Most Popular ArticlesSeptember 1, 2009
The Ideal Financial Planning System
It’s hard to know where to start correcting this illogical system, so let’s reframe the problem and ask ourselves: What would the ideal financial planning system offer?
Planners should focus only on data that's directly relevant to their clients’ financial plans. They must promote a healthy and sometimes emotional discussion about "acceptable" goals but also accommodate the inclusion of "ideal" goals – hopes and aspirations. Planning should be a client-focused process designed to make the most of the one life clients have.
Perhaps most importantly, proper planning involves an ongoing review of the three levers that are under our control.
Let's say we determine that a client is willing to work until age 62. I want to also know when they would ideally like to retire. Would they retire at 60 or 58 or 55 if they could be confident that they could afford to do so?
How about retirement expenses? What if a client is willing to live on $80,000 per year in retirement, but would love to consider living on $110,000 per year. Or, what if they’re currently saving $27,500 per year, but would like to explore whether they can save less now in order to enjoy more of their financial resources today?
Remember, this is about making the most of the one life your clients have.
What if a client is deathly afraid of the stock market? Proper financial advice should not “sell” anyone on the benefits of stocks or push a client out of their comfort zone. My goal is to take as little risk as possible while still maintaining comfort and confidence that my clients can achieve everything that's important to them. To instill comfort and confidence in financial plans, clients can consider taking on more investment risk, but this must be a choice and not a requirement.
These are but a few examples of the different levers you can push and pull to impact your clients’ financial situation.
Prioritizing Your Financial Levers
For some clients, it's more important to enjoy the fruits of their labor today. By working an extra year or two longer, a client can defer their retirement in exchange for the opportunity to save less money each year leading up to retirement. I'm sure they can think of some great family vacations or other treats they could enjoy each year by reducing their annual savings. How many financial planners ever discuss the possibility of saving less?
Others might be burned out at work or eager to pursue a second career – they can't retire soon enough. Those individuals would be willing to save more today, temper their retirement lifestyle and increase their investment risk, all in an effort to retire as soon as possible.
The best solutions for these clients are found in the interplay of the different levers that can be pushed and pulled to accommodate your clients’ financial situations.
Let's say that it's December 2008, and we've just come through one of the worst years in the history of the investment markets. What should your clients do?
Well, first of all, advisors should have been meeting and discussing plans with their clients on a quarterly basis throughout 2008. The right financial planning system cannot be a product that you use once and only update or revisit every few years. Proper planning is an ongoing, proactive advisory relationship. Your clients shouldn’t have been caught off guard at the end of 2008; you should have been involved in regular conversations and updates with your clients throughout the year. A "set it and forget it" approach to financial advice doesn’t work.
But let's say your investments are down 25% and you're worried that your clients will have to work indefinitely and fight to stay above the poverty line.
What about your levers – focusing on things you can control like time, cashflow and risk? Clients might have to consider working an additional year or two, but a good financial planner will have already discussed that possibility early in the relationship.
Consider the concept of "ideal versus acceptable" goals I discussed above. That wasn't just a “feel-good” exercise. The economy and your clients’ finances don't exist in separate vacuums, which means your clients will inevitably need to change their plans. By having the conversation upfront about both what they’d love to do and what they’re willing to do, you've already established a range of possible alternatives that they can revisit. Maybe they originally said they were willing to work until 62 but would love to retire as early as 55. Let's say we planned for them to retire at 58, and because of the drop in the market they have to consider working two more years to age 60. Or maybe they’ll have to save a little more than they prefer or take more investment risks. Only by proactively focusing on the things they can control and regularly reviewing and updating their outlook can you truly have an impact on your clients’ financial plans.
While this fact is probably a fading memory, remember the market can go up too. What happens if the market has a nice run over the next several months? Proper planning should accommodate the opportunity to retire earlier, spend more in retirement, save less each year, reduce investment risk, or some combination.
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