7 strategies financial advisors use with their own money

Many people rely on financial advisors to help them with various financial goals such as managing their investments, saving for retirement or guidance for building an overall financial plan. However, many financial advisors also manage their own families’ finances using the same strategies they often recommend to their clients.

Top strategies financial advisors use when investing their own money

1. Set up automatic contributions to retirement accounts

Saving for retirement can sometimes take a backseat to more urgent financial needs, so setting up automatic contributions to retirement accounts can help make sure you stay on track to meet your goals, says Melinda Kibler, a financial advisor with Palisades Hudson Financial Group in Fort Lauderdale, Florida.

“The peak years of saving for retirement are also often the busiest years,” Kibler says. “Retirement seems a long way off, but if you don’t consistently chip away towards the dollar goal, it will be much harder to get there. Automatic contributions are a safety mechanism to ensure you are consistent in your focus.”

Kibler says it’s ok to start with smaller contributions and build them up over time. You might switch to larger contributions near the end of the year once you know exactly what your income will be. Work towards a long-term goal of maximizing your 401(k) contributions each year.

2. Invest using index funds

Brian Fritzsche, senior financial planner at Chicago-based Moller Wealth Partners, says he uses index funds in both client portfolios as well as his own because of their low cost, transparency and diversification.

For an investor early in their career or just starting out with investing, Fritzsche says a simple approach using a total market index fund may be the best approach. These broadly diversified funds give investors exposure to the market at a low cost, often less than 0.10 percent annually.

Once investors are more established, Fritzsche recommends using index funds to help manage their portfolio’s overall asset allocation. “We typically include asset classes such as large company U.S. stocks, small company U.S. stocks, real estate, natural resources, international stocks, and emerging market stocks, etc. when putting together a broadly diversified portfolio,” Fritzsche says.

3. Look for incremental changes that can add up

Achieving your financial goals can often seem daunting, so finding small ways to increase your savings can feel like a more manageable task.

“I look for opportunities to improve my finances by 1 percent,” says Patti Black, a financial advisor with Savant Wealth Management in Birmingham, Alabama. “For example, can I increase my 401(k) plan savings by 1 percent? And then set a reminder to increase it another 1 percent in six months?”

Black says she also uses the “50/50 rule” when she receives a bonus or a pay raise, where she spends 50 percent of the increase and saves the other 50 percent. However, Black says she won’t use the half that she spends to create a new recurring monthly bill, such as buying a car.

4. Utilize Roth accounts

When it comes to contributing to retirement accounts, you can either make contributions before taxes or after taxes. After-tax contributions, made through accounts like Roth IRAs or Roth 401(k)s, allow your money to grow and be withdrawn tax-free during retirement. Pre-tax contributions may help lower your tax bill today, but you’ll pay taxes on withdrawals during retirement.

“While there is no immediate tax benefit on the Roth side, getting retirement funds into a tax-free account serves as a good hedge against future increases in tax rates,” Fritzsche says, adding that most current tax rates are set to increase after 2025 without further action from Congress.

Brice Carter, a financial advisor at Michigan-based Financial Strategies Group, also uses Roth accounts because of the flexibility they provide. Retirement can bring surprises for people such as caring for aging parents or assisting adult children, so it’s nice to have access to tax-free funds through Roth retirement accounts.

5. Take advantage of market downturns

Carter also says he looks for opportunities to take advantage of stock market downturns. When stocks have fallen roughly 15 to 20 percent, he tries to boost his savings and contribute extra money to stocks.

During the initial Covid panic when stocks fell more than 30 percent in a matter of weeks, Carter says he often repeated the phrase “excess cash flow goes to stocks.” Planning for how you’re going to respond to a bear market before it happens can help you take advantage of the opportunity instead of making an emotional decision because you’re scared.

Fritzsche suggests using a rules-based system that forces you to rebalance your portfolio at certain thresholds, which can help take emotions out of the decision-making process. March 2020 was a good example of how the rules-based approach can pay off.

“It probably did not feel good to be buying stocks as it seemed the world was collapsing, but the rebalancing system said we should and it worked out to be a great purchase point for the long term,” Fritzsche said.

6. Ensure their emergency fund is only used for emergencies

Building an emergency fund is one of the first things advisors suggest to those who are early in their financial lives. Typically, having three to six months of expenses set aside will help you navigate most financial surprises.

But Carter suggests another step to ensure your emergency fund isn’t tapped for a non-emergency situation. Instead of having your emergency fund in a savings account at the same institution as your checking account, hold your emergency fund in a separate brokerage account where you can use CDs or money market funds to get a higher interest rate and it won’t be quite as easy to use the money for something you don’t really need.

When the emergency fund is right next to your checking account, it’s too easy to tap into when it should only be reserved for true emergencies, Carter says.

7. Keep their allocation to individual stocks small

Many people like to buy individual stocks and financial advisors are no different. But keeping your allocation to individual stocks a small percentage of your overall portfolio will help manage the risk that you’re wrong.

“I have always maintained a side account that I allow myself to ‘play’ with,” says Laurie Nardone, managing principal at San Francisco-area firm Shira Ridge Wealth Management. “I buy a stock when it seems right…absolutely the wrong way to invest! But I’m not betting my future on it.”

Nardone says most of her money is invested the same way she invests money for clients, using diversified low-cost ETFs and rebalancing the portfolio in a systematic way. In the account she does use to buy individual stocks, she tries to stay disciplined by selling half of what she purchased after seeing a 10 percent gain.

“I sometimes fall out of that discipline when life gets too hectic, but for the most part that has been a helpful process for me to use in holding onto the gains that I’ve made in that account,” she said.