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, 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.
