Show them their past, to help them build their future

The fundamental principles of wealth creation may not change but personal advice needs to be dynamic and flexible to keep people engaged and on track. Jon Shaw writes. The value and importance of saving, budgeting and cash flow management doesn’t need to be explained and sold to financial advisers. It doesn’t really need to be explained to the average person either. Most people understand the beauty of compounding yet surprisingly few actually have an effective, structured system for saving, investing and everyday money management. Education isn’t the main issue. The main issue is keeping people interested and on track for the long term. That can be achieved by making the advice journey personal and dynamic, and providing continuous positive reinforcement. It’s also important to get clients to look back and see how far they’ve come rather than only looking forward at what they can achieve. Scenario modelling is a common tool used by advisers to show people what they can achieve but it can also be a valuable retrospective tool. According to modelling by Innova Asset Management, if a person with $10,000 saves $50 per week for the next 24 years, they’ll end up with $265,401, assuming a compound annualised return of 8.54^ per cent. Based on the same assumptions, if they save $100 per week for the same 24 years, they’ll end up with $459,456. That equates to an additional $194,055. When clients see these numbers for the first time and realise what is realistically achievable, they’re awakened and enthused but after they’ve been diligently saving for a while, they may start to lose interest. People need to be regularly reminded of where they’d be if they’d sat back and continued to do nothing so they can appreciate what they’re achieving. During client meetings, advisers tend to focus on the future and make forward projections, as they should, however it’s a worthwhile exercise to remind clients of where they were three, five, ten years ago and how their position has improved. In the same vein, saving, budgeting and cashflow management also needs to be dynamic. Financial advice isn’t static. It changes as a person’s circumstances, needs and objectives change. Similarly, asset allocation and portfolio construction isn’t a set and forget exercise. So, cashflow management shouldn’t be either. In order for a savings and budgeting plan to be effective it has to be personal and dynamic. It shouldn’t simply be a one-off plan to put away a fixed amount for the next 30 years. It should be flexible and accommodating in recognition that people’s circumstances change. Some month’s money is tight and people have unexpected bills and expenses to pay. They may not be able to put any money aside that month. On the other hand, a self-employed client who is experiencing a stellar quarter in terms of work may be able to save and invest more that quarter, and then pull back to more normal levels the next quarter. Whatever the case, money management needs to be agile to prevent people from getting bored or discouraged and giving up altogether. With new cloud-based, real-time cashflow management software it’s actually possible for advisers to see what’s going on in their clients’ lives and finances, and set dynamic goals accordingly. The other danger of setting a fixed savings goal each week or month is that it can become seen as a burden and chore to save, akin to mortgage repayments. On the flipside, it may hold people back who are able to save more. The fixed model works for some but others prefer a more competitive approach where their savings target consistently rises in line with their income and ability to save. What about retirees? Saving, budgeting and cash flow management is not only important for accumulators but it’s critical for retirees because they’re drawing an income from a finite pool of assets at a time when longevity is increasing. Retirees need to make their money last longer and the safest way to do that is to save, if possible. According to modelling, produced again by Innova Asset Management, a 65 year old retired couple with $550,000 in superannuation will run out of money and become fully dependent on the Age Pension at age 82^^, assuming they drawdown $59,160 per year which is in line with what the Association of Superannuation Funds of Australia (AFSA) believes is required to live a comfortable retirement. However, if that couple can save $200 per week and limit their weekly spending to $1,100 they can stretch their retirement savings to last more than seven years longer until they’re age 89 or beyond^^^. Again, to keep clients interested and engaged, they need to be reminded of where they would be if they did nothing and be given positive reinforcement to keep them going. Furthermore, retirement is such an uncertain stage in life and the assumptions that were true at age 65 may be irrelevant at age 70 so advisers need to be constantly reassessing their clients’ needs and cashflow plans.   ^Based on performance replication of the S&P/ASX 200 Total Return Index and Bloomberg AusBond Composite Total Return Index. The client’s original $10,000 portfolio was invested in 60 per cent equities and 40 per cent bonds, rebalanced every four weeks. ^^Based on the assumption their portfolio delivers the same return as the Mercer Balanced Growth Index from 1992 to 2016 ^^^Based on the assumption that the $200 weekly saving is invested in a term deposit earning 4 per cent per annum. Inflation is assumed to be 2.5 per cent. Jon Shaw is head of operations at Moneysoft. 

This article featured in Professional Planner in November 2016.

Take a free 30 day Moneysoft Business Account trial by filling in this short form.

Posted 8 years ago 5 Minute(s) to read