Financial Matters

What is a Financial Architect?

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Ever heard of a Financial Architect? Two words that seem unrelated. “Financial”, meaning pertaining to money decisions, and “architecture”, meaning the creation and design of a project. If you want to build a home, you probably are not going to start by picking out the faucets and light fixtures. Though they are important elements of the final structure, there are so many paramount decisions that must be made before the finishing touches polish the design. Financial planning needs to be approached with the same methodology.

Can you imagine trying to build your dream home without an architect? Just because you could do it, would you want to do it? If not, it is because you trust that the architect knows some things about design that you probably do not. Of course the internet is a resource, but how accurate would it be for your specific project? For most people designing a home on their own is not something they would attempt; however, designing a financial plan is a task they willingly confront alone.

How do they approach making a plan? People go through life accumulating different financial products and making various financial decisions. This is typical. A car is purchased, a home is purchased, a retirement plan is started, taxes are paid, insurance is purchased, investment accounts are opened, college savings is started. People are trying to be responsible and make prudent financial decisions, but then why are so many still left feeling confused? Why are so many not reaching the financial goals they envisioned?

One reason is that financial decisions are not being coordinated and measured for efficiency. This results in an array of unrelated products, purchases and investments, resembling a sort of “financial junk drawer”. In this drawer there are a lot of important documents that lack organization, and a lot of financial decisions that are made independent of one another, setting the stage for the perfect financial slippery slope. Like throwing a pebble in a pond, the ripple effects go on and on, and if you do not understand these ripples you may end up with unintended and unwanted consequences.

Consider for example getting into a fender-bender only to find out the car insurance deductible is higher than you thought. With little savings to pay it, money is depleted, and the rest of the monthly surprise expenses go onto a credit card. The credit card now has a higher debt to limit ratio which negatively impacts your credit score, and when you go to buy a new car later, the car loan interest rate is higher causing higher monthly payments. One ripple effect after another, in this case all negative.

How is this prevented? By understanding that money decisions cannot be made in a vacuum, and if there is no consideration for how decisions will impact other areas of your financial world, then money will unknowingly be transferred away to financial institutions, corporations and the government. Consequences that are actually the opposite of what people want. Financial architecture is the process of looking at all your money decisions at one time to identify the possible ripple effects, negative and positive.

When was the last time your insurance agent, tax preparer, banker, human resource contact, investment professional and attorney all sat down together in a room to discuss the best money strategy for you and your family? That way each one would understand the impact of each money decision. Unfortunately this never happens. The foundation is never properly laid before the construction starts. An architect needs to be there to coordinate all the decisions. This meeting is not typically done in person, rather by gathering all the information that is sitting in that financial junk drawer and sitting down with a financial architect.

Sound like a different approach to planning? It is, and for people in the top demographic it is the difference between a good plan and outcome, and a great plan and outcome. The more you make the more you have to lose, meaning the more that could be unknowingly transferred away due to a lack of coordination of money decisions. Most people are very surprised to learn where they stack up compared to the income of other Americans. According to 2014 data from the IRS and the Tax Foundation the top 1% household income is approximately $465,000. The top 5% is approximately $188,000. Surprising? Even more startling is that the top 1-5% pays almost 60% of federal income taxes. For those in this demographic one of the biggest unintended money transfers is to the federal government, but this is probably not a surprise. Of course this does not include state income taxes which are as high as 13.3% in California.

The second reason so many are not reaching their financial goals is because there was an expectation that money would behave like math, and it does not. Typical financial planners are reliant on math formulas and clients start out believing the myth that money will grow like the equations. Wealth would be created by investing a certain amount for an amount of time at a certain interest rate. If that equation worked everyone would be happy. So what goes wrong? Why haven’t the accounts grown to the exponential expectation?

In addition to taxes ever heard of wealth eroders like inflation, market volatility, fees, unintended work loss, consumer interest, money mistakes, propensities to spend, lawsuits, or plain old procrastination? These financial disruptions are what cause plans to fail when people fail to plan. Hoping nothing bad happens is not a plan. Preparing for the worst and navigating successfully through bad times will give the security so many crave.

Proactive or reactive? Which do you want to be when it comes to your money and financial decisions? Most live in the world of reacting to bad things and not being able to take advantage of opportunities. Being proactive means anticipating wealth eroders and having a strong defensive money strategy.

Ever heard, “Offense wins games, defense wins championships”? Think it only applies to sports? One of the keys to long-term success is to have a strong financial defense. What is financial defense? It is making sure that the protections are in place before something bad happens. Before an accident, an illness, a death, a job loss, anything that could potentially cause financial devastation to a person or family. A strong foundation supports a home; a sturdy defense protects a financial plan.

Man holding money

Financial architecture is about building strong financial plans from the ground up and making sure the plan can weather the financial storms that are sure to come over a lifetime. When considering money decisions remember each decision will affect another financial area and remember money will not grow like a math equation. Focus on being proactive by asking, “if this happens, what is my plan”? Taking the time to explore these concepts will help give you more peace of mind and better financial outcomes for you and your family.

 

Asalyn Coachman is a Registered Representative of and offers Securities through The O.N. Equity Sales Company, Member FINRA/SIPC, 39395 W Twelve Mile Rd., Ste 102 Farmington Hills, MI 48331 (248) 482-3600.  Investment Advisory Services offered through O.N. Investment Management Company and FAI Advisors, Inc. Financial Architects, Inc. and FAI Advisors, Inc. are not subsidiaries or affiliates of The O.N. Equity Sales Company or O.N. Investment Management Company.

Asalyn Coachman is a Registered Representative of and offers Securities through The O.N. Equity Sales Company, Member FINRA/SIPC, 39395 W Twelve Mile Road, Ste. 102 Farmington Hills, MI 48331 (248) 482-3600. Investment Advisory Services offered through O.N. Investment Management Company. Financial Architects, Inc. is not affiliated with The O.N. Equity Sales Company or O.N. Investment Management Company. Asalyn earned a degree in Economics from Harvard University and a law degree from the State University of New York at Buffalo. She lives in Lake Orion with her husband and two children where she is active in organizations such as the Harvard Club of Eastern Michigan, Lake Orion Schools, and the Baldwin Center of Pontiac, Michigan, where she serves as board president.

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