The 8 Critical Components of a Financial Plan for High Net Worth Clients
Every financial advisor and wealth manager will present you with a financial plan based on the information you bring to them. However, if we may digress for a second, we wish to alert those of you with $5 million to $500 million in investable liquid assets that you can achieve a much broader and deeper level of knowledge by submitting a request for a free copy of the 7 Secrets to wealth management, 70+ page, book here.
On the surface therefore, every financial plan seems to include an air of customization. The surprising reality is somewhat different. Almost every financial advisor – especially those from big investment firms with branches dotting the country like fast food franchises – will give you a plan that’s very similar to the ones they offer to everyone else.
Table of Contents
Building Upon the Foundation of Certainty
These first four components of your financial plan are the most critical. Everything else builds on those. Incidentally, these first four are also the ones most financial planners get wrong, or don’t even utilize.
These next four components make up the second layer of your foundation. Built upon the first, they are just as important if your plan is to succeed and sustain itself over the rest of your life.
Why? Because every plan looks great at first sight. Just like everyone feels great optimism and excitement at the start of a long hike or a marathon. But what happens ten years later? What happens when half your goals have become obsolete and replaced by new ones you hadn’t even thought of when you first developed your plan? What happens if your financial situation suddenly changes (for better or for worse)?
That’s what the next four critical components of financial plans address.
5. Allocates Your Assets Based On Your Goals
Asset allocation is, according to multiple experts, the most critical component of any investment plan. Remember the context here though. Your investment plan is a subset of your financial plan. The first four components listed above comprise the core foundation, as already stated.
Out of that foundation, we develop your investment plan, which begins with asset allocation.
Your allocation is based on your risk tolerance, in part. But your risk tolerance also is subject to your goals and the results of your stress tests and the historical data. Too many advisors just ask you what your risk tolerance is, with zero context and with nothing other than hunches and personal preferences to guide you.
This is worthless.
Your risk tolerance – in a financial plan of the sort we’re discussing – is in one sense not even up to you. Your risk tolerance flows out naturally from the results of your stress tests and goals. If a conservative allocation allows you to accomplish all your goals, then your risk tolerance is conservative. If a moderately aggressive allocation at this point in your life is what helps you accomplish your goals, then that’s your risk tolerance.
For instance, we had a client come to us once whose previous managers believed they could outperform the market. (Hint: That’s a major warning sign you need a new advisor. For all 7 warning signs when choosing a financial advisor, click here) [link to Ultimate Guide]
That manager opened eight accounts with various money managers, all of them positioned for massive growth allocating 100% of his assets in equities. No bonds. Only one of eight beat the market. And this is not unusual at all. [link to blog 1 – outperforming market]
After running his lifestyle goals and plans through our process, we found this client only needed 30% of his assets in equities. Far from 100%! With a conservative asset allocation, he would have lower taxes, all his investments in one place, peace of mind, and assurance he would achieve what mattered most to him.
His risk tolerance was revealed by his plan. It did not determine his plan.
See the difference?
6. Rebalances Regularly
With great asset allocation comes great responsibility to rebalance.
Not all your assets will perform as expected. Some will do better, some will not. But the allocation is what keeps the plan safely intact in 75-90% of your stress test scenarios. So a critical component of your financial plan is to rebalance your assets regularly to preserve that financially secure asset allocation.
7. Pays You Predictable Monthly Income
The only way to have true peace of mind – even during retirement, is with assured monthly income. Thus, your financial plan must include a monthly amount you can count on just as if it were a paycheck.
This income must be enough to sustain the lifestyle you outline in your goals. It must also be an amount that keeps you within the 75-90% Comfort Zone we keep referring to.
Again – are you seeing how all these components of your financial plan work together to produce the secure, focused, and successful lifestyle you want?
8. Updates Quarterly
Your goals, plans, finances, and priorities will change. It’s inevitable. No one’s plan stays intact and relevant for decades.
Thus, if your financial plan doesn’t get updated regularly, its relevance begins to diverge from your life until eventually it disconnects altogether. For instance, suppose your initial financial plan allocated a sizable portion of wealth to send two of your grandkids to the most elite universities.
But then, one grandkid lands a full-ride scholarship, and the other decides on a different life path and doesn’t need the money. Now you’ve got hundreds of thousands of dollars you weren’t anticipating having. And suppose on top of that, you get divorced.
Just these two events will upend your entire financial plan. Those extreme (though very common) examples highlight the many more small events that slowly erode every financial plan over time.
Your plan, your goals, your asset allocation, your rebalancing, your monthly income, your financial investments – all must be updated every quarter.
At Pillar, this includes re-running the 1000 stress tests to make sure your financial plan remains on track – according to your updated lifestyle goals and situation. Again, these eight components of a financial plan must function as a single unit, not in isolation. Hopefully you’re starting to perceive the depth behind this approach.
Non-Critical Components of a Financial Plan
What you don’t need in your plan are:
- Projections or goals for a specific rate of return
- Pre-packaged products (especially ones with high fees, which most of them have)
- Non-data-backed goals like trying to outperform the market
Your plan is based around your lifestyle goals, and how your money can help you achieve them. Using the stress-tested historically-backed approach, you have that security baked into the plan regardless of how your specific performance looks.
Your performance matters – it’s how we achieve the plan. But the performance itself is not the plan.
If you want a financial plan created for you based on these eight foundational components, personalized for your specific situation, start a conversation with Pillar today.
If you want a cookie-cutter plan that’s the same for someone with $50,000 in assets as it is for someone with $50 million, then visit your local franchise. And grab a burger with fries while you wait. Start a Conversation
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