The Need for Planning—Not Just Advice—Is Clear

Where does a comprehensive financial plan start?

Art by David Huang

Financial advisers say the coronavirus pandemic has exposed the need for creating a comprehensive financial plan as opposed to receiving ad hoc advice.

“It would be nice if everyone had a comprehensive financial plan, just as it would be nice if everyone went to the doctor to have a comprehensive physical,” says Steve Gresham, a senior education adviser at the Alliance for Lifetime Income. “But that doesn’t happen very often.”

Ric Edelman, founder of Edelman Financial Engines, says he only offers comprehensive financial planning to his clients. In his opinion, that starts with learning about the client’s goals. “All of your decisions are based on those goals,” Edelman says. “Without answers to these questions, it would be impossible to form a financial planning strategy. We want to take a look at each client’s entire financial situation. We need to know about all of their money, their expenses, their attitudes toward risk and their need for liquidity.”

Gresham also says a comprehensive financial plan should be specific to each individual’s goals.

“The biggest drivers are longevity and health,” he proposes. “That determines your approach to investments to meet that time horizon. This is simple but exceeds what most people do.”

“We also want to look beyond their finances,” Edelman says. “Do they have insurance, debt, employee benefits? Do they have particular family circumstances that they need to address, like an aging parent or children heading to college?”

Edelman also believes it is important for a comprehensive financial plan to include cash reserves. Certainly, he says, the current pandemic is underscoring the critical importance of having an emergency savings fund of six months to a year’s worth of expenses covered.

In fact, 4-Point Financial makes having an emergency savings fund that can cover that period of time the centerpiece of its comprehensive financial planning, says David Keefe, a financial adviser with the practice. Hundreds of thousands of dollars can also potentially be accessed from cash value life insurance, Keefe says.

“Clients who have worked with us on a comprehensive financial plan have those components in place,” he says.

Sheila Padden, a board member of the Alliance of Comprehensive Planners, says a comprehensive financial plan should extend beyond investments.

“We have comprehensive relationships with our clients,” Padden says. “For instance, we are discussing with clients that run small businesses whether they should be applying for a Paycheck Protection Program [PPP] loan and whether they should file their 2019 tax returns now or wait until the July 15 extension. There is a value in doing comprehensive planning because no one area stands alone.”

Like the others, Padden believes that a comprehensive financial plan is rooted in knowing the client’s goals and what they are trying to accomplish. She also believes that it should include insurance and estate planning.

The advisers in the Alliance of Comprehensive Planners are fee-only, so they do not receive commissions from selling products or receive referral fees, Padden notes. They address numerous financial planning issues in an integrated fashion, she says, adding that clients receive analysis and advice on investments, insurance, taxes, education, retirement, estate planning and other critical issues.

While many advisers do not address tax issues, Holistiplan has created software that enables advisers to go over their clients’ tax situations, says Kevin Lozer, co-founder of Holistiplan.

“Within seconds, it produces a white-labeled tax report that advisers can review with their clients to have a meaningful conversation about their tax situation,” Lozer says. “In turn, that helps drive some of their investment decisions.”

Finally, a comprehensive financial plan should have a portion of the portfolio invested in annuities to safeguard against longevity risk, says Cyrus Bamji, head of communications at the Alliance for Lifetime Income.

“At a 30,000-foot level, there has been a major shift in retirement planning in the past 30 or 40 years,” Bamji says. “In the early 80s, 60% of people had a pension. Today, it’s only 17%. The burden for retirement savings has shifted to the individual—and yet, there is very little attention paid to what actual income you are going to need in retirement. There are three sources of protected income: pensions, Social Security and annuities. You need to consider putting an annuity in your retirement plan portfolio so that you will have a source of guaranteed income for the rest of your life.”

Because retirement plan sponsors are not likely to offer their participants access to an adviser who will create a comprehensive financial plan, Envestnet | MoneyGuide has created financial planning software that breaks down individual goals into sections, called MyBlocks.

“We absolutely believe in having a comprehensive financial plan,” says Kevin Hughes, chief growth officer at Envestnet | MoneyGuide. “MyBlocks takes on financial planning one block at a time, such as looking at consolidating credit card debt, or doing a Roth conversion. So there is a place for both ad hoc financial advice and comprehensive planning. Many people are not ready for a comprehensive plan, so many companies are implementing these blocks. Likewise, many advisers are using MyBlocks to engage digitally with their clients in a hybrid model.”