The Wisdom and Wealth Podcast

Financial Planning: More Than Just Portfolio Returns Episode - 89

November 16, 2023 Joshua Klooz
The Wisdom and Wealth Podcast
Financial Planning: More Than Just Portfolio Returns Episode - 89
Show Notes Transcript Chapter Markers

Welcome to this week's episode of Wisdom and Wealth! Check out below for an outline of today's discussion. 

  • Common mistakes in financial planning:
    • Emphasis on retirement and portfolio return assumptions
    • Warning against exclusive focus on short-term gains and market volatility
    • Advocacy for concentrating on factors within one's control
  • Importance of trust in financial planning:
    • Building trust through understanding clients as individuals
    • Stressing the significance of beliefs and principles in the partnership
  • Constructing a cash flow as a critical aspect:
    • Highlighting the importance of understanding clients' unique goals and aspirations
    • Evaluating tax planning alongside income requirements
    • The role of cash flow in controlling market returns and optimizing tax efficiency
  • Avoiding common pitfalls:
    • Caution against advisors focusing solely on returns and not understanding the client
    • The value of asking in-depth questions about family, beliefs, and tax planning
    • The potential downside of seeking higher returns without considering cash flow efficiency

Please check out and subscribe to my Youtube Channel and Newsletter!

JOSH KLOOZ, CFP®, MBA
WEALTH ADVISOR

Phone 281.719.0036
Text 281.699.8691
Fax 281.719.0156
jklooz@carsonwealth.com

1780 Hughes Landing | Suite 570
The Woodlands, TX 77380

Music by bensound.com




Speaker 1:

Hello and welcome in again to the Wisdom of Welfth podcast. Thank you again for your time. Today I want to focus in on some of the things that I encounter when a prospective client comes across my path and primarily I want to focus in on what I believe are some of the pitfalls that different friends and neighbors can encounter. So what do I mean by some of the common things? So when I review a prospective client's financial plan or their financial standing when they come in from other firms, one of the common mistakes that I encounter is that I find that there's a lot of the time someone's been sold the idea of retirement and the portfolio return assumption necessary to get them from point A to point B. Now you may be listening and saying, josh, what's the big deal? But you may think that's only natural. But for someone to focus on just portfolio returns, I'd submit to you that honestly, that's focusing on the wrong thing. It tends to lead to people to think very short term rather than long term, micro rather than macro, and when you combine this with a market that typically rewards people for long term decision making and long term commitments, it's a recipe for disaster. So focusing on returns exclusively, upfront again, I just think doesn't serve anyone very well when they start out in that conversation. It causes someone to focus on something that, frankly, they can't control and which isn't designed to bring you a short term return, frankly, in most cases. So, rather than focusing on what you can't control, I'd rather that you focus on what you can control, and by that I want you to focus on your spending, your tax planning, and a lot of the financial relationships that are out there either knowingly or unknowingly start out on the wrong foot to begin with. So to illustrate my point, I'm going to walk you through a hypothetical scenario. I'm going to tell you about a hypothetical couple named John and Jane Doe. I'll focus today on just a few of the things that I think are macro points, and maybe later we'll dive in more, but we'll see where we get today With this time that we have together. So, first and foremost, mr and Mrs Doe came in to their financially advisor relationship wanting to know if they could stop working. Not uncommon and not unlike most other people that they want to know when they could stop working Would they have enough to live on? Like most people, they're looking forward to Just being able to spend their free time as they want, and they wanted more of their free time. They wanted to use that time, however, they chose. Often, when this is the case, people go in search of what they think is security, and it causes them to ask the wrong questions because they don't know what questions to ask. They haven't spent their life in the industry, around the industry, and even if they verify the firm that they're interviewing Through other sources, they can't necessarily verify whether their firm can deliver on what they're selling them, whether they can deliver on what they're seeking. Even so, without having any previous experience, oftentimes people partner with someone who's focusing on the wrong things Without even realizing it. Like we mentioned before, they focus on the just a simple rate of return, asset allocation and buzzwords like are you a conservative investor or are you a Moderate investor? They don't do any actual Planning, and the hard part about this story for Mr and Mrs Doe is that, like so many people, they fall into this trap. They're seeking Security and they look to investment returns and, deep down that, they they think that this is going to bring them income security, so they focus on something that I believe unfortunately Causes them, gives them the illusion of security and causes them to focus very short term rather than long term, and Unfortunetly the illusion comes to an abrupt end the first time that market volatility comes into play, because everyone believes that they've been through you know, wild market before. But what we found, and what I have come to understand, is that going through a market Volid, a volatile market when while you're working is far different than going through one and experiencing one when you're driving your income and your paycheck from your resources. It's just a different psychological profile to begin with. It puts you just in a different category all the way around. So when someone comes to me and and asked for these things similar to like Mr, mrs Doe or John and Jane, I want to focus on their monthly income stream. But before we get there, john and Jane, you know, like most couples, to make matters worse with this newfound time freedom, they consume a little bit of TV and with that TV comes Financial news, and if you've been around me for a long time, you know that I don't have any love lost for financial media. And what hurts is you know they've. They're trying to do the responsible thing and, like most couples, we'll just use this. For example, john probably spends more time trying to be informed about market trends, and Jane doesn't spend as much time, you know, focusing on that. So, unfortunately, even though their heart is to be Better informed, they've gone to the last place that I'd spent that I would send anyone that I cared about or wanted to advise to find good information, to be informed. Now, luckily, jane has avoided this trap to a degree, when you know she's just decided not to worry about it. Outsource this to her husband, you know. But it still isn't a good recipe, because when Moments of stress come into the picture, guess what? You know, you're both watching the TV at the same time. So, again, like I said, the sad part about all this is that John and Jane, these hypothetical Perspective clients, just simply want someone to give them wise financial counsel. Unfortunately, the first step to this whole process wasn't jotting down their investable net, net worth. It wasn't having them fill out an otherwise meaningless, you know, investment risk profile or analysis, but it was actually getting to know them as people, trying to understand their unique goals, aspirations and dreams, getting to understand what their family's unique needs are. You've heard me say it once and I'm positive you'll hear me again say it again, but all financial planning and wealth advisory relationships ultimately begin and continue because of trust, and that trust is only capable and only an option when you actually understand who each other are. And a side note to that is it's very important that you understand the beliefs and principles of the person that you're partnering with as well, but that's a side tangent. So when you have spent your entire life in another field, you're coming to my industry and our industry hoping to find someone that'll guide you through the next chapters of your life. You want someone that knows how best to help you and your specific needs to get answers to life's questions, regardless of what your scenario might be. You don't need those answers all at once, obviously, and if you've been with me in any amount of time, you know that I tend to get very particular and I ask a lot of questions up front. I don't want to expect those answers all up front, but I do want those questions in the back of your head. There's simply no amount of there's simply just no amount of time that you could spend asking someone about their financial resources up front. That could outweigh the value that you get from understanding someone's unique beliefs and life experiences before you ever begin to look at asset allocation and all those other things. So John and Jane deserved someone who was going to get to know them, at a minimum in their family, and more in depth the better. The more in depth, the better. They deserve someone who was going to take the time to monitor their cash flow and that's assuming that they constructed a cash flow but monitor that cash flow and make sure that it was constantly fitting their needs. More importantly, they deserve to partner with someone who would come alongside them and explain what was going on periodically in their cash flow and in their portfolio and how that affected their financial situation, and arm them with the information that they needed to fall back on when you know their confidence in the market, you know waned, or when market volatility inevitably comes around At the end of the day. I find couples like John and Jane in various stages of life and I typically ask them for their financial and their family investment philosophy. And also I ask them could they explain to me a little bit more about their tax plan and what tax planning has gone into their family situation? Now, if I get too long of an awkward pause, I typically try to make a corny joke to loosen things up, but this is the point where I explain to people that constructing a cash flow is the second most critical piece of financial planning. Understanding you, the client, is first and foremost, but constructing that cash flow and understanding what those income requirements are going to be is important. Sometimes clients, or prospective clients, may come to us and say, hey, I need a number that the engine of their financial resources just can't generate, and so you have to say, okay, well, here's what we need to do in order to help you achieve that goal, and sometimes it means working longer, sometimes it means investing differently, but it is never as simple as just you know asset allocation and forgetting everything after that fact. Constructing a cash flow for people is important because it forces you to map out another piece, which is your tax rate. I've talked about tax planning and it forces you to understand what your tax rate will be today, what it will be once you've reached required minimum distribution age and what it will be when you're in your 80s and 90s, and then even what tax rate your heirs might be at when you know they inherit your assets. I think it goes without saying, but I'm gonna repeat it again how beneficial is it to get a client another 1% return? If it arbitrarily, if in getting that 1% return you've made their cash flow inefficient and their tax rate goes up and they're not actually able to harvest any of the benefits of that increased return, it just doesn't make any sense. And typically what happens in order for the typical advisor to get that extra return is that he exposes clients to, he or she exposes their clients to greater risk than is necessary. So again, when I construct a cash flow for someone and I'm looking at how that I generate that cash flow and that income and also I want to know what their tax rate is at those various stages of life, it may sound minuscule or like a small thing, but even being able to change someone's average tax rate over the course of their investment lifetime 1%, you know and marginally bring that down and smooth out their tax ride, that's something that you can actually plan for. That's something that you can actually, with a greater degree, control market returns In the timing of those market returns. You have absolutely no control over those things. What you do have control over is the plan that you create and the discipline that surrounds and the education process that surrounds your investment philosophy. If you can avoid those large spikes in your income and make sure that you're able to keep your dollars working longer for you, it goes without saying that you're going to have a better outcome in most cases. The reason that I'm such a big proponent of this is that, again, it forces you to focus on what you can control, not what you can't control. We're in a unique position where we can help clients figure out how to put their wealth to work through wise choices over time, so that they can be more efficient, more tax optimized and, in most cases, save money at the end of the day. If you're watching this, listening to this or choosing to read it via the newsletter, and you're entertaining the thought of partnering with someone or working with someone who hasn't really spent a whole lot of time getting to know you or who is asking a lot of questions upfront in the first 20 or 30 minutes of meeting you about what your investable assets are and what you expect your returns to be, you might want to be forewarned that may not be the best setup and the best relationship to generate the trust and understanding that I previously mentioned If you're around the industry long enough, and I think just to summarize here one of the things that probably the whole lack of understanding who your client is and getting to know them, the piece that and then failing to put together that cash flow the reason that this comes full circle is, if you're around the industry long enough, you'll undoubtedly hear an industry veteran tell you that the words that they fear the most over everything else, and the words that I'd even say they probably hate the most, are this time it's different. What they mean by that is that the talking heads are doing what they do, which is sell books instead of manage money. They're telling people that it's time because of this time this market event is different than all the rest. It's time to ditch your first principles and all that you've ever learned and run and hide, when in reality that's the exact opposite of what anyone that cares about you at any stage of life has ever told you to do. The fact that you think you can avoid momentary pain for long term gain. That's just the reverse of the entire way the whole universe works. So I think it's important to base your relationships and design your relationships so that they help you to control what you can control and to plan for those moments that no one can predict and that no one can avoid, and help you go through those events and understand how those events affect your cash flow or don't affect your cash flow, and what are the requirements that you need to meet in order to continue to be disciplined, tax efficient and continue moving forward and making progress with regard to your plan. Is the person that you're meeting with or deciding to meet with today? Can they do the work necessary to help you generate and inconsistently make wise choices over time as they pertain to your cash flow? Those are the questions that you need to walk through. Thank you for your time and your attention today. Again, if you're planning on partnering with someone, or if you're even thinking through your existing relationship, ask yourself the question does this person really genuinely want to understand who my family is and what our cash flow looks like, and how that cash flow affects our purpose in life? You've heard me say multiple times again that my calling is to enable others to fulfill their calling, and the way that I do that is ensuring that people's financial wealth is harnessed to their purpose in life, and so, at the end of the day, I have to know clients very well and understand how to communicate with them, how each and every portion of their portfolio affects the cash flow that they depend on and the cash flow that they depend on to secure goals and dreams for this generation or the next generation. Thank you again for your time today. If you have questions, please reach out and, as always, please know that I'm wishing you and your family continued truth, beauty and goodness in the road ahead. Have a great day.

Common Pitfalls in Financial Planning
Financial Relationships and Family Cash Flow