Advisors make a serious mistake when they assume their client knows the answer to the question. “What’s it for?” Not just at the overall financial planning level.
What is a life insurance policy for should be simple, but seldom is.
If people do not know what something is for, there is little expectation that buzzwords, repetition and summaries will add value.
You might want to try this with your clients, friends, and even yourself. Write out an answer to, “What is financial planning for?” Point form will be fine.
I think we can agree that the answer most people come up with is filled with complexity, generalizations and other even less useful things. Waving hands for example.
This is the definition I have used since 1984. Maybe it can give you some insight.
“Financial planning means to effectively and efficiently allocate today’s income and wealth to your obligations of the past, to your lifestyle needs and preferences in the present, to your expected needs and preferences in the future and finally to the demands of the government and others in such a way that the financial resources for a) desired lifestyle, and b) accumulated wealth, are both secure and predictable.”
The important parts are:
- Plans must be effective. They focus on only the things that matter to the client.
- Plans must be efficient. No wasted time or money. Avoid losses, particularly taxes.
- Allocate what is already on hand and what will be received in the future, income primarily. Maybe gifts and inheritances.
- Plans relate to the time zones of life, but do not need to be addressed all at once.
- The past. Commitments that will be met from future resources. Debt, obligations to family like education, maybe parents.
- The future. Lifestyle after retirement. Potential health related costs. Estate, or gifts for family or others.
- The present. Spending defines lifestyle. How much do you need or want and how does that balance with the past and future?
- Society imposes costs on individuals and these must be met. Income taxes, government pension and other programs, sales, municipal and other taxes, union dues and so on are required and must be part of the plan. Within limits, they are manageable. Know the limits.
- The result is sufficiency. Enough to live the desired lifestyle, with security, forever. Security is really “margin for error.” Margin for error creates the space within which there is predictability. There could be more required spending or lower investment returns. Know the space where life is predictable.
The planning engagement should begin with the what’s it for question. It keeps the discussion of the strategic, tactical and logistical universe focused. We need to do this because ……… follows easily when the what’s it for connection is known.
Hand waving, buzzwords and colored pie charts on good paper won’t work. For long.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.