Such a tool does exist, however, and it’s one that many planners already use in their initial client meetings. It is the household balance sheet, which quantifies and summarizes an investor’s financial resources and goals. During regularly scheduled meetings, it can help clients assess their goals and make sure they are on track to achieve them. But the household balance sheet can become especially useful when the economic news is unsettling, as it so often has been of late.
The household balance sheet is useful in these circumstances because it allows advisors to give quick, specific and contextualized responses to the real question behind every investor’s anxiety: How will this news or market development affect me and my ability to meet my financial obligations?
It’s the nature of investors to get anxious when faced with the unmanageable, and when it comes to household finances, we can’t manage what isn’t measured. The household balance sheet doesn’t address things that are out of the client’s control, like how the markets will perform this week or next month. Instead, it creates a snapshot of a household’s finances and demonstrates the results of different choices or scenarios. It gives the advisor a holistic view of the client’s portfolio, including goals, which can lead to better measurement and management of the assets earmarked for those goals.
Much like any business, every household has a balance sheet, whether the principles realize it or not. The first step in constructing the household balance sheet is to help clients formulate a goal plan. This sets the context for whatever investment strategy is being pursued. It also keeps the focus where it belongs—on the client—and not on the short-term results of any particular investment or market condition.
A balance sheet allows the advisor to collect and summarize household financial data, with side-by-side comparisons of expected commitments, such as expenses and goals (liabilities), versus the resources needed to pay for them (assets). Resources include current balances in brokerage and bank accounts, retirement accounts, future savings and future benefits, including Social Security and pensions. On the commitment side of the ledger would be the household goals and expenses, such as paying for college educations or retirement plans, and mortgage expenses.
After the advisor has collected the financial data, the next step is to use the balance sheet to track resources and goals over time. This will provide the perspective needed to determine whether clients can afford their goals and, if not, where adjustments should be made. Revisiting the household balance sheet on a regular basis will allow investors to recognize and respond to any new developments, whether these are personal or global.
During periods of dramatic fluctuations in the markets, advisors can use the household balance sheet to help stabilize their clients. Its easy-to-read one-page format can be revised with far less time and effort than a comprehensive financial plan. The balance sheet allows advisors to plug in different “what if” scenarios to address, quickly and concretely, a client’s anxious questions.
Even when tough budgeting decisions are called for, most clients appreciate the feedback provided by the household balance sheet and most advisors appreciate the guardrails it places on client discussions. Most important, the balance sheet keeps the focus on a client’s long-term plans, rather than on short-term fluctuations in their portfolio. It thus serves as a reminder that investments are simply the means to attain goals.
Whether scheduled or impromptu, discussions between advisors and clients should always focus on goals and on the choices the client can make to achieve them. The household balance sheet ensures that those conversations are based on relevant and actionable information – which lowers everyone’s anxiety level and strengthens the relationship between the advisor and client.
Neal Ringquist is president and chief operating officer of Advisor Software Inc., a provider of wealth management solutions for the advisor market. In that position he is responsible for overseeing all aspects of the firm’s operations as well as setting and driving the overall company strategy.