Even Financial Planners Need Advice: The Value of an Outside Perspective

In our January, 2015 newsletter, Jim shared that his biggest takeaway from the NAPFA National Conference in October was the presentation by Dan Heath, who shared his insights on how people might make better decisions. I had the occasion to practice his advice first-hand, as well as to experience the value of professional, objective advice (and provide some at the same time!).

As some clients know, my family is moving to a new house. Typically, when you move, you sell your previous home. But we refinanced our mortgage very close to the absolute bottom of the interest rate cycle, and the financial planner in me is having a hard time giving up such an incredibly low rate. So I started toying with the idea of renting out our house instead of selling it.

As a financial planner, I’m aware of all sorts of calculations that I would run if a client came to me with the same idea. Of course, I did none of them. I was too wrapped up emotionally in the decision. All I could see were the benefits: Our mortgage rate was so low, it was impossible for this to not work out. Of course we would always have the house 100% occupied. And there would never be any improvements or repairs to make. Right?

It took a friend in the real estate business to bring me back to earth and remind me of the costs involved with renting. And when I did the math, from an investment point of view, this wasn’t the best option for our family. She also asked me a great question: “If you had the equity in your house sitting in cash, would you purchase the house for the sole purpose of renting it out?” I had to answer no. And with that, she helped me through both the R (Reality-Testing Your Assumptions) and A (Attain Distance Before Deciding) of Heath’s “WRAP process” of decision making.

It gets better. During our conversation, my real estate friend mentioned that she was considering building up some liquid assets to be able to purchase investment properties to either flip or rent. Now it was my turn! I gently suggested that since her primary source of income was in real estate, that from a diversification point of view it might make sense to have investments that weren’t tied to that same market. If the value of real estate goes down or the market goes flat, her regular income is going to be impacted. At the same time, the values that she would get for flipping houses would decrease, as would the value of her rental properties. If she thought of her entire financial life as one big portfolio, then a diversified mix of stocks and bonds could balance out her human capital, which was tied directly to real estate.

We can all benefit from good, informed advice. When it comes to our finances, even when we know the right thing to do, having guidance from an objective and knowledgeable third party helps crystalize the decisions we know we should make. At Woodward Financial Advisors, we embrace the opportunity to help our clients make mindful and thoughtful decisions about their money. If you think we might be able to help you, let us know.