Investors often fail at financial wealth management for a number of reasons. These include trying to time the market, picking the wrong advisors, or not understanding the risks of offshore accounts

Many of our Successful Investor wealth management clients live off their investments. As well, from time to time, they need to sell some of their holdings to supplement their dividend income. So, rather than trying to predict price changes or spot highs and lows, we focus on tailoring clients’ portfolios to their circumstances and temperament.

Moving in and out of the market is generally a bad idea. In fact, we’d say it’s one of the three great financial wealth management obstacles for Successful Investors.

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Three major financial wealth management obstacles Successful Investors face

First, numerous studies have shown that when investors on the whole try to get in and out of the market, they wind up making around one third of the profits they would have made if they had simply stuck with their initial holdings.

In-and-out traders may be right for a time—selling before a market setback, or buying prior to an upturn. But inevitably they wind up missing out on the market’s biggest gains. Once you’ve sold, it’s just too easy to stay out until you are sure the market has hit bottom. The problem is that the biggest market gains start sooner, go higher and last longer than most people expect.

A second important obstacle to personal wealth accumulation is the failure to take your broker’s potential conflicts of interest into account.

If you invest directly in stocks (as opposed to mutual funds or other investment products), your broker only makes money when you buy or sell. A good broker will still try to do what’s good for you, and will try to talk you out of bad ideas, even though it costs him/her money. However, brokers are only human, and good ones are hard to find.

The third obstacle is taking on too much risk, especially in the early days of an investing career.

Some investment beginners think they can trade penny stocks or options when they are just starting out, then switch to more conservative investing later on, after they’ve built up their small investment portfolio into a large one. But if you—or anyone for that matter—could succeed in that initial aggressive small portfolio approach, why would you change anything?

Financial wealth management mistake: Selecting the wrong advisors to work with

Instead of picking the wrong advisor, use these tips to learn how to pick a broker who can contribute to your investment success.

• Ask lots of questions. Some of the world’s worst brokers are the most charming, most glib, nicest-looking and best-dressed people you ever met. However, when you judge investment knowledge, look deep. Anybody of average intelligence can develop a veneer of investment expertise. Ignore appearances and use the “encyclopedia buyer’s trick”: ask questions to which you know the answers.
• Choose a stockbroker who will value your business. A broker who mainly handles million-dollar clients may agree to handle your $100,000 RRSP account. But don’t be surprised if you wind up dealing with his or her fresh-out-of-school assistant.
• Choose a stock broker who specializes in your kind of investments. Some brokers focus on risky areas, such as penny mines or options. Others mainly sell stocks, bonds and mutual funds. They’ll bring little enthusiasm or expertise to areas outside their specialty. If your broker’s interests differ from yours, get a new broker.
• Put a high value on experience. Bad brokers are not necessarily bad people. Some give bad advice because they earn more commissions that way. Others are inexperienced and just don’t know any better. But the longer an individual works as a stockbroker, the more he or she can tell you about risk, and that’s essential for successful investing.

Financial wealth management: Offshore investing risks can easily outweigh the rewards

Earnings in an “offshore account” are generally not taxed or are taxed lightly by the country where the bank or brokerage account is located. This includes jurisdictions such as Switzerland or the Cayman Islands.

However, Canadian residents are obliged to report any income they earn offshore on their Canadian tax returns. (You can only claim tax-exempt “non-resident” status without giving up citizenship by staying outside Canada for more than half of a tax year.) Offshore banks generally do not cooperate with, or provide reports to Revenue Canada on your income earned from any form of investment. So it’s up to you to comply with these reporting requirements.

There are, in some cases, ways of structuring your business affairs using offshore companies or trusts that can cut or defer your taxes. However, the reporting rules for foreign investment property are complex, the information required is extensive, and the penalties for non-compliance are steep.

An offshore account may help you defer or avoid taxes on investment profits, legally or otherwise. However, when you invest money with any company, you need to investigate carefully and make sure you have adequate safeguards. Otherwise you may have losses rather than profits.

We advise against doing anything illegal to cut taxes. Moreover, when you invest with the intention of evading taxes, you may put yourself at risk of losses that exceed what the taxes would have cost you.

In regards to advisors, robo-advisors have become a topic of interest. How do you feel about robots managing your wealth?

What lessons have you learned from working with the wrong financial advisors?