Financial planning lessons from 2021

As we look back on the second year stuck in a COVID world, many things have unfolded that give us a reason to pause and learn. Some are new, some are old, but nonetheless there was something going on for anyone who chooses to learn from history.

The first element is that we can learn, once again, from Yogi Berra: “It’s not over until it’s over!” Looking back in 2021, this can apply to many topics: market rallies, interest rate increases or decreases, COVID, political polarization, inflation, tax changes (or not), and life changes.

When we look at the investment charts for 2021, we see a few things. Overall, taken as a whole, 2021 has been a very good year. Barring increased volatility and fear of new variants shutting down economies around the world, most markets trended higher with the US leading the pack.

There were times when the volatility on the downside made many investors wonder if the bottom was finally ready to fall, but it wasn’t. This is one of the biggest reasons why clients should be grateful to you… assuming you have a good diversification strategy and don’t get too cute trying to time the markets with frequent trades reacting to charts at short term or in the headlines.

Just when you think you have mastered the markets and their direction, things change. Take the end of 2021, for example: most analysts were calling for another Santa Claus rally, but the omicron variant had another idea. The seemingly weak but highly contagious variant has caused Europe to go into lockdown again and has struck fear into most major cities across the United States. …as before, with little financial disruption!

At the start of 2021, most proclaimed that the decades-long bond rally was over and that rates would finally start to climb. For moments during the year, it appeared there was some truth to that forecast. But at the end of the year, 10-year US Treasuries were in the mid-to-low 1% range. And even at that, it was still the highest 10-year government bond rate in the developed world. Go figure: the world’s most advanced economy is doing pretty well, and we’ve had to pay more than any other country to take our debt out onto the streets.

I have been wrong for several years now, speculating on the end of the decades-long debt rally. Even though the Fed has signaled rate hikes in 2022, don’t count your chickens on two counts. First, rising rates may not be as bad as you think. Second, these hikes, if they occur, might not be as damaging to the economy as you fear.

Nonetheless, it makes sense to review your clients’ fixed income holdings and ensure that their portfolio includes asset classes that fare better in a rising rate environment, namely rates short-lived, possibly high-yield floating bonds that have always helped conservative investors during periods of rising rates and could help them again should the interest rate cycle finally change.

Another pandemic

As for COVID, there are two major surprises for many. The first is that it still persists. Some reports suggest we may not see a meaningful end for two years. But the second part is the lack of impact it has had on the economy. In the United States at least, the economy is doing well, unemployment is low, corporate profits are high, and anyone who owns real estate is giddy with the value of their bricks and mortar.

Of course, what goes up must come down one way or another, and there will be declines in the valuations of all of the aforementioned asset classes in the years to come. The when part is the unknown.

When it comes to housing, procrastinators are the losers. Based on statistics regarding household formation, it appears that the bottom is not yet ready to fall. A decade ago, household formation was at its lowest point since World War II. The low training statistics were based on the hangover from the banking crisis and the fact that new graduates wanted to rent rather than own, as their older siblings had unfavorable housing and employment experience soon after. obtaining their diploma.

But today, thanks to a robust economy and low interest rates, household formation continues apace. Add to that a trend of suburban migration as millennials start families, and the housing market is as strong today as it’s ever been, with no slowdown in sight.

Political polarization remains alive and boring. Nothing seems to be easily accomplished in Washington these days. Parties chastise their members if they disagree in the least with what the leaders want to do. While it might sometimes make us look silly on the world stage, it has yet to change the quality of life here in the United States and certainly hasn’t rattled financial markets. If you look beyond the United States, it seems that our political climate, for all its quirks, still works as well or better than many other developed countries around the world. When you compare our government to less developed countries, it’s not even close. Take a look at Venezuela, Argentina, Afghanistan and African countries if you need to find a bright spot about our politics and polarization.

2021 may be the year inflation returned, and clearly supply chain and shutdown issues were a big part of that. Calling it transient, however, may be a bit naïve. Wages and housing are a big part of inflation, and workers and owners are loath to take less than last year. For that, the inflation numbers we had grown accustomed to in the very low 1% range might be gone for a while. It takes a big recession for rents and wages to go down, and I don’t know anyone for that to happen just to slow down the inflation stats.

Like everything else that seemed to change in 2021, rising inflation has yet to hurt financial markets. Sustained, above-average inflation can hurt at some point, but in the meantime companies have been able to raise prices and not hurt profits due to rising costs across the board.

The value of planning

More than many years in recent memory, 2021 has proven more valuable than ever when it comes to proactive and comprehensive wealth management. This style of customer service is essential to developing lasting and lasting relationships. This is especially true if your customers have had previous experiences with a company that does not perform this function. In the future, you will either provide this level of service or you will lose customers to those who do.

The proactive planner in 2021 was able to take advantage of the market volatility we saw and execute a crop of losses as the year progressed. This has come back to roost for planners who use a lot of mutual funds where the distributions of many US growth funds have been quite robust in 2021. Without ever reaping the losses as they have manifested, the fund investor buy and hold paid a fairly high tax bill due to the lack of proactive planning on the part of their advisor.

All the 2021 jokes about tax reform were nothing more than a noisy distraction. While we can all expect tax changes with each new administration in Washington, the noise this year has been extremely volatile. It was a year where it wasn’t enough to just talk about potential changes in your client newsletter. That year, forecasting and planning took center stage. Even though no major tax changes were passed in 2021, our clients are eternally grateful to see firsthand the series of actions we had queued up on their behalf to make the most of any changes. potential.

2021 has been another great year for Roth conversions. This now marks the 12th year in a row that we have used lower tax brackets for small Roth conversions. When I started writing about this 10 years ago, many of my fellow CPAs grieved me, wondering if I understood the value of deferral. Now, with many wealthy clients holding large Roth accounts, I know we were right to do so.

If your business was proactive in front of customers and all the noise of possible change, use that as a model for how to serve in the future. Hard work and a sincere, deep concern for your customers never goes out of style.

The final lesson of 2021 is that things happen. Life throws curveballs at you all the time and can change in the blink of an eye on any given day. For this reason, I believe that not being proactive and holistic on behalf of your clients is negligence. Each year, make sure their estate documents are up to snuff and appropriate for their particular circumstances and goals, that their insurance will protect them from the risks you and they think they may face, that their businesses have a viable and viable succession plan , that the governance and day-to-day operations of their financial lives are consistent with the structures they have established, and that they understand the potential range of expectations regarding their investments.

I hope you are having a great 2022 and that your customers are able to maximize the benefits of all that your business can do for them.