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Financial planning is a forward looking activity. Tax filing usually looks at past events. There are times when clients face a situation in the present and they don’t think to ask for advice. They might not consider tax filing advice because “It hasn’t happened yet.” They might not consider there is a financial planning need because “It might not happen” or “It hasn’t happened yet.” What are these crossroads in life that you need to ask probing questions to uncover?
Years ago, I learned a very good lesson from my first manager. He said “When you have a problem, put a price tag on it. It is a $100 problem? Is it a $1,000 problem?” This helps you determine how much time, attention and resources you should devote to solving it. But what happens when the cost is unknown or open ended?
1. The client’s future job stability is in doubt. Several events can set off alarm bells. The words “restructuring” and “downsizing” rarely imply there will be a happy ending. If their firm is merging or getting bought out, there are likely headcount changes ahead.
Proactive: You need to ask how things are going at work. Are any upcoming major changes? Draw them out. If they might get laid off, offered early retirement or otherwise find themselves out of a job, it makes sense to start working now to find another position. They are still employed. Their industry friends can help. “Work the phones” so they are in a position to be acting, not reacting. They don’t need to immediately take another job, but they should not plan on going down with the ship.
2. The client is only a few years away from retirement. One of Charles Schulz’s great lines was: “No problem is so big or so complicated that it can’t be run away from.”1 Many people put delay thinking about retirement using the same logic. They often make unrealistic assumptions about their expenses in retirement. “I won’t be eating lunch out or needing to get my suits drycleaned, so my expenses will fall dramatically.” Really?
Proactive: Start by asking questions like: “When do you plan or retiring?” Bring the conversation around to what retirement will likely cost on an annual basis and what their retirement savings and retirement income can support. It’s an awkward situation, but they need a plan.
3. The client has a variable rate mortgage and interest rates are rising. This is the tip of the iceberg. They might also have a variable rate Home Equity Line of Credit (HELOC). They probably have credit cards too. All these will push rates up when interest rates rise.
Proactive: How much debt are they carrying? What is it costing them? What are their current interest rates? If rates rise by 50 basis points, what will it cost them the next month? What can be done to ease the pain?
4. The client may be receiving an inheritance, but not in the immediate future. Sometimes a client might see a future inheritance as their early retirement plan. Some even imply their parents selfish, keeping their assets intact during their lifetime instead of giving their money away now! (One wonders how they would react if their children brought up the same argument later in life!) The client might be assuming they can dig themselves into a hole financially because the inheritance later on will rescue their finances.
Proactive: You cannot rely on a future inheritance because it might not be there. Their parents might require long term care. If one parent dies and the other survives, they might remarry. Their parents might live a long time. Waiting for an inheritance can be like a gambler hoping for “one big score” to payoff their debts. Your client should plan to live their life without building in the inheritance or have a plan to invest it as a legacy for their own children.
5. The client is expecting a year-end bonus, but is unsure of the size. This is similar to the inheritance example. Their compensation is salary plus bonus. The bonus can be substantial, but is determined by how well the company has done that year.
Proactive: Let us assume the client is not deep in debt. They might assume they will get an annual bonus every year forever. It will only get bigger and bigger. This leads to the mindset they can spend it on luxuries now. Clients need to have an investment plan to put that money to work. Some can go towards luxuries, but the majority should be invested for future growth.
6. The client has received upfront money from their new employer. This might not happen as much as before. This is a signing bonus. There might be strings attached. If a financial advisor moved from one firm to another, they are probably expected to bring a substantial number of their clients over with them. The upfront money might be structured as a forgivable loan. If the upfront money isn’t a loan, it might be paid out in trances, based on meeting certain criteria.
Proactive: The client cannot treat this as “money found in the street” and consider it a windfall. It is money they will have earned because getting clients to move can be hard, especially since the former firm will want to retain them. Treat the money as cash you might receive, but does not belong to you just yet.
7. It is likely the client’s child will get into an Ivy League university. Your client has done a fine job raising their child. Getting into an Ivy League school is a steep, upward climb yet the incoming class is often 1,000 to 2,000 students. This will be expensive.
Proactive: Your client likely knows if this is a reasonable outcome. In addition to setting money aside, they need to navigate the world of financial aid, often with professional advice. This needs to get done in advance.
8. Someone in the client’s family has a major illness with long-term consequences. Medical care improves year after year. About 92% of Americans are covered by health insurance.2 However, there are still some illnesses that are virtually incurable and expensive to treat over the long term. Insurance companies can no longer set lifetime limits (3) but there are exceptions, like grandfathered plans.3
Proactive: Your client needs a plan for how they might pay for a catastrophic medical emergency in their family. This might be additional insurance coverage or access to a line of credit. They need a strategy, especially if certain illnesses run in their family.
There are times clients should ask for advice but do not. These are times you need to be digging and probing.
Related: Do Clients Wonder Why Everyone Else Can Spend So Much?
1. https://www.goodreads.com/quotes/229021-no-problem-is-so-big-or-so-complicated-that-it
2. https://www.census.gov/library/publications/2023/demo/p60-281.html#:~:text=In%202022%2C%2092.1%20percent%20of,91.7%20percent%20or%20300.9%20million).
3. https://www.hhs.gov/healthcare/about-the-aca/benefit-limits/index.html