Almost by definition for many, the essence of financial planning is that it's comprehensive. Financial planners don't just look at a particular problem or product; they account for everything holistically to arrive at a recommendation and solution that fits in with the big picture. In other words, they don't just plan for a slice of the pie; they plan for the whole pie. Yet it seems that for many planners, the "whole pie" is the client's balance sheet; we plan for all the different assets (and liabilities?) that the client has, not just a particular account. What about the OTHER pie, though? Not the asset one; the INCOME pie.
The inspiration for today's blog post comes from a conversation I had recently with financial planner Don St. Clair, and some discussion we've had about just how "holistic" most planners are, given how little time many planners spend in dealing with the liability side of the client's balance sheet (i.e., do you give as much time to planning for your client's big debts, like a mortgage, as you do their big assets, like the 401(k) or brokerage accounts?). But this conversation in turn morphed into another discussion: how managing liabilities also consumes so much of a client's income, and comprises such a huge part of the client's cash flows.
Don, not surprisingly, believes it's important to have a strong focus on the entirety of a client's cash flows, not just the ones that translate to the balance sheet, but I was really struck by a comment he once made to me, in reference to the "typical" client cash flow pie as shown here:
As Don stated it so simply: "My clients like working with me because I deal with more than just the things between 12 and 2 [o'clock, when you look at the pie chart as a clock]."
How right Don is; so many planners spend an inordinate amount of time focused on everything between 12 and 2, which is entirely about the cash flows that will contribute to assets on the balance sheet, and so little time elsewhere. Yes, some planners spend a reasonable amount of time on tax issues (although many defer entirely to the client's accountant), which at least gets them planning from 12 to 4. But so few planners spend more than just a few minutes of time focusing on the mortgage and liabilities, one of the biggest slices of the pie, and in my experience even more planners eschew spending any time on the other huge part of the pie: from 8 to 12, the spending portion.
Yes, many planners do look at FUTURE spending as it relates to setting a spending goal in retirement (and in turn determining the amount of assets needed to support spending), but how many planners really have conversations about a client's current spending habits? Most of us seem to view it as forbidden territory, with comments ranging from "you can't tell a client how to spend their own money, and they won't listen to you anyway" to "clients will just shut down if you try to talk about budgets with them."
Yet the reality is that for virtually all clients, the majority of their wealth is their human capital, which is converted to income over time, and that channel from human capital to financial capital is their cash flow statement. Or viewed more directly, for most clients, their cash flows are their daily experience with their money, and the aspect of money that is most tangible to them. Yet again, we as planners tend to spend FAR more time talking about assets that are only used for distant future goals, than we do about cash flows that clients can relate to every day.
Personally, I have to admit that I think Don has a good point here. A lot of planners really do spend nearly all of their time doing planning between just 12 and 2 o'clock on the cash flow pie/clock, even amongst those who try to have a holistic and comprehensive focus. Even if there is some time spent on other parts of the cash flow pie, it still pales in comparison to how much time we spend between 12 and 2 o'clock, and how much we focus on the balance sheet instead. Why are we so averse to spending more time on spending? Is it because that's not "where" we get paid for our services? Is it because we're uncomfortable talking about spending issues with clients? Is it something else?
So what do you think? Are planners overly fixated between 12 and 2 o'clock on the cash flow pie/clock? Why don't planners spend more time on the rest of the pie? Should we be more oriented towards the client's cash flow and income pie, and less focused on the balance sheet? Do we need to be?