Find gaps in a client’s financial plan

Offering wealth management services is something all accounting firms should do for all clients who need it. My premise is that everyone needs some kind of financial planning; the scope and depth of engagement will vary depending on the complexity, but all of your company’s customers have financial issues and needs. The hard part is getting your customers to understand that they have needs and that your business can be the solution to bring it all together.

The concept of a financial planning audit had been floating around in my head for a while. Indeed, it is designed to reveal and document gaps in a family’s financial plan. The challenges of such an offer are not in the tactic of getting the job done, they are in getting your customers to recognize that a second look or opinion can be a good thing.

Think about all the things your customers seek multiple reviews for: home renovations, medical issues, auto repairs, vacation planning, wedding planning… the list goes on. Yet, when it comes to personal financial matters, why are they so sedentary and “satisfied” with their financial situation? There are plenty of answers I’ve heard from clients and prospects, but most are just cover-ups so they don’t sound silly. Responses that are commonly vomited include:

  • “I have more money than I need; how can you help me?”
  • “I’m ready and I have my team of advisors. I’ve worked with these companies for years and don’t feel the need to change.
  • “I am personally friends with my [attorney, investment person, insurance agent or banker] and would find it too hard to break up.

All valid excuses for your client, but unacceptable for the family financial unit if their personal and professional financial situation is plagued by loopholes and unmonitored elements. This is where your financial planning audit can make sense.

A different audit

The financial planning audit is a non-offensive way to dig into your clients’ personal financial lives to see that they are, in fact, in good shape. I believe this offer is readily accepted by clients as the service resembles something they expect from a CPA firm – an audit. When you communicate the value of an audit, you make no reference to the possibility that they may need to eliminate one of the incumbent advisors.

Throughout the audit process, you will likely discover many shortcomings and shortcomings that will cause your clients to wonder why their incumbents have not corrected these shortcomings. You and I know why, but customers are always the last to find out they’ve been poorly served. The reason their existing team hasn’t discovered the shortcomings is that they all strictly stick to their silo and all try to spend as little time as possible for the revenue dollars they charge.

Perhaps the biggest challenge in completing an assignment such as a financial planning audit is the estimated time it will take to complete it. Your best clients may accept an hourly type of engagement and understand that you really can’t give an accurate estimate of the time and cost associated with the engagement. Everything from their insurance policies to their estate documents can be voluminous.

These commitments are also easily subject to scope drift. In other words, like renovating an old house, you don’t know what you’re going to find until you open the walls or, in this case, read their documents.

To document this engagement, I would create a work plan to ensure that the engagement is complete and can be reviewed by another professional in your firm. I find the guides created by the PFP division of the American Institute of CPAs particularly helpful. With the many guides published and kept up to date, you can easily set your firm’s standard for documenting these engagements.

Just like a financial plan, your financial plan audit services should be comprehensive, unless a scope limitation has been requested by the client. These areas should include a cash flow review and their financial independence forecasts. Don’t be surprised if they only have a brief financial independence forecast as a financial plan. Many of the big companies that we all see advertising in golf tournaments and the like consider forecasting independence to be the breadth of their financial plan.

The financial plan audit should cover all major areas of a plan including risk management, tax planning, retirement planning, investment planning, estate planning, corporate governance reviews and family, and any other important part of the financial life of the family.

A perfect example of scope creep is when you look at their estate plan. If your client has documents that are over 10 years old, should you just stop reviewing them and tell them the documents are outdated? I would suggest not continuing to work through the documents to see what other gaps exist. Common areas of deficiency lie in issues such as the spendthrift protection of heirs. Just because their daughter is 35 doesn’t mean she should have access to your clients’ wealth.

In older documents, it is common for adult children to have full access to inheritances when they reach a certain age. While this may have been what your client wanted when the documents were drafted, you should ask about the stability of the marriages, the health of the grandchildren, the risky circumstances surrounding your children, and whether they care about lineage planning.

Your client may not realize that if his 35-year-old daughter dies prematurely with outright access to inheritance, the assets are likely to go directly to your son-in-law, also 35. Most would agree that remarriage is possible for a 35-year-old man, and when that happens, your grandchildren are no longer first in line for your inheritance – they may be second or even far behind the new spouse of your son-in-law! I have yet to meet a client who did not find this possibility troubling and did not want it to change.

Identification of threats

Risk management is another often overlooked area in the financial planning process. When performing your PF audit, I suggest approaching risk from a broader perspective than just looking at policies. You want to look at risk from all angles. You want to start with an overall risk assessment and reveal where the risks may be coming from.

Some are obvious, such as residential rental property and the perils of homeownership in general. But within that same property there may be hidden risks that have been overlooked and masked by the substantial insurance cover the client may have on the property itself.

Some of these risks may lie in the form of ownership. Full ownership is not recommended for rental properties. You may ask why an LLC or other form of ownership was not used. The only thing worse is when your client owns it jointly with another person. In this case, your client still has all the personal exposure as if he owns the property himself, but now compounded by the fact that there is a second owner whose responsibilities and lawsuits could cause problems for any asset they own, including the one they own with your client.

Beyond the form of ownership, you should read the policies. More likely than not, their existing team of financial advisors did not. Simply asking for the policy is a differentiator in their eyes. This is also a good example of something that may be outside the area of ​​expertise of the financial planner, so you may need to hire an insurance specialist to help you review contracts.

You may want to check their leases. Are they using canned leases they found online, or have they had their lawyer draft one that incorporates protections? I would look for protections like requiring tenants to insure their contents or alternative housing in the event of a problem with the building.

The form of ownership can be even more important with your clients’ main business assets. Do they own their business in their own name or is it held in an estate planning trust? Leaving it in the name of the individual will subject this asset to probate and public notice if not held in trust. What about the real estate that houses the business? Is it in a separate trust or LLC, with a current and appropriate lease with your client’s business? Probably not!

The review of personal insurance such as life, health, disability or long term care is also part of the PF audit. Some of the common findings here include a disability policy that only pays benefits at age 65 or for five years if the client is close to age 65. Is the cost still worth it or should this policy be abandoned?

Life insurance is perhaps a little more complicated, but just as important as anything else. A life review should start with re-establishing your client’s need for coverage, then a review of what they currently have followed by a recommendation on what to do next. With life insurance, many customers have agents who only want to sell them insurance, not give advice. This is very obvious if you have a client with many small life insurance policies. I hate to throw agents under the bus, but when I see a client being sold a new whole life insurance policy every year, it really bothers me. Worse still, when they start borrowing from old policies to buy new ones.

The area of ​​investments is what many of your clients think of financial planning. In many cases, their investment advisor does literally no financial planning, but the client can designate that person as their financial planner. Rather than getting into an in-depth investment analysis here, I would see that their risk tolerance matches their portfolio and their expected results match their investment needs. This is also a good time to tell them that asset management has become a commoditization and that they can only get asset management at a much lower cost from many other companies. When planning companies charge retail for asset management services, there should be a strong financial planning component, unless the investment advisor is highly specialized or consistently delivers incredible returns.

As you might expect, a good PF audit process will expose incumbents. Some clients will appreciate you helping clean up the mess their team has created, and others will ask you to help replace the team. In my experience, the latter happens 95% of the time!