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Saving, budgeting and cashflow management lead to improved client outcomes, risk-free

Author: Gil Gordon, Director, RI Lower Hunter (This article was published in Professional Planner 9th December 2015) Advisers who want to make a real difference in their clients’ lives can’t rely solely on something as unreliable and volatile as investment performance, especially in the prevailing low growth, lower return environment. Investment management and strategic asset allocation may add an additional 1 or 2 per cent to a portfolio’s performance over time, which is not to be ignored in a lower earning rate, higher volatility world. But the most effective and consistent way for advisers to create value is to educate clients about the benefits of saving, budgeting and cashflow management, and work together to develop a realistic budget and banking structure which will help them modify their financial behaviour. Current advice processes focus heavily on strategic investment advice, asset allocation and portfolio construction but don’t devote adequate attention to fundamental wealth management and wealth creation principles like budgeting and cashflow management, which arguably can have a larger impact. Where did the money go? When an adviser sits down with a client to review their income and expenses, they commonly ask, “Where did the rest of the money go?” A common client response is, “I have no idea”. It’s in that moment that clients realise there’s a meaningful amount of money they can’t account for. An adviser who can help clients find and appropriately redirect missing cashflow, be it $10,000, $20,000 or $50,000 a year, will ultimately help them achieve their goals and objectives quicker. Finding an additional $20,000 to pay down the mortgage or cover private school fees is like having a $400,000 investment yielding 5 per cent only without the investment risk. But identifying the problem is only halfway to solving it. The modern client has a level of complexity that far exceeds their parents or grandparents. They have cheque accounts, savings accounts, on-line or e-saver accounts, car loans, personal loans, lines of credit, fixed mortgages, credit cards, direct debit arrangements, Bpay and salary packaging arrangements. It’s very easy for people to spend money via multiple channels, at the same time. Effective cashflow management The majority of attempts to budget fail because meaningful and permanent change comes from a change in behaviour not simply reporting spending patterns. An effective cashflow service contains three key elements:
  • A redesigned banking structure that changes a client’s behaviour at the point of sale.
  • Provision for the necessities of life (bills, food, fuel etc) plus an allowance for lifestyle expenditure that is motivating and rewarding to clients.
  • Regular reporting mechanism to provide feedback.
The role of a financial planner evolves into that of a financial coach. It’s not about telling clients what to do but educating them about the long-term impact of their behaviour and enabling them to modify that behaviour. It involves putting a personalised plan in place to help them achieve more with their money; keeping them on course; and tracking their progress. With new cloud-based technology like Moneysoft, advisers can quickly and easily get a complete overview of a client’s wealth and track their financial progress. They’ll be able to identify, and therefore address, unhealthy behaviour like habitual over-spending on pay day or a renovation blow out which unwinds a year of hardwork. A practical way to help clients with budgeting and cashflow management is to break spending into three categories. For example, predictable spending such as bills and mortgage repayments over which they have (or may wish to have) little discretion or choice; fairly predictable regular spending like food or groceries over which they have some discretion; and irregular, unplanned discretionary spending like buying new clothes, furniture or a holiday. It’s the irregular lumpy spending which gets many people in trouble but it’s where easy runs can be achieved. With the right banking structure in place, and a dynamic tracking and reporting solution, advisers can help clients modify their behaviour and get their financial house in order. Ironically, by putting boundaries in place, clients can achieve guilt-free spending and greater financial freedom over the longer term. A new advice proposition Budgeting and cashflow management is relevant for every client whether they have income of $40,000, $400,000 or $4 million per annum. It’s important for young people just starting on their financial journey and it’s critical for those in or near retirement for whom longevity of capital is important. For advisers who are struggling to engage new clients or who want to lower the average age of their client base, a budgeting and cashflow management service is a way to engage with a younger client demographic using a value proposition they understand, and most importantly, they’re willing to pay a regular fee to enjoy. It’s a value proposition which doesn’t require a large pool of investable wealth or revolve around the sale of financial product yet positions the trusted adviser well for the provision of those financial products. This article was published in Professional Planner on the 9th December 2016,   The views expressed in this publication are solely those of the author; they are not reflective or indicative of the licensee’s position, and are not to be attributed to the licensee.