Welcome to Hidden Value, the column where Joe Elsasser, CFP, addresses common financial planning issues with insights advisors and their clients may not have considered.
Financial advisors may preach prudence and provide practical plans, but numbers on a spreadsheet don’t always translate into golden decades. Some clients spend too much, too soon, too often. They see six or seven figures in account balances and tell themselves that buying a new SUV each year can’t make that much of a difference, or they really would like new granite countertops for their kitchen. Such spenders may be among the most stressful clients to work with. You can observe the wrong path they’re taking, but they don’t see it, don’t care, or feel powerless to change.
Clients who disregard the speed limits you post might be the most difficult to advise, yet they also may be the ones who most need adept advice. The role of an advisor should be that of a coach. You don’t want clients to feel beaten down by these conversations; you want them to feel empowered to make decisions that align with their resources both today and in the future.
Early Warning Signs
Don’t wait to start looking for potential trouble. If pre-retirees tell you that the cost of their basic income needs (for housing, food, vehicles, etc.) is well below their cash flow, yet they still have debt as they near retirement, that’s a signal they tend to spend heavily on “wants,” with payment deferred.
Similarly, advisors may expect clients to follow a budget. However, if the client requests an excess withdrawal every year for a “one-time” expenditure in addition to his basic plan, you can expect this to be a continuing drain on his resources. Model out a budget of the last few excess withdrawals continuing into the future, and show the impact on the future ability to spend.
To prevent unhappy later years, you should repeatedly show clients the impact of overspending. At every meeting, demonstrate the future shock with real life numbers. Show the impact on sustainability: how spending now might deliver current satisfaction but impair the prospects of achieving major goals and enjoying long-term financial security.
When one of my clients compounded one financial mistake — buying a timeshare — by buying another one, I went through the numbers with him, showing the deterioration of his long-term cash flow. He would retire one day, as all clients do, and see his income drop. The future I showed him was sobering, and since then he has become a more prudent consumer.