Most Popular ArticlesSeptember 1, 2009
Cashflow
Cashflow is the amount of money coming into or going out of a financial "household." If you spend more than you earn, then you're running a deficit – as does our esteemed government. Your clients’ credit cards will be stacked against them as they plan their financial future.
On the other hand, if you're spending less than you earn, you have the ability to save and invest. The more your clients save, the less dependent they are on the performance of their investments to secure their financial independence.
Risk
You can take risk without realizing a return, but you can't have return without taking some risk, despite what some infomercials would have you believe. While you might want to rely on projected investment returns to help secure your client’s financial future, you have to first make sure you're taking the right risks that can produce those expected returns.
I don't mean to imply that the more risk you take, the more return you will get or that this risk/return relationship has no upper limit. Risk and return are highly dependent on taking the right types of risks, the kinds that have the highest probability of being rewarded.
I encourage my clients to only take on as much risk as will let them confidently plan to reach their most important goals and objectives. Taking unnecessary risk is the equivalent of gambling, and there's no reason for your clients to do this to themselves or their families.
There are other risks – market timing, investment picking, interest rates, purchasing power and more. Identifying those risks and whether or not they have a reasonable potential for reward is essential for sound financial planning.
Using Levers in the Planning Process
Let's move forward with what we know: We can't control returns, but we have varying degrees of control over time, cashflow and risk. We can push and pull these three financial “levers” to accommodate our clients’ financial situation.
How should you incorporate these levers into your financial planning process?
To plan properly, one must apply to the concept of financial advice an entirely new paradigm, by looking at your goals in different and unique ways.
In the most widely used financial planning models, clients provide their "planner" with a set of data, much of which isn't even that important. For example, how relevant to your clients’ financial future is the amount they paid their phone company last month? Yet many planners insist on gathering this detailed level of data for their clients, even though doing so is time-consuming and potentially uncomfortable for the client.
Clients are typically asked to complete a multiple-choice "risk tolerance questionnaire" designed to do two things: reduce an advisor's liability in case of a future disagreement about their investments and allow clients to take on the maximum amount of investment risk that they can stomach, regardless of whether or not they actually need to.
Clients are asked to provide many other pieces of data to create their financial plan, and one of the most important is their planned retirement age. Unfortunately, rather than discussing this in a manner that makes it something clients can look forward to, the way many planners frame this discussion serves to encourage clients to work as long as they are physically able.
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