5 Silent Killers of a Financial Plan

“The best laid plans of mice and men often go awry.”

As it turns out, poet Robert Burns was onto something. All too often, CPAs and advisers construct tax, estate, retirement, risk management and investment plans that are either never implemented or are misaligned with their clients’ values. Some common missteps could keep a client from adopting a well-crafted financial plan, thus diminishing the value you add to the process.

Let’s take a look at some of these silent killers and how to avoid them before another financial plan goes awry.

Unrealistic Expectations

Perhaps the most common (and avoidable) mistake is building a financial plan on highly aspirational, or worse, totally unrealistic expectations. A sound financial plan is only as good as its inputs, so it’s important to ensure that you are forecasting an appropriate rate of return, inflation rate and honest gauge of spending and cash flow needs. Digging into the client’s cash flow today can help determine a realistic spending level in retirement.

Emotional Decision Making

Emotions are often the enemy of financial well-being. To make matters worse, clients may not even be aware of the detrimental effect emotions have on decision making. You must engage in an honest conversation with your clients about behavioral biases to uncover vulnerabilities in their plan. Some questions you may ask your clients are, “Do you find yourself reacting to news headlines? Are you following the advice of your peers at cocktail parties?”.

Sometimes, a client is confused over needs versus wants. An irresponsible pursuit of wants (e.g. vacation homes, toys, lifestyle maintenance) masked as needs can wreak havoc on a financial plan when circumstances unexpectedly change, and particularly when the costs of the desires are underestimated by the client.

Inflexibility

Does the plan allow for flexibility during events that are out of your client’s control? Can it evolve to their changing needs? For example, should a client retire during a bear market, have you built in a flexible withdrawal and spending plan during years of negative returns? Make certain that you model and discuss “Plan B” options should they need to be exercised, such as working longer, cutting spending, and lowering goals. Also, help your client plan to build an appropriate emergency fund to address unforeseen circumstances.

Inaction

A perfect financial plan is worthless without proper follow-through. You can build a realistic, flexible, comprehensive plan for your client that they either are unmotivated to, or uncertain of how to implement. A clear action plan can circumvent this scenario.

Further, clients who hesitate to leverage and implement sound professional advice end up paying for that inaction. Examples of how this may manifest include:

• Not having proper property and casualty insurance coverage and having a large claim put their nest egg in jeopardy

• Exposing their dependents to undue hardship in the event they are disabled or die prematurely without adequate life and disability coverage

• Failing to address how they want their assets distributed and who will care for their children in a comprehensive estate plan

• Disregarding a tax management strategy and paying too much tax or maintaining a tax inefficient portfolio

You can step in as the quarterback to coordinate between various players including investment advisers, insurance brokers and estate planning attorneys to ensure all bases are covered and the client is acting on that advice.

Unclear Values and Priorities

A plan that fails to resonate with a client or ignores their immediate and future needs, is like an airplane on the wrong flight path landing in the wrong destination. Are your clients uninspired? Do they lack commitment to their plan? If a plan doesn’t closely align to their values, a client will likely be less motivated when life or the markets require a course correction.

Structure your planning process to include time for discussion and reflection on priorities. Encourage your clients to step back and consider their values by asking questions such as, “What are the non-negotiables of your plan and where do you have flexibility? Are you allocating your resources in line with priorities?”.

If you find that your clients’ plans have been victims of these silent killers, the AICPA Personal Financial Planning (PFP) Section can help. As the premier provider of information, tools and guidance for practitioners who advise individuals, the PFP Section can equip you to steer clear of these hazards and partner with your clients as you plan for many life-changing moments to come. Or, learn more at the upcoming Advanced Personal Financial Planning Conference as part of AICPA ENGAGE.

Mark Astrinos, CPA/PFS, RLP, principal and founder of Libra Wealth in San Francisco. Mark works with clients across the country to design the life they want by integrating their financial resources and human capital. Drawing on his tax and business background, as well as his training as a Registered Life Planner, he focuses not only on creating wealth, but finding a healthy balance between money and life.

Silent killer courtesy of Shutterstock

5 Silent Killers of a Financial Plan

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