This article is a continuation of the Goals-Based Construct. The last article was all about dreaming, which helps clients get excited and engaged in their financial planning. Now it’s time to discover the parameters that we’re working within in order to help them achieve their dreams. This part is all about the dollars.
The simplest way to explain to clients how we, as financial advisors, can help them achieve their financial goals is with this simple paradigm:
Paradigm = Dreams + Dollars + Deadlines
So, after the Dream Session is over, I set the stage for the next part of the Goals-Based Construct where we talk about how to accomplish their most important dreams.
I introduce the Six Big Levers when we’re talking a lot about numbers and dollars.
These levers establish the role you’re playing, and will continue to play, in helping your clients accomplish their life goals.
The Six Big Levers are:
- How much you spend
- How much you save
- How long you work
- How much you want to leave behind
- How long you live
- Market returns
And what is really compelling is the amount of control (or lack thereof) that either we or our clients have on these 6 Big Levers!
Take a look:
- How much we spend – Complete control
- How much we save – Complete control
- How long we work – Mostly control
- How much we leave behind – Complete control
- How long we live – Influence, but no control
- Market returns – ZERO influence or control
Interestingly, how much time do people in our industry spend talking about #6 vis a vis the others?! Any guess would be hyperbolic on my part, but NOT MUCH!
So what we are going to do differently—differently than almost everyone else in our industry—is we are going to spend our time talking about the things we can influence and control. We’ll spend virtually ZERO time talking about things we have absolutely no control over (other than our passive allocation decision, which we will talk about since we have agency over that!)
If I stopped right here, for most of the industry, this would be a paradigm shift that is simply untenable—a “bridge too far” because we love talking about the markets. What a waste of time that is!
What we want to do is plan for and measure how we can achieve our clients’ unique goals with the most certainty possible, or at least the minimum variability required. We want to focus on the things we can control while managing our exposure to the things we can’t.
Unlike the Dream session, the conversation around the Six Big Levers will be more practical and quantitative:
- How much do you save (paystub minus expenses) and have saved (rough numbers are fine for now)?
- How much do you think you would need to live on in retirement?
- What are some of the things you would like to spend money on in retirement that are not included as necessary expenses? (Travel, vehicles, gifting, hobbies, second home, etc.)
- How long are you planning to work (in a perfect world)?
- Do you have a specific goal for leaving money to the next generation or charitable organization of choice?
- Tell me about your risk management status—life, disability, LTC insurance. What kind, at what cost, and how long are they good for? How do you feel about it? Is it enough?
The goal of this construct is to take the least market risk, while maintaining the greatest probability of reaching our most important goals. Again, this means focusing on things we can control. So, we should aim to drive down portfolio expenses by using low cost funds, and eliminate excess underperformance risk by using broad market-based index funds.
One Final Thought
Think about a world where you never, ever had to have another conversation about the underperformance of the portfolio relative to its benchmark. You only talked about performance in terms of the “funded status” of each clients’ particular unique goals. And the ongoing advice you gave was more around behavior and decision making than about what the markets were going to do.
That’s what we, as financial advisors, should be doing.
