5 COVID Questions to Ask a Financial Advisor

By Moneta Partner Travis Freeman

Back in 1996, the Space Studies Board of the National Research Council predicted we would have astronauts on Mars by 2020. In 1951, Popular Mechanics published an article predicting the 21st century would bring personal helicopters for every family, “big enough to carry two people and small enough to land on your lawn.” Even Time magazine reported in 1966 that this century would have so many machines producing goods for us that, “everyone in the U.S. will, in effect, be independently wealthy.”

Back to the future in present day 2020, not only do we lack a colony on Mars or personal choppers, we’re faced with a global pandemic that has caused high market volatility, job losses and much worse. As our brave healthcare workers and innovative scientists work to care for the sick and develop a vaccine, it’s important to keep a close eye on your nest egg during these uncertain times. For those of you using a financial advisor, below are five questions to ask a financial advisor during this volatility:

1. What can I access if I need cash right away? Assuming you have an emergency fund in place, do you know what you could access from your investments if your emergency cash was exhausted? Knowing what’s available to liquidate may help you understand your cash position if your situation takes a turn. It’s also possible your liquidity is very limited due to taxes or other reasons. With this knowledge, you may consider establishing a Home Equity Line of Credit (HELOC) or other liquidity options, even if you don’t plan on accessing them.

2. How often are my investments being rebalanced? Rebalancing is arguably one of the most important strategies during market upswings and downturns. Let’s say you had a diversified portfolio comprised primarily of stock and bonds with a 50/50 mix. Now let’s assume the stock portion drops by 20% in value. Your portfolio’s allocation has changed in this scenario and may now be 40% stock and 60% bond. By using rebalancing, you may decide to sell 10% of your portfolio that’s invested in bonds and buy stock with it instead. This example allows you to buy stock while it’s “down” by using bonds, which may not have changed in value much at all. This will also allow your portfolio to come back to the original balance of 50/50 you wanted. Without rebalancing, your level of risk could be well above (or below) your target. Looking back at March, April and May, you can see how rebalancing may help to take advantage of volatility and manage risk. It’s also worth noting that having numerous accounts with multiple firms can make this strategy difficult without the right tools in place, such as having an old 401(k) with one firm, an IRA with another and a trust account with yet another.

3. Is a Roth IRA conversion right for me? Converting a pre-tax IRA to a Roth IRA, in whole or in part, involves paying income taxes on the amount converted. Once in the Roth IRA, as long as you follow the 5-year rule and other IRS rules, you may enjoy tax-free growth on the converted dollars. This strategy isn’t for everyone, but it’s worth asking the question in 2020 if we continue to see volatility. Why? If you’re thinking of converting $50,000 worth of assets and those assets drop in value to $30,000, you may only need to pay income taxes on the $30,000 “depressed” value of those assets. If your investments recover back to $50,000 or more, you may have taken advantage of good timing for such a strategy and the $20,000 of gains would be tax-free within the Roth. Also ask your advisor if he or she has experience with Roth conversions. They can be very complicated. Ask them about the “pro-rata rule” with regard to this strategy. If they look at you like a deer in headlights, proceed with caution.

4. What are my expenses with my investments? This is a timeless question, but important during times like these because interest rates are back to record-lows. If you rely on interest-paying investments such as bond funds, such investments may have made sense a year ago. In today’s rate environment, it may make sense to buy individual bonds instead of paying an expense ratio to a mutual fund bond manager. Keep in mind, this doesn’t mean people shouldn’t use bond mutual funds. Instead, it’s worthwhile to have a candid discussion of expenses to see if anything can be improved. If much of your money is in a 401(k) but you have investments outside the 401(k) too, consider using the 401(k) for mostly stock exposure. Then your “outside” assets can be used for something like an individual bond ladder or investment exposure you can’t find in a typical 401(k).

5. How does this change my plan? If you’re nearing retirement, it’s worth discussing how this may or may not change your retirement projections. If you’re paying for private school and saving for a child’s college, does this change the savings strategy? Maybe you can’t save as much right now or maybe you can save more aggressively during market dips. Do you have a healthcare directive or powers of attorney? If you become ill, you may be wishing you had these estate documents updated or in place. Does it make sense to transfer funds from your IRA to your Health Savings Account this year? It’s worth mentioning this last strategy is only allowed once-per-lifetime by the IRS, so have a conversation about the rules first. Above all, this truly is an unprecedented time and worth asking the question about what may have changed in your financial plan.

As a bonus, ask about “tax loss harvesting” too. This strategy can make sense during sharp downturns for people who have non-IRA dollars, such as trust accounts or individual accounts. It’s a potential tax reduction strategy. Overall, if you’re paying a professional to help you with various strategies, ask questions about those strategies during this volatility. I’m confident we’ll recover from this strange period in history, just as we’ve always recovered from challenges in the past. The year 2020 may not involve flying cars or robot butlers, but I, for one, am excited about our future post-COVID. Consider wise strategies during this volatility that may help you months and years from now. Contact Moneta Group now to get started on your road to financial security.

© 2020 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only, based on generic assumptions.  This is not an offer to sell or buy securities, nor does it represent any specific recommendation.  You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

Additional articles