Recently, I overheard this conversation at a cocktail party:
“Who manages your money? Do you like him?”
“Yes, he does a great job managing my money.”

The phrase “manages money” is often used to describe things done by a financial advisor. But what does the phrase really mean?

Upon first blush, the question ‘Who manages your money?’ is synonymous with ‘Who invests your money?’ There are plenty of DIY resources and media outlets that say you do not need someone to manage your money – just put it all in an index fund and you will be fine.

But managing money is much more than just buying and selling investments, at least when done properly.

When a financial advisor receives a seemingly simple request for cash from your investments, there are at least 7 different questions that advisors will ask themselves:

1. Which account should the funds come from?
2. Are the funds available to withdraw currently?
3. If not, what should be sold?
4. What are the tax consequences of selling an investment?
5. When does the client need the money?
6. How best to send the money to the client’s bank?
7. Should the portfolio be rebalanced to account for cash withdrawal?

Many of these questions are not addressed by DIY resources.

So, let’s do an exercise and lay out the questions you must ask yourself when paying a bill.

• Identify which account you will use to pay the bill. Will you use your checking account, or is the bill sizeable enough to impede your ability to pay other bills? Will you use your savings account, and if so, will that negatively impact your peace of mind?
• Will you need to replenish your checking or savings account, and if so, how will you do that?
• If you are entering or in retirement, will you continuously need more cash than you have available?

Each question begets other questions.

Let’s continue with the above scenario. If you decide your checking and savings accounts will not suffice, then what?

• You could take the money from a taxable brokerage account or a retirement plan. Each one of those accounts has different tax consequences, so you need to determine the tax cost of withdrawing funds from each.
• Wait – do you have a line of credit? Maybe you don’t have to take funds from either account and can instead borrow what you need from your line of credit.

This is where it can get tricky because there are no obvious answers to which account makes the most sense. Many variables must be considered, and the answer may differ from person to person, depending on their circumstances and goals.

Another part of managing money is figuring out how much cash to leave in an account. If you withdraw money monthly it may seem pretty straightforward because at least you know how much is needed. But how much to keep in cash versus keeping it invested is not as easy to calculate. It’s especially tricky because there is a significant difference in interest rates between funds sitting in cash and funds sitting in a money market account.

An experienced financial advisor can help you strategically weigh these options and bring value to the relationship by recommending different types of accounts that maximize your investment returns. For example, they may take advantage of tax-efficient assets by placing them in taxable accounts while placing tax-inefficient investments, such as taxable bond funds or high turnover stock mutual funds, in retirement accounts, where the tax inefficiencies can be masked.

For clients who wish to keep cash balances in excess of FDIC Insured Deposit limits, financial advisors play a critical role in determining how best to protect those assets from creditors.

As you can see, managing money is more than just picking the right investments. It involves making money decisions while always balancing short-term needs with long-term financial goals. Advisors make these choices strategically, while individuals and DIY resources may not consider all the consequences and face unpleasant surprises down the road.