Chapter 14
Developing a Personalized Financial Plan
IN THIS CHAPTER
Taking your client’s input into consideration
Mastering the three Cs of financial planning
Making sure you cover the key areas
Harnessing the power of financial planning tools
Reviewing and revising the plan routinely
Your client’s financial plan is the cornerstone of his financial future and one of the few tangible products you’re solely responsible for delivering to him. The plan must be a comprehensive and holistic assessment of the client’s goals and objectives, so it places him on the best path toward the financial outcomes he desires most.
In this chapter, you discover how to understand your client’s priorities and concerns, create a financial plan that places the client on a path to achieve the agreed-upon goals, and review and modify plan to keep your client’s finances on the right path or to shift course when life doesn’t cooperate with the plan. I also recommend a variety of professional financial planning tools that can make your job much easier while enabling you to present the client with a polished product. As an added bonus, I include my own Three Cs philosophy to personal financial planning.
One of the benefits of developing and implementing a comprehensive, holistic plan for each client is that you don’t need as many clients because you’re providing for all their financial needs. Financial advisors who deal exclusively in investments or insurance or other niches have to spend much more time in client acquisition.
Obtaining Your Client’s Input
A solid financial plan begins with client input. You must have a clear picture of his current finances, goals, concerns, and any potential threats or issues that could impact his finances.
Start by gathering copies of your client’s household budget, bank statements, loan statements, credit card balances, investment statements, insurance policies, and family governing documents (such as a will or estate plan). Gathering this documentation is part of the client due diligence process that I explain in Chapter 13.
Documentation provides a solid base for developing a financial plan, but dig deeper to evaluate your client’s mindset and financial attitudes, behaviors, goals, and concerns. Here are a few open-ended questions that can help reveal more about what makes your client tick:
- What keeps you up at night? What concerns do you have about money?
- What experience do you have working with a financial advisor, if any?
- How would you describe what your life looks like in five years, ten years, and twenty years from now?
- What concerns do you have that are unrelated to money?
- How would you describe a successful financial advisory relationship?
These questions loosen up clients to provide you with much more relevant input than merely what appears in their financial documentation. Even better, the answers to these questions and the resulting discussion provide a context for understanding the details in the financial documents. Only by talking with your clients do you begin to understand any frustrations they face with their current financial situation and any encounters they’ve had in the past with other financial advisors. You may also gain insight into the client’s mindset and behaviors that have contributed to these frustrations.
Listen not only to what your clients say, but also be aware of what they’re not telling you. Often, I’ve found that clients reveal more in what they omit from the narrative of their financial life than what they disclose. Sharing past financial decisions and mistakes is much more personal for clients than sharing intimate details about their health with a doctor. Even though most health issues arise due to poor diet and lifestyle decisions, patients often withhold that information, either because they’re embarrassed about it or because they don’t want to be told to make difficult changes.
The same is true of clients working with their financial advisors. When someone optimistically and enthusiastically invests in a stock that subsequently loses all its value, a client has a funny way of erasing that experience from his memory banks, a symptom of the behavioral aversion to loss. If the client eventually discloses the mistake, he’s likely to express his embarrassment by saying something like “I should’ve known better!”. (Actually, he shouldn’t have known better, because the ability to know better comes from acquiring professional knowledge and experience.)
Invite clients to share with you all their financial experiences — the good, the bad, and the ugly. Full disclosure provides the most valuable input when developing a client’s financial plan.
Going Deep and Broad with Every Client
Because each client’s financial life has so many different facets, even when the individual isn’t a high-net-worth client, I developed a useful guide to organize a financial advisor’s thinking. I call it The Three Cs of a Holistic Financial Plan.
Imagine a Venn diagram (Figure 14-1) with three intersecting circles:
- Copy
- Capital
- Consequences
FIGURE 14-1: The Three C’s of a holistic financial plan.
The area of overlap is where you, the financial advisor, operate when you’re developing a holistic financial plan. Each area requires specific care and attention, not only in terms of making client assessments, but also with regard to uncovering the levels of uncertainty that a client may be comfortable living with.
In the following sections, I explain each area in detail.
Copy
Copy (words on a page) refers to all the written documentation or family governance paperwork that’s been drawn up (usually by an attorney) to spell out what the family’s intentions are for their assets. In most cases, these documents are family trusts or wills, medical directives, powers of attorney, and other related documentation that dictate how the family is to act and who in the family will be in control when a patriarch or matriarch is no longer able to make decisions regarding their household matters.
Triggering events could be as varied as early onset dementia, Alzheimer’s disease, or any other mentally or physically debilitating disease. More often than not, families must handle some level of deterioration in health of a parent or other loved one before death occurs. Making sure that all matters have someone who can step in, and be in charge, is extremely important.
Your role in respect to the copy aspect of a financial plan is to be sure that your client has received legal counsel in these areas and has the documentation to ensure that the directives are carried out.
Consider providing your clients with a document or a folder that contains all of the following information and documents that their loved ones will need in the event of your client’s death or inability to make decisions. Include the following:
- Your name and contact information
- A list of income sources, including pension plans, IRAs, 401Ks
- A list of banks and account numbers
- Any Social Security or Medicare/Medicaid information
- Insurance information, including all policy providers, policy numbers, agent names, and contact information
- A copy of the client’s most recent tax returns
- A copy of the client’s will
- A copy of the client’s living will (advanced medical directive)
- A copy of any power of attorney your client has signed
- A list of liabilities, such as mortgage loan, car loan, and property tax, including what’s owned to whom and when payments are due
- The location of any mortgage documents, such as the deed of trust for a home the client owns
- The location of car title(s) and registration(s)
- The location of any safe deposit box(es) and key(s)
You may want to include this package as part of your service or charge a separate fee for preparing it. Having all of this information in one place makes it easy for authorized relatives or friends to take over when necessary. In the event that it’s needed and used, the relatives or friends in charge will greatly appreciate it and likely sing your praises to everyone they know.
Capital
Capital (any asset or investment holding) refers to all allocations of household money, including all claims (or demands) on those assets. For example, in most U.S. households, the largest family asset is the primary home/residence. In other families, the most valuable asset is the family-owned business. These assets typically have some kind of debt associated with them, such as a mortgage for a home or a line of credit for a business.
All the various components of capital are constantly changing. Fluctuating stock and bond markets, real estate markets, the business environment, economic expansion or recessions, and so on all dictate the market value of these myriad holdings on any given day. Market valuations plus the liabilities associated with these assets affect the household’s net worth. Unknown liabilities (such as those that blindside a family — disabilities, death, job loss, and so forth) can wreak even greater havoc on a household’s net worth.
As you develop your client’s financial plan, you must account for all the capital assets and liabilities and review the plan regularly to ensure that the household’s net worth is on track and address any and all potential threats to that net worth.
Consequences
Consequences refers to the various scenarios that your client wants to avoid, such as the following:
- A difficult family dynamic or dysfunction that persists for decades and becomes a major threat to the family’s capital at a point in time when most families achieve a heightened awareness of the desire to maintain their lifestyle.
- The panic that often ensues after the stock market plummets, which can drive clients to liquidate their holdings at the worst possible moment. Doing so creates a long-lasting consequence, which isn’t easily rectified.
- Naming a trustee or executor within the family documents who has a contentious relationship with family members or siblings, which can create terrible long-term financial and emotional consequences.
All of these situations (and others) are avoidable with the proper planning and proactive approach, and all of them are part of your responsibility as your client’s financial advisor. By addressing any and all scenarios that could place your client’s capital at risk, you give your client the best opportunity for success.
Outlining a Client’s Financial Plan
Often, the most difficult part of a project is getting started. To simplify the process, begin with an outline that covers the six key components of personal finance success:
- Cash flow
- Investments
- Taxes
- Insurance (home, auto, life, and health)
- Estate planning
- Business succession
Each of these components is within the capital section of “The Three Cs of a Holistic Financial Plan,” presented in the previous section. In the following sections, I explain each of these areas in greater detail, so you know what to include in the client’s financial plan.
Focusing on cash flow
The first order of business in financial planning is to document the client’s cash flow. You should have all the information you need to complete this section after working with the client on budgeting (see Chapter 9). The financial plan needs to contain a personalized cash flow statement similar to what businesses use to gauge their solvency. Divide this part of the financial plan into three sections:
- Income: Salary, bonuses, self-employment income, government benefits, child support/alimony, investment/retirement income, interest income, and so on.
- Expenses: You can divide this section into fixed and variable expenses.
- Fixed expenses: Mortgage/rent, car payments, insurance premiums, property taxes, alimony/child support, and so on.
- Variable expenses: Groceries, utilities, medical bills, entertainment, dining, home/auto maintenance, spending money, and so on.
- Net cash flow: Subtract expenses from income to determine monthly and annual net cash flow.
Cash flow can be a positive or negative number based on numerous factors, such as the client’s stage of life and how well the client is managing the family’s finances. A negative value isn’t necessarily bad; for example, if an older client’s expenses exceed his income, he may be enjoying the fruits of his labor, which is great. However, if a younger client who’s not independently wealthy has negative cash flow, that’s a problem to address.
Getting a clear picture of a client’s baseline income and expenditure is fundamental to making any kind of financial plan. Of course, unexpected income and expense events can change cash flow dramatically, but the financial plan tries to minimize those risks by addressing insurance needs, as I explain in the later section “Addressing insurance needs.”
Considering savings and investment goals
In the investment goals section of the financial plan, list the client’s financial goals along with details on how the client’s capital will be invested to meet those goals. Common investment goals include the following:
- Retirement: Generally, clients need 70 to 80 percent of their pre-tax income to maintain a comfortable lifestyle in their golden years. The plan should include the retirement savings goal and details on how the client will meet the agreed-upon goal, including income from Social Security, investments, and other assets (such as selling a home to downsize). (See Chapter 7 for more about retirement planning and other asset management topics.)
- Education: If your client plans to pay for a child’s or grandchild’s education, include the projected amount needed and the amount of money to be invested monthly to achieve that goal along with the expected rate of return.
- Emergency reserves: Every client should have the equivalent of 3 to 12 months of basic household expenses (excluding discretionary spending) in a liquid account, such as a savings or money market account. Include the amount and how much your client needs to set aside each month to meet that goal. (See Chapter 9 for details.)
- Starting or growing a business: If your client is planning to break free of the corporate grind to start or grow his own business, the personal financial plan should contain a business plan with details for starting the business. (Creating a business plan is beyond the scope of this book. Check out Creating a Business Plan For Dummies, by Veechi Curtis (John Wiley & Sons, Inc.) for details.)
- Income: If your client plans to invest in vehicles that generate additional monthly income, include this as part of the plan.
Don’t let clients limit their financial plans to savings and investments. Clients may seek your advice solely for good investment recommendations, but plotting the course to get them from here to there (their financial goals) is much more involved than just buying a good mutual fund or stock, socking away a certain amount of money routinely, and hoping for the best. Without other considerations that surround a client’s life, any great investment plan can be undone by a number of unforeseen money events or behaviors.
Accounting for taxes
Taxes are a fact of life, but part of your job is to ensure that your clients aren’t paying more taxes than necessary, so they can put more of their hard-earned capital to work for themselves. When creating a financial plan, include a plan for minimizing their tax burden.
Team up with your client’s accountant to identify ways to reduce a client’s tax burden, which may include the following:
- If your client routinely receives a large tax refund at the end of the year, review his tax withholding and advise him to have less tax withheld from his paycheck, which can improve cash flow and provide opportunities to use that money in other ways to reduce taxes.
- Maximize the amount your client invests in tax-deferred retirement accounts, such as a 401K or individual retirement account (IRA).
- If future taxes are a concern, your client may want to sock away additional money with a Roth IRA or 401K. If tax rates are expected to rise considerably in the future, your client may also benefit by shifting money from a regular IRA or 401K to a Roth IRA or 401K, although your client must pay income tax at the current rate on any amount converted.
- If your client has a high-deductible health insurance policy, have him set up a health savings account (HSA) to pay for medical bills with pre-taxed dollars.
- Make sure that when your client files taxes, he maximizes the allowable deduction by taking the standard deduction or itemizing deductions. (Here’s where a tax-savvy accountant has the best opportunity to reduce your client’s tax burden.)
- As possible, consider the timing of events, such as a marriage, the purchase or sale of a primary residence, and the purchase and sale of investments to take advantage of any relevant tax breaks provided by the government.
- If your client plans to support charitable organizations, include contributions (and the timing of those contributions) as part of the tax-savings plan.
Dozens of tax-saving strategies and techniques are available. See Chapter 11 for additional details.
Taxes, including federal, state, and local income taxes; property taxes; and capital gains taxes, can reduce a client’s disposable income by up to 50 percent depending on the client’s effective tax rate. That percentage represents a good chunk of money to leave on the table. The tax portion of your client’s financial plan could save your client enough in taxes to more than cover your advisory fees. This savings in itself can be a key value-add to your clients.
Addressing insurance needs
Every financial plan needs a section devoted exclusively to insurance. This section should include the insurance types, cost, and coverage. Be sure to include the following insurance types, some of which depend on your client’s situation, such as whether he owns a business:
- Life
- Health and supplemental insurance
- Disability
- Homeowner or rental insurance
- Auto
- Business, including personal liability, property, workers’ compensation, home-based business, product liability, and business interruption insurance
Refer to Chapter 8 for additional details on keeping your client’s properly insured.
Don’t focus exclusively on delivering asset management, even if that’s your area of focus. If you’re primarily an investment manager, you still need to make sure your clients are properly insured, even if that means partnering with an insurance expert. If your client experiences an unexpected life event he’s not insured against, it could wipe out a significant chunk of his accumulated assets, leaving you with that much less to manage. A temporary disability or financial hardship may not have a huge impact, but long-term disability, illness, or death could be devastating for the family’s finances. Every solid financial plan makes allowances for managing possible and probable risks.
Connecting the financial plan to the estate plan
Your client’s estate plan is separate from his overall financial plan, but this section of the financial plan provides an opportunity to make sure that your client has an estate plan in place. Think of it as a checkbox on the financial plan. Check the box if the client has an estate plan in place, and leave it unchecked if that’s something you need to prepare for your client. Chapter 10 discusses estate planning in greater detail.
In simple estates with few assets and no family contention or dysfunction, estate planning doesn’t require much more than some basic family governing documents, including a will and a living will. However, many households have some degree of family dysfunction that requires further attention and proactive discussion. Also, if the client’s estate exceeds certain market value thresholds due to sizeable accumulated assets (including, a family-owned business value), then the IRS is going to come knocking when that asset is being transitioned to the next generation’s ownership, and a plan must be in place to deal with that.
Connecting the financial plan to the client’s business succession plan
If your client owns a business, a succession plan is part of the overall financial plan. However, on the financial plan itself, this section is more of a checkbox that indicates whether the client has a business succession plan in place. You may want to include a few additional details from the business succession plan in this section of the financial plan, such as:
- A list of trigger events the activate the business succession plan
- The current business valuation
- The name of the person who’s going to run the business if your client is unable to do so temporarily or permanently
- How the client or the client’s family will draw compensation from the business if a trigger event occurs
The actual business succession plan should contain additional details and be prepared by the family’s lawyer. (See Chapter 10 for details.)
Assisting your business-owner clients in creating a solid business succession plan is a great value-add for any financial advisor. By providing this service, you differentiate yourself from a majority of the financial advisors practicing today. Of course, you’ll have to team up with a lawyer to get it done.
Making Your Job Easier with Tools and Guides
A financial plan requires a considerable amount of math to figure out cash flow and perform projections related to financial goals. Fortunately, numerous financial planning software packages are available to make the job much easier and construct a plan that is and looks professional.
When you’re in the market for financial planning software for your advisory business, make the following considerations:
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Whether the software is based on goals, cash flow, or both: Your choice depends on your approach to financial planning. If you’re big on budgeting and want to track every dollar spent, look for more of a cash-flow product. If you primarily encourage clients to set financial goals and allocate a certain amount of money periodically to meet those goals, look at products that are more goals based.
The trend in this market is to provide feature-rich products that cater to both cash-flow and goals-based financial advisors, but some products still favor one over the other. - Comprehensiveness: Some financial planning software is dedicated solely to investment management. If you do as I recommend and function as a full-service advisor, you want a product that can handle various insurance types, Social Security benefits, retirement distributions, college savings, stock options, and more.
- Ease of use: Consider how easy (or difficult) the software is to use, including ease of input and the ability to change values and make other adjustments.
- Projection features: Many financial planning tools include projections based on historical data and market expectations to predict financial results. Look at how the software formulates projections. Some packages use a straight-line method based on an estimated projection, such as a 5 or 6 percent return. Others use a Monte Carlo simulation that models the probability of different outcomes based on random variables. And still others feature what-if analyses, so you can play with the numbers to explore different outcomes, such as a best- and worst-case scenario.
- Reports and interactive tools: All financial planning software can generate reports based on the numbers you enter. However, some include interactive tools, such as a dashboard with sliders that enable you to play with numbers and gain immediate feedback on how changes to inputs affect the outputs. These graphical, interactive financial planning programs are great if you like to sit down with clients and explore the outcomes of different financial decisions. They’re also useful if you just want to conduct in-depth analyses yourself.
- An online client portal: If your clients want to be more involved in the financial planning process and be able to monitor their financial performance more closely, having an online client portal can be a big plus. More and more financial planning software developers are moving in this direction, because more and more clients are demanding it.
You can find plenty of templates and software (for free and for cost) by searching online. Just search for “professional financial planning tools,” and you’ll find dozens of links.
Based on established products and market share, here are the top three financial planning software packages:
- eMoney Advisor (
emoneyadvisor.com/products): This product serves as a virtual lockbox, giving you the ability to house the various aspects of a client’s financial life in one place. It features a client portal, screen sharing, account aggregation, an interactive estate planner, an advisor dashboard, a mobile web app, a goal planner, and much more. The ability to aggregate accounts, whether or not you have custody of the assets, is a big selling point. - MoneyGuide Pro (
www.moneyguidepro.com/ifa): This software includes a planning portal that encourages clients to focus on long-term goals and discourages reactive behavior; what-if scenarios that enable you to show clients the impact of market corrections, early death, and unexpected expenses; streamlined data gathering; a Play Zone, where clients can see the impact of adjusting variables; a Social Security planner for maximizing benefits; and more. - Naviplan (
www.advicentsolutions.com/products/naviplan): This software focuses on cash flow planning with an option to produce quick, goal-based assessments. It features comprehensive planning centered on detailed tax analysis, advanced estate planning, models to test alternative planning scenarios, and an optional client portal. Many advisors access this software through their broker/dealer’s licensing agreement and don’t pay for it separately.
Reviewing the Plan Regularly
Even the best laid financial plans can fail, either because the client doesn’t stick to the plan or because life throws your client a curve ball. Stay proactive by meeting with your client quarterly, semiannually, or annually to review the plan and any changes in your client’s life that may call for adjustments.
During your review, always explain the rationale behind the plan. When clients understand the plan and the strategy you’ve painstakingly developed for them, they’re more likely to adhere to it and less likely to get spooked by unexpected events. Be methodical in your due diligence process, as I explain in Chapter 13. Making sure your clients understand how the different pieces of their plan function relative to each other is probably one of the most important and challenging aspects of this profession.