Comprehensive Financial Services Defined

Has any financial adviser ever offered to provide you with “comprehensive financial services?”  What exactly does that mean?

Consider some of the mystifying jargon that has entered the financial services lexicon in just the last decade:  robo-advisers, smart beta, target date funds, clean (or “T”) mutual fund shares, and so on.  What do those terms mean?  Do you need to understand them?  Should you even care?  The short answer is that you don’t need to know or care about any of this bewildering lingo.

Despite the noble work of about 300,000 well-trained, highly competent and caring financial advisers in the United States, Wall Street can be a dangerous—and expensive—place to learn, for the uninformed.  So we thought it would be instructive to cut through the Wall Street fog machine and define some potentially perplexing terms in a way that will make sense to anyone seeking financial planning and/or investment advisory services.

Below, we present a list of 10 specific deliverables across five disciplines—financial planning, investment management, tax, estate planning, and insurance—that we believe are necessary for truly comprehensive financial services.

Depending on its size, scope, and range of services, a financial advisory firm may deliver some or all of these services directly or through a coordinated approach with a client’s other professional advisers in areas such as tax, insurance, and legal matters.

Financial Planning

1. Written Financial Plan. This document:

• Identifies all your financial goals.
• Captures every financial asset that you own or will receive in the future.
• Projects the growth of your assets, typically based on historical rates of capital market returns.
• Details projected investment returns, earnings, and spending to fund your goals.

Most importantly, your written financial plan should determine the probability of achieving your goals.

2. Step-by-Step Action Plan. This is a chronological list of action steps required to maximize the probability that you will stay on track with your financial plan over the years.  These action steps need to be updated regularly, and at least annually.

3. Progress Reports. These are annual one-page summaries highlighting the most important information in each area of your financial life, so you’ll have all the information you’ll need to make big decisions.

4. Goal Blueprints. Developed for each goal, these each include a summary showing the current amount earmarked for the funding of the goal and a status check to determine whether you are on- or off-track relative to that benchmark.  If you are off-track, there should be a recommendation for specific corrective action, including dollars and deadlines.

5. Cash and Debt Management Plan. In conjunction with your financial plan, you should have a debt elimination plan and a cash reserve plan to cover emergencies.  New retirees who are now living off their accumulated assets and have significant allocations to equities also need a cash reserve plan to handle a potential bear market.

Investment Management

6. Portfolio Management. This plan allocates your portfolio of investment assets (i.e., marketable securities such as stocks and bonds) and other assets, such as real estate, business interests, and alternative assets, to fund the goals in your financial plan.

Tax

7. Income Tax Projection. In coordination with your tax adviser, who will calculate your projected taxes due, your financial adviser should seek ways to reduce and/or minimize your taxes.

8. Income Tax Review. Before you file your tax returns, your financial adviser should review them to ensure that no tax reduction opportunities have been overlooked and that there are no red flags that need to be addressed.

Estate Planning

9. Estate Plan Review. Each year, your financial adviser should coordinate with your estate planning attorney to review your estate plan, checking for any changes to your estate circumstances, desires, wishes, or the tax laws that might indicate a need for revisions to your plan.  Every three to five years, you should meet with both advisers to fully review the entire plan.

Insurance

10. Safety Review. This is a critical exercise designed to identify every conceivable risk to your financial plan.  Your financial adviser should coordinate closely with one or more insurance specialists, depending on your facts and circumstances, to make sure that for each type of recommended insurance coverage, your policy has the required features and appropriate coverage amount, there are no gaps in coverage, and the premium is reasonable relative to the potential benefit.

Many financial advisers offer value propositions emphasizing market timing or fund/security selection to justify their fees.  We think that’s nonsense.  And though there is no such thing as a good one-size-fits-all approach, for financially successful people and families who want to do something else with their valuable time besides managing their money, this list should be a good starting point and should be helpful in identifying an investment adviser who provides truly comprehensive financial services.

Behavioral Takeaway

The Paradox of Choice is a behavioral finance doctrine that describes how the presence of too many choices is paralyzing and debilitating, hindering decision-making.  To avoid this situation when shopping for a financial adviser, ask candidates to provide a brief list of the services that they offer, in plain English, along with the price.  This will provide a simple basis for comparison, eliminating paralysis and helping you make an informed decision.