By Adrian
Nazari
A client walks
into your office. The market has him down. His retirement
account is not where he’d like it to be. He has a new baby and
wonders where he’ll find the funds for her college education.
What does the future hold?
As a financial
advisor, you have the power to help this client reach his goals.
In fact, with the right services in your business, you could
help him find the funds he needs to increase his retirement
savings and save for his daughter’s education today. You could
change his whole outlook in a matter of minutes.
With today’s
economy, financial advisors are seeing many clients who are
worried about the market and their future. They want to save
more, they want to get out from under their debt, and they want
to save for their children’s education, but simply do not know
how to make it happen.
Advisors want to
make it happen. They work to mix just the right amount of
ingredients—securities, bonds, mutual funds, 401(k)s and more—to
bake the perfect cake for each client: the cake with the words
“financial security” written on top.
But often one key
ingredient is missing: liability management. While most
financial advisors have long lists of ingredients to manage
assets, their liability cupboards are often bare. And that means
advisors today are ignoring an important part of their clients’
financial well-being.
According to
recent data published by the Federal Reserve, U.S. consumers
hold more than $8 trillion in liabilities. These are mostly in
the form of mortgages and equity loans but also in credit cards,
auto loans and other forms of debt. This debt can be a burden on
any investor trying to build his portfolio. Yet managed
properly, debt can positively contribute to net worth. With a
careful plan, an investor can actually generate assets from
debt.
The total
financial advisor is one who understands and helps his client
with debt as well as assets. To best manage a client’s finances,
an advisor must look at both sides of the balance sheet: assets
and liabilities. In doing so, he can find the cash to start
funding a 529 plan for a client’s daughter and build his
retirement account as well. And that’s not just good news for
the investor; that’s good news for the advisor as well. Helping
clients better manage the liability side of their balance sheets
offers a tremendous growth opportunity for the advisor’s
business.
To build a liability-management service into your practice, you
need to look at a client’s total liability picture. While
mortgages are often the biggest liability, they are rarely the
only debt in the client’s portfolio.
Once you have
discussed all liabilities, take the following steps to help your
client and grow your business:
First, treat
liability management as equal to asset management.
Make the
commitment to assist clients with their debts as well as their
assets. Find a strong liability-management partner to acquire
the right tools. This partner can perform back office services;
tap into a lot of financial institutions; walk you through the
transaction process; handle the fulfillment and processing of
the liability plan; and educate you on how to translate
liability-management services into the growth of your business.
Also, include liability-management services and tools on your
website with 24/7 access and transactional capabilities for your
clients.
Second, find funds
for your client. Once you are set up to offer liability
services, the most important step to growing your business is
helping your clients reassess their debt and determine where
money can be found and saved. The key is to find an
Internet-based total liability-management service that helps you
“find” funds for your client, that can save your client
thousands of dollars each year and can provide transactional
capabilities to implement the chosen plan on demand.
An Internet-based,
liability-management service allows an advisor to enter general
information about his client and his liabilities into a Web
interface. The service will calculate scenarios for
restructuring the debt based on the information entered and will
match the best provider and product for each scenario.
The advisor is
then given several options to present to the client. Each
option, matched with the appropriate provider, will include a
monthly cash flow and tax savings.
For example, let’s
say the client who is looking to increase his retirement savings
and build a college fund for his daughter has a $450,000 home
with a $300,000 mortgage and $2,000 in monthly payments. The
client also has a $10,000 car loan with $400 in monthly payments
and a credit card with a balance of $5,000 and a $300 minimum
monthly payment. By plugging this limited information into your
liability-management service, you could present this client with
several plans that could generate anywhere from $200 to $300 to
nearly $1,000 in monthly excess cash flow and tax savings in
today’s market, depending on the client’s financial profile and
lifestyle. Once the client selects a plan, it can be implemented
online right away, providing better cash flow, more tax savings,
and funds for that retirement plan and 529 plan.
Third, reallocate
“found” funds into assets. The beauty of providing total
liability-management services is that the advisor helps the
client find the money to fund a solid, asset accumulation or
preservation plan. “Found” funds can be converted into any
number of assets, such as mutual funds, 529 funds, annuities and
retirement programs.
Fourth, understand
the varying factors that contribute to total liability
management. Mortgages are managed based on the fluctuation of
rates. But rates are not the only factor when looking at the
total debt picture. An advisor should manage liabilities based
on different axes that impact clients at different times. For
example, the advisor must consider the following factors:
Risk tolerance:
What is the client’s willingness to take risk?
Life cycle:
Is the client close to retirement? Does the client need access
to equity? Is the client looking to buy his first house? Does
the client have children who will go to college? Does the client
care for elderly parents? The answers evolve through the stages
of the client’s life.
Economic cycle:
What are interest rates currently? Where are we in the cycle and
will rates likely go up or down?
Goals: What
are the client’s investment goals?
Cash flow
needs: Are there short- and long-run life events that must
be considered?
Finally, shoot for
a high “L2A.” L2A, or the “liability to asset” number, is the
total dollar amount that an advisor converts from liabilities
into assets. An advisor’s performance can be measured by looking
at how many liabilities he converted to assets in any given
period. For example, how much cash did an advisor free up for
his clients in one year? The cash can then be reallocated into
asset-accumulation products. And the L2A number can provide a
strong indication of an advisor’s worth. |
