This article is the fourth in a six-part series on best practices for wealth advisors. You can read the previous column, “Building Trust With Clients and Prospects” here.
Building a financial advisory practice is a process. It’s something you can do that’s repeatable and replicable. And how you go about building your business determines what kind of business you’ll have.
If you’re winging it now, you’ll always be winging it. It’s better to make decisions and establish practices that contribute to the health and success of your business. That’s the easier way.
One way to help build your business — and keep a steady increase in the flow of your income — is to incorporate a found money commitment into practice with your clients.
What Is a Found Money Commitment?
A found money commitment is a client’s commitment to utilize found money to help them achieve their financial goals.
Found money may come from savings realized through reduced expenses, windfalls, tax savings, or any other area where you and/or the client find places to free up either one-time funds or ongoing cash flow that could be used to reach goals.
The danger of not having this commitment is that the funds disappear, they get absorbed into the pool of expenses.
Or worse: They get blown on some frivolous purchase. Without such a commitment, you may never even know that some of this money was found.
Implementing a Found Money Commitment
Like most aspects of planning, there’s a process involved. The first is establishing a solid baseline. That baseline is the client’s existing discretionary income.
Taking the client’s word for their discretionary income can be a big mistake. They often don’t know. Or they throw out a number that isn’t real.
And if this number isn’t solid, you run the risk of any ongoing contributions being canceled — and that costs you money.
The number is easy to test. Let’s say your clients say that as a couple they have $1,000 left over each month after paying their bills and allocating as they presently do toward their goals.
Let’s say they have decent incomes and this seems reasonable. So where does this money go? That’s the test. If this discretionary exists, it has to go somewhere. Typically it would be undirected and accumulate in the checking account into which pay is deposited.
This account should then have a decent balance. At least over $10K. And you want to see where that account was three months ago and six months ago and make sure the excess is real.
Sometimes, the bank balances in a case like this are hovering under $1K in total. Doesn’t mean the clients are incorrect.
Perhaps something else is going on. You need to probe: “Tell me, Mr. and Mrs. Client, has something significant recently changed in your financial situation? Has something changed that has just created this discretionary income?”
Perhaps they both just got raises, perhaps one got a raise and they just finished paying something off. But there’s also the perhaps that this discretionary doesn’t really exist. That’s the most common scenario.
Usually if the account balances don’t support the clients’ stated discretionary and there’s been no major change to create this discretionary, then the discretionary isn’t real.
Determining Actual Discretionary Income
You’ve got some options. Bank statements show you what’s really happening to the balance.
Perhaps there are leftover funds, just not as much. Perhaps the clients need to track expenses for a month or two to find out where the money goes. Since so little is done with cash now, the bank statements will probably tell you what is really happening.
If there’s a big discrepancy between what the clients think is happening and what reality says is happening, that’s ok, just not ideal. Actually it’s pretty common, unfortunately. You just need to implement things across time.
Instead of investing the whole thousand that doesn’t exist, begin with a couple hundred, then review after a couple months to see if you can increase it.
Ideally you can come to a number that is really solid and supported by the evidence. Then you have a real good floor. Now’s when you want to gain commitment.
Getting Clients to Commit to Goals
Let’s alter our scenario a bit and use another all-too-common client.
Let’s say they need to allocate an additional $1,400 per month to be on track for their financial goals. And you’ve co-established a very solid discretionary number of $475 per month. There’s work to do.
It’s best to set the stage first. Ask the clients what they are willing to change to meet their shortfall. Often you’ll pick up a bit this way.
Just as a reminder, you want to be supportive. If they tell you they’ll go out to eat one less time per month, which will put another $100 into the pot, that’s great. You’ll want to use reflective probes to show understanding and clarify their commitment.
Each time they give you something, you do the same process. You clarify and gain commitment with a reflective probe. Then you ask “what else?” And then you shut up and wait.
Repeat this process until they have nothing left to offer. Now the stage is set.
They know their goals are important, you’ve been through all that. And they don’t know how they can make it happen. They’ve put in all they’re willing or able to put in.
Now is the time to gain a real commitment to found money. You’ve probably already seen most of what you’re looking for sitting right there in the budget. But never ask for it without commitment first.
You’ll want to be nice and simple and direct: “Mr. and Mrs. Client, if I am able to show you ways you could find additional money in your budget, how much of that would you be willing to commit to your financial goals?”
Let them talk if they need to. Pretty soon they’ll give you a number; most times that number is 100 percent.
Then ask the same thing for windfalls, except, of course, that you won’t be the one to find them. You’ll get a number, maybe 100 percent, maybe 50 percent. Whatever number is fine. Your job is to lead them, not beat them into submission.
Once you have the numbers, you need to confirm them with a reflective probe. They need to own the commitment.
Don’t rush the process. Nice and simple, “So if I understand you correctly, Mr. and Mrs. Client, you are willing to use 100 percent of any money I am able to find in your budget to help you reach your financial goals?” Same thing with windfalls. Confirm the number, confirming it’s theirs.
Now you have commitment to the discretionary and commitment to found money. There are lots of places to find the money.
Where Else to Find Money
Property and casualty insurances are a big one. They should be shopped periodically, but only after you review the coverages.
Are the coverages appropriate for their situation? Do they have very low deductibles that it might be appropriate to move up a little?
Are there redundant expenses? Many clients are, for example, paying in more than one place for AAA-type protection, as it is often included in either their P&C or even with a newer car’s warranty.
There are many unused subscriptions out there. Magazines never read, streaming services never used. Find out if there are any the clients could willingly do without.
Don’t overlook memberships: Many more gym memberships are paid for than are used.
And review other recurring expenses like cable and security systems. Lots of times people are overpaying or paying for things they don’t use.
And you’re not fixing the problem for them, you’re giving it to them as an assignment, to shop around and consider alternatives. The legwork is on them.
So far you’ve most likely found a bit of money and haven’t touched their lifestyle. They can free up a bit without altering in any way what they’re doing. Now you need a big one.
Modifying Taxes for Additional Found Money
Now you need to deal with taxes. Most clients get excessively large refunds. Most clients also have very predictable tax situations. This year looks a lot like last year looks a lot like the year before.
There are certainly some differences due to tax law changes and increases in income. And we have to be careful not to overlook any other potential changes — including, due to you being the great advisor you are, that they’re now contributing much more to their pre-tax retirement accounts.
Hopefully you can simply lay out your clients’ tax situation accurately and recommend they adjust their withholdings to take the majority of their over-withholdings back into their paychecks where you can allocate it into investments to help them achieve their goals.
Some advisors are very competent with taxes. Others have to send the client to a tax advisor, which costs time and money.
Leave them with a reasonable refund as a cushion. What is reasonable is a function of the complexity of their tax situation. With most new clients you’re finding a few grand here to add toward their goals each year.
In either event, the client may push back on giving up the tax refund.
You don’t argue, you gently remind them of their found money commitment, and you shut up and wait while they beat themselves up.
Most times they’ll acquiesce. It’s in their best interest to do so.
Any good system requires maintenance. You’ll want to confirm discretionary at least once a year. You’ll want to verify they’re still committed to allocating found money.
Because you’ll continue to find it. They’ll actually find some of it and offer it up. It’s amazing how much they’ll find themselves across time.
But they’re only doing this because you taught them to commit found money to their financial goals. It’s, after all, a commitment they’re making to themselves.
They are willing to do what they reasonably can to achieve their financial goals. You’re just leading them down that path.
This article is the fourth in a six-part series on best practices for wealth advisors. You can read the next column, “The Fine Art of Goal Development” here.