Voices Finding the gaps in a client’s financial plan

U S Wealth Management

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Offering wealth management services is something all accounting firms should do for all clients that need it. My premise is that everyone needs some sort of financial planning; the scope and depth of the engagement will vary based on complexity, but everyone that is a client of your firm has financial issues and needs. The harder part is getting your clients to understand that they have needs and that your firm may be the answer to pulling it all together.

The concept of a financial planning audit has been in my head for a while. In effect, it is designed to reveal and document deficiencies in a family’s financial plan. The challenges in such an offering are not in the tactics of getting the work done, they are in getting your clients to recognize that a second look or opinion may be a good thing.

Think of all the things where your clients seek out multiple opinions: home renovations, medical issues, car repairs, vacation planning, wedding planning … the list goes on and on. Yet when it comes to personal financial matters, why are they so sedentary and “satisfied” with where they stand financially? There are lots of answers that I’ve heard from clients and prospects, yet most are merely cover-ups so that they don’t look foolish. Answers that are commonly spewed include:

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

All valid excuses in the eyes of your client, but not acceptable to the family financial unit if their personal and business financial situation is plagued with gaps and unattended items. That’s where your financial planning audit may make sense.

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A different kind of 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 that this offering is easily accepted by clients in that the service sounds like something they’ve grown to expect from a CPA firm — an audit. When communicating the value of an audit, you are not making any references to the possibility that they may need to eliminate any of the incumbent advisors.

Throughout the audit process, you are likely to uncover many deficiencies and gaps that will cause your clients to ask themselves why their incumbents hadn’t addressed these deficiencies. You and I know why — but clients are always the last ones to find out that they’ve been underserved. The reason why their existing team didn’t uncover the gaps is because they all rigorously stick to their silo and all try to spend the least amount of time possible for the dollars of revenue they are billing.

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

These engagements are also easily subject to scope creep. That is, like renovating an old house, you don’t know what you are going to find until you open up the walls or, in this case, read their documents.

To document this engagement, I would create a work program to be sure that the engagement is complete and able to be reviewed by another professional in your firm. I find the guides created by the American Institute of CPAs’ PFP division particularly helpful. With the many guides that are published and kept current, you can easily create your firm’s standard of 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 review of cash flow and their forecast for financial independence. Don’t be surprised if all they have is a brief financial independence forecast as their financial plan. Many of the big firms that we all see advertising in golf tournaments and the like consider the independence forecast the extent of their financial plan.

The financial plan audit should cover all of the major areas of a plan, including risk management, tax planning, retirement planning, investment planning, estate planning, business and family governance reviews, and any other major moving parts in the family’s financial life.

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 simply stop reviewing and tell them that the documents are outdated? I’d suggest not — continue working through the documents to see what other deficiencies exist. The common areas of deficiency lie in issues such as spendthrift protection for heirs. Just because their daughter is 35 doesn’t mean that she should have outright access to your clients’ fortune.

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

Your client may not realize that if their 35-year-old daughter passes prematurely with outright access to the inheritance that the assets are likely to go directly to your son-in-law, also 35. Most would agree that a remarriage is possible for a 35-year-old, and when that occurs, your grandchildren are no longer first in line for your inheritance — they may be second, even a distant second, to your son-in-law’s new spouse! I haven’t met a client yet who didn’t find this possibility unsettling, and didn’t want it changed.

Identifying threats

Risk management is another area that is often overlooked in the financial planning process. When performing your FP audit, I suggest approaching risk from a broader perspective than merely looking at policies. You want to look at risk from every angle. You want to start with an overall risk assessment, and reveal where the risks may originate.

Some are obvious, such as residential rental property and the perils of being a landlord in general. But within that same property there may be risks lurking that have been ignored and masked by the substantial insurance coverage that the client may have on the property itself.

Some of these risks may lie in the form of ownership. Ownership in one’s individual name is not advised for rental property. You may ask why an LLC or some other form of ownership was not utilized. The only thing worse is when your client owns it jointly with another individual. In this case, your client still has all of the personal exposure as if they owned the property themselves, but now compounded by the fact that there is a second owner whose liabilities and lawsuits could lead to 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 financial advisory team has not done this. Simply asking for the policy is a differentiator in their eyes. This is also a good example of something that may be out of the financial planner’s area of expertise, so you may need to engage with an insurance specialist to help look at the contracts.

You may want to look at their leases. Are they using canned leases they found online, or did they have their attorney draft one that has protections built in? I’d look for protections such as the tenants’ obligation to insure their contents or replacement housing in the event of a problem with the building.

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

Looking at personal insurances such as life, health, disability or long-term care is also a part of the FP audit. Some of the common findings here include a disability policy that only pays benefits to age 65 or for five years if the client is near 65. Is the cost still worthwhile or should this policy be dropped?

Life insurance may be a bit more complicated but just as important as anything else. A life review should start with reestablishing your client’s need for the coverage, then a review of what they currently have followed by a recommendation on what to do. With life insurance, many clients have agents that only want to sell them insurance and not give advice. This is very evident if you have a client with many small life policies. I hate to throw agents under the bus, but when I see a client who is sold a new whole life policy each year, it bothers the heck out of me. Even worse is when they start borrowing from the older policies to buy new ones.

The investment area is what many of your clients think financial planning is all about. In many cases, their investment advisor does literally no financial planning, yet the client may refer to that person as their financial planner. Rather than getting into a deep investment analysis here, I’d see that their risk tolerance matches their portfolio and that their expected results are in line with their investment needs. This is also a good time to tell them that asset management has become commoditized, and that they can get asset management only at a far lower cost from many other firms. When planning firms are charging full retail for asset management services, there should be a heavy financial planning component unless the investment advisor is highly specialized or consistently delivering amazing returns.

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

John P. Napolitano 

Chairman & CEO, US Wealth Management LLC

Updated: September 4th, 2021

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