To work on a financial plan with clients you have to talk about their debt. But doing so can be difficult.
You need to have tough conversations to get an accurate picture of a client’s finances and so you can provide them with the best cash-management advice, says Jane Olshewski, manager of financial life planning with Investors Group Inc. in Winnipeg. While the old saying is “cash is king,” to an advisor, cash management is king, because that is the cornerstone of any financial plan.
Here are a few ways to frame those conversations on debt with clients:
> Don’t judge
Make the conversation about the future, not the past. It’s not your place to judge a client’s mistakes.
Focus on the next steps for the client to make in order for him or her to become more comfortable in handling their debt.
“It sets clients at ease when they realize the conversation is more forward-focused,” Olshewski says.
> Tailor the conversation to the client
Take an approach that suits the client’s personality.
If you know a person responds better to emotions, emphasize that he or she will be completely out of money before they die based on the information you have, says Drew Abbott, a vice president and investment advisor with TD Waterhouse Private Investment Advice in Toronto.
For clients who are more methodical, take a numbers-based approach to their decisions, Abbott says. Simply show them the physical plan with a bar graph outlining the shortfalls in income.
> Teach independence
Educate your clients on how to manage their finances instead of simply telling them to get rid of debt.
“You have an opportunity to play a role as a coach or educator when it comes to financial matters,” says Olshewski. You can show clients how to better understand cash flow, she says, so they can manage their finances themselves.
> Use an image
Give clients a visual aid to help them understand their debt and spending decisions.
Olshewski suggests asking clients to think of three buckets, representing yesterday, today and tomorrow. Yesterday’s bucket is for the client’s past commitments. It holds everything from their mortgage to cellphone payments and credit-card debt.
Today’s bucket contains the client’s daily expenses for that pay period. It includes items such as gas, food and entertainment.
Finally, ‘Tomorrow’s bucket’ holds a client’s plans, whether that’s a family vacation in six months or a plan to retire in 30 years.
Visualizing these buckets works as a budgeting aid to help people understand where their money goes and what is at stake if they cave to a big-ticket purchase, like a flat-screen TV.
“When people have those three budgets,” Olshewski says, “they understand, if they make that big purchase today, where they are taking that money from and where that costs them.”
> Discuss solutions – even the tough ones
Depending on the client’s situation, he or she may face difficult decisions. It’s important you discuss all possibilities.
If the client’s debt-load is serious enough, you may have to talk about cutting spending, downsizing a house or a spouse returning to work, says Abbott.
IE