Goals-based money management strategies have long been a mainstay for traditional financial advisors.
But more and more, advisors are shying away from prioritizing (or even including) cash-flow analysis into their client strategies. Experts say that’s a big mistake – and they’ll offer many reasons why.
First, some data to chew on.
Mitch Anthony, author of “The New Retirementality,” who works closely with financial services professionals, recently completed a survey of financial advisors and found that less than 5 percent actually conduct cash-flow analysis for their clients.
Part of the problem may be that thorough cash-flow analysis carries with it myriad moving parts, and takes time to complete. That could steer advisors away from the process.
“Let’s face it – cash-flow analysis is hard, and takes time,” said Dede Jones, a money manager at Innovative Financial in Lakewood, Colo. “We try to include this with every engagement but sometimes have to accommodate client attention spans. The fact is, cash-flow analysis is time consuming for someone.”
‘A Thoughtful Approach’
So besides time and complexity constraints, why aren’t more financial advisors doing it? “Priorities” may be one reason.
“Portfolio construction today requires a thoughtful approach, and unfortunately, advisors and clients are caught up in matching market returns,” said Matt Ahrens, a financial planner at Integrity Advisory Group in Overland Park, Kan.
“In reality, the most important objective is preparing a client and their portfolio for retirement, and there is no better way than a cash-flow analysis.”
That analysis also leads to tough conversations with clients, even though those conversations are necessary.
“There is no way of knowing a client is overspending unless this analysis is done, and there is no way of knowing the client’s portfolio has the proper risk/return profile without this analysis, but these conversations can become difficult,” Ahrens said.
The money managers who do conduct cash-flow analysis for their clients say they’re glad they did it.
“Whenever I take on a new client, or even do a client review, I always go over
cash flow and their budget,” said Tammy Johnston, a Calgary-based financial advisor, adding that she makes her clients show her “everything.”
“Why? Because most families are bleeding a minimum of $200 a month that they
aren’t even aware of due to fees, miscalculations, garbage insurance, penalties, and all sorts of other things big and small,” Johnston said. “This frees up money to invest or purchase valuable insurance.
“Plus, it really builds the relationship and trust with the client. It might not pay off directly in time for billable hours, but it allows you to easily sell good product that you do get paid on and it makes it easy for them to enthusiastically refer you to their friends, family, and colleagues.”
Consider this list of steps from a recent white paper on cash flow by Precision Wealth Strategies:
“The process of gathering accurate inflows and outflows data is crucial to the process,” PWS wrote. “’Forgetting’ certain inflows and/or outflows may have disastrous effects on a client’s long-term financial situation. Client checklists of income inflows and outflows can be very valuable in the process, and decrease the likelihood that the client will overlook certain information.”
Cash-flow analysis is an on-going process which involves several steps:
• Identifying current financial inflows and outflows.
• Analyzing the short- and long-term effects of the inflows and outflows on the financial portfolio through the development of numerical projections.
• Developing strategies to adjust cash flow if the projections indicate the portfolio will be depleted prior to an individual’s death, or the deaths of both husband and wife at reasonable life expectancies.
• Monitoring the cash flow on an ongoing basis by utilizing a systematic approach to keeping track of financial inflows and outflows.
Cash-flow analysis is a critical component of the comprehensive financial planning process, the white paper added.
“It is important in all client situations, since knowing whether or not an individual or a family has a positive or negative cash flow impacts all other aspects of a financial plan,” PWS stated.
Too Important To Ignore
While reasons for not conducting a cash-flow analysis for their clients do exist, don’t use them as an excuse for bypassing the process for your clientele. The fact is, cash-flow analysis is simply too important to ignore.
“For the approximately 10,000 baby boomers retiring every day, income planning has become as much or more important than asset management, to the success of the overall financial plan,” said William Stack, founder of Stack Financial Services in Salem, Mo.
“That’s why cash flow is the way to go. It’s much easier for clients to feel confident about their finances, when they know what expenses they have, and where the funds will come from to meet the need. It also enables them to make meaningful lifestyle choices ahead of time, increasing overall happiness in retirement,” Stack noted.
Yet clients can’t make those choices if they don’t know where they stand cash management-wise.
It’s up to their financial advisor to help them out.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at email@example.com.
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