economic and earnings growth may help offset trade tensions.

If you have any questions, I encourage you to contact me.

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Economic forecasts set forth may not develop as predicted.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This research material has been prepared by LPL Financial LLC. Tracking #1-712538

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LPL Ranks #1 in Customer Loyalty in 2018

The most meaningful measure of how well we’re serving our clients is whether we exceed their expectations in delivering the value and commitment they need to pursue their life and financial goals.

That’s why I wanted to share with you the news that LPL and its affiliated advisors, including Cornerstone Wealth Management, were recently ranked No. 1 in customer loyalty among 21 leading financial distributor firms. It means a great deal for us to be part of a network that’s a recognized industry leader in providing quality personal service—and it’s an even greater honor that LPL has risen in these rankings in each of the past three years.

The rankings were among the findings in Investor Brand BuilderTM, a Cogent ReportsTM study released by Market Strategies International, in which 4,408 affluent investors nationwide were surveyed.*

The study explored the key aspects of client experience that drive investor loyalty. On each of the top 5 drivers of investor loyalty, LPL earned No. 1 rankings by exceeding client expectations in the following areas:

  • Quality of investment advice
  • Financial stability
  • Easy to do business with
  • Range of investment products and services
  • Retirement planning services

In addition, LPL ranked No. 1 in the likelihood of its investors recommending the firm and its advisors to their friends, families, and colleagues.

As an advisors affiliated with LPL Financial, I we are proud of this recognition by investors of the value of the objective financial advice we offer to help clients pursue their goals, and of the innovative products and services our affiliation with LPL allows us to provide access to.

I appreciate the opportunity to partner with you, and I look forward to our continued work together. Thank you for your business.

This letter was prepared by LPL Financial LLC. This is not a recommendation to purchase, or an endorsement of, LPL Financial stock. LPL Financial and Cogent are unaffiliated entities.

*Market Strategies International, Cogent Wealth Reports, “Investor Brand Builder™: Maximize Purchase Intent Among Investors and Expand Client Relationships,” November 2017.

ABOUT THE REPORT: Market Strategies International’s Cogent Wealth Reports: Investor Brand Builder™ provides a holistic view of key trends affecting the affluent investor marketplace. The November 2017 report is based on a web survey of over 4,000 affluent investors, who hold $100,000 or more in investable assets. A total of n=82 LPL advisor clients were represented in the study. Customer Loyalty is based on how likely the participant would recommend each of their investment account companies to friends, family, or colleagues. Participants also evaluate their investment account companies using a 5-point rating scale across 10 aspects of client experience.