The planning tools commonly used by financial advisors tend to cluster at either end of the spectrum, kind of like weights on a barbell. At one side are comprehensive financial planning programs which require inputting tremendous amounts of data and result in reports of 50 or more pages that many clients never actually read. On the opposite end are online calculators designed to solve specific problems like whether it’s better to buy or rent or if an adjustable rate mortgage makes more sense than a fixed rate. Calculators can be useful, but they only look at a single question that a client has resulting in perspective addressing only a small part of the client’s overall financial picture.

A growing number of advisors however have found that neither set of tools fully fits the bill for their various clients’ needs. They want to leverage a solution focused on long-range goals that is more holistic than what is possible strictly relying on calculators, but don’t have a client base, or an approach to advice, that requires full-blown comprehensive financial planning.

For many of these advisors the first step is often to help clients formulate a goal plan which will set the context for whatever investment strategy is being pursued. It also keeps the focus where it belongs—on the client—and not on the short term returns of any particular investment. The most convenient planning tool for these middle-ground advisors is one that they may not have considered, but likely rely on in their initial client meetings—the household balance sheet.

Much like any business, every household has a balance sheet, whether the principles realize it or not, and that household balance sheet can be the ideal construct for the advisor and client to jointly map out a goal plan. The balance sheet is a great approach because it goes beyond any individual calculator and allows an advisor to collect and interpret household financial data in an easy-to-read one-page format. One of the beauties of using the household balance sheet in client meetings is that it doesn’t require a lot of words, because the picture and the numbers tell the whole story.

The same result often shows up in comprehensive financial plans, but it takes a lot more work to get there. The household balance sheet offers a snapshot of the client household’s financial circumstances. It provides an initial diagnosis of the affordability of the goal plan. It allows easy side-by-side comparison of expenses and goals vs. assets and resources.

For example, the household balance sheet is structured so that on one side are listed the resources that can be expected to be available to fund goals. These would include current balances in brokerage and bank accounts, retirement accounts (401(k) or IRA), future savings and future benefits (social security and pensions). On the debit side of the ledger would be the household’s goals and the levels of funding required in reaching them. Ideally the advisor would break the goal section into three areas: Necessary Goals (the minimum amount of funding needed to meet living expenses in retirement, for example), Target Goals (the plan the household expects to follow), and Aspirational Goals (a best case scenario including the things and level of funding that the client would like if enough resources are available).

In quarterly meetings the household balance sheet can be used to help clients assess their goals and make sure they are on track to achieve them, but can be created with far less time and effort than a full-blown comprehensive financial plan would require. Many advisors find themselves faced with clients who don’t have a sense of the weak areas in their goal plan or even if their goals are in any way realistic. Revisiting the balance sheet on a regular basis can be instructive in determining changes in the financial circumstances of the household or in assessing potential risk to the plan.

This balance sheet snapshot allows the client and advisor easily change the income parameters. The single sheet balance sheet summary and analysis is extremely useful during periodic checkups of the financial picture and when running “what if” scenarios.

 

The Right Tool in the Right Situation

Granted there are multiple buckets of advisors and placing primary reliance on the household balance sheet construct is not the right approach for all of them all the time. But the household balance sheet as a tool does have a place in virtually every advisor’s practice. Even those advisors who consider themselves comprehensive planners probably have some clients for whom a comprehensive plan is not appropriate due to the scope of the client engagement.

The household balance sheet is also a great tool for RIAs or financial advisors whose practices are oriented toward providing investment solutions, but also recognize the importance of introducing their clients to the notion of a goal plan. As many advisors have discovered in the last few tumultuous years, if you’ve trained your clients to only think about performance, performance ends up being their only goal.  And that can lead to some unpleasant conversations.

For the registered reps of independent broker/dealers, using the household balance sheet as a planning tool can allow the creation of a more in-depth household profile than will be the result of a standard risk tolerance assessment questionnaire. Adding the household balance sheet to their toolboxes can also allow reps to handle more clients because it’s so much more efficient than the comprehensive financial plan.

Short of a full-blown financial plan the balance sheet is about the most client-focused approach an advisor can take. It’s all about the clients’ goals. It goes specifically to the client and their financial circumstances and the things that they can control. It doesn’t address the things that are out of the client’s control, like how the markets are performing this week, or this month. And from a practice management perspective, it’s an incredibly efficient tool which can effectively cut down the advisor’s planning time.  

 

Neal Ringquist is President and Chief Operating Officer of Advisor Software, Inc., a leading provider of wealth management solutions for the advisor market. In that position he is responsible for overseeing all aspects of the firm’s operations as well as setting and driving the overall company strategy.