Advisers have a fiduciary responsibility to educate their clients that generating enough cash to fund lifetime goals and objectives adequately is the key to financial success.
While maximizing returns is desirable, an investment portfolio must be managed as part of a comprehensive program that also maximizes positive cash flow.
The job of advisers, therefore, should be to define and measure the client's destination, plan how to reach the destination and monitor progress — all while keeping an eye on cash flow.
Accomplishing lifetime goals, such as educating children and enjoying retirement, requires that advisers calculate the cash needed to fund them. For example, a specific objective might be to retire at 65 and live on $100,000 a year in today's dollars after taxes. Stated this way, the amount of savings and investments required to generate that cash level (including the tax bill) can be determined.
While clients, from a cash flow standpoint, may be able pay for their current lifestyle, they might not be able to save enough to afford tomorrow's lifestyle. For example, carrying a large mortgage today may prevent setting aside the required amounts for college or retirement. Clients need to be made aware of this.
A comprehensive financial plan encompasses all areas of the client's financial needs and concerns, and is designed to attain defined goals. The plan's scope should focus on cash flow and also cover debt management, tax reduction, risk management and insurance, college, retirement,
estate planning and of course investments.
In my experience, the six biggest cash-robbing barriers that impede clients from carrying out a sound financial and investment plan are the following:
• Materialistic thinking. Many clients are so preoccupied with procuring "things" that they do so at the expense of accumulating wealth for financial security and independence. The financial adviser's role is to quantify for the client how to balance today's expenditures against the requirements for adequately funding future desires.
• Undisciplined, emotional spending. Materialistic thinking often results in "spendicitis," a malady of clients who impulsively spend more than they make and don't track where their money is going.
• Burdensome, costly debt. Excessive spending leads to taking on expensive, high-interest debt, which even the best-performing investments may not be able to overcome.
• Taxes. Year-round tax planning and tax awareness have a bigger payoff than year-end, last-minute attempts to slash taxes. Furthermore, clients should manage their cash flow with an after-tax, not pre-tax, mentality.
• Inflation. Increases in the cost of living are the silent killers that erode purchasing power and never go away. Inflation is particularly harmful during retirement, as investors are forced to make ever-greater withdrawals from retirement plans — and pay taxes on the larger amounts — in order to cover rising living expenses.
• Poorly structured investments. Advisers must structure well-diversified investment programs that match a clients' tolerance for downside risk yet don't lose too much value during downturns. Remember, investments that drop 50% in value require a 100% return to get back to where they started, which could take years. Moreover, even superior investment performance cannot overcome poor cash management, which results in having no cash or insufficient cash to invest according to plan.
• Inadequate, improper risk management. Comprehensive planning, not piecemeal product sales, is required to protect against life's unforeseen and financially devastating events. Many "what ifs" must be considered, including disability, premature death, long-term care, illness, divorce and job loss.
Since nothing in life is static, advisers must adjust to their clients' changing circumstances, as well as to changes in the markets, the economy and tax law. To keep up with these changes, financial management reviews should be performed at least annually or more frequently.
It is a fiduciary responsibility for the adviser to be proactive as well as responsive to the needs of the client to ensure their wealth accumulation and protection. But just as proper investment advice is central to wealth accumulation, proper cash-flow advice is equally important to make sure clients can attain their goals.
Brett Wilder is president and chief executive of the Financial Management Group Inc. of Cincinnati. He is the author of "The Quiet Millionaire: A Guide for Accumulating and Keeping Your Wealth" (FMG Publishing Inc., 2007).
For archived columns, go to
investmentnews.com/investmentstrategies.
