ACP Blogs

 View Only

The Seven Core Concepts You Need To Build A Holistic Financial Plan


Here at ACP, our community of advisors has a particular way of looking at household financial planning. Even though we all serve many different clients with varying demographics, household incomes, financial profiles, and goals, we come together on a core set of beliefs that fuel our practices. 

Today, we want to illustrate ACP’s seven core concepts for approaching financial planning with clients. These concepts were developed by Bert Whitehead who in 1995 presented them to a group of four other professionals with the intent to change the way we approach financial planning: from institutions to people. 

Bert knew that as it currently stood, the financial planning industry didn’t cater to the needs of the real people who walked into his office each day. He, like others, noticed that the financial industry was designed to sell products to consumers and perform investment research and analysis; it was not about understanding and creating a plan for people who needed help. 

We are grateful for the work that Bert and so many other talented advisors have done over the years to build a community of people with a passion to make the financial planning world comprehensive and tailored to the people who fuel it. You can listen to our interview with Bert by tuning into our podcast episode. 

Here are the seven ACP concepts that will help you build a successful, client-focused financial practice.

1. Adopt an endogenous vs exogenous approach

In statistics, endogenous variables are determined within the model and are therefore internal. Exogenous variables are determined outside of the model, making them external. Now how does this idea apply to financial planning? 

The endogenous and exogenous approach seeks to identify financial planning issues that are either one of two things:

  • They are in control of the client (endogenous)
  • They are outside of the client’s control (exogenous)

When we think about this in terms of financial planning, it is important for advisors to prioritize the endogenous factors of the client such as their job, education, or other factors intrinsic to the client’s life, as opposed to exogenous factors like interest rates or market fluctuation over which the client has no control. 

You and your clients can’t control when the market will go up and down but you can control and track your spending habits, debt, investment goals, etc. 

Understanding this approach gives the advisors the opportunity to structure their practices around the needs of each client as opposed to timing the market or predicting financial trends. 

2. Determine your client’s money personality

Every person has a unique personality. Some people are shy whereas others are expressive. Some march to the beat of their own drum, where others feel more comfortable in routines. Just like each of your client’s traditional personalities differs, so too will their money personalities. 

A money personality is a tendency for how one views and handles money. Some clients may adopt more risk than others. Some clients may be spenders while others are savers. Identifying the money personality of your clients will help you best tailor your approach to their financial plan. 

If, for example, you are working with someone who is a big spender, perhaps you will help them automate their savings (personal, retirement, investments, etc.) to help them reach their goals. Each person is different and will need unique advice depending on their relationship with their finances.  

3. Measure risk analysis (not risk tolerance)

Risk tolerance has been a part of the financial planning vernacular for a long time. This term refers to the amount of risk a person is willing to live with for their desired returns. From a psychological lens, risk tolerance can’t be measured, as it refers to a personal threshold for the amount of risk assumed in an investment plan. 

A better way to think about risk is in terms of risk analysis. A risk analysis differs from risk tolerance because it assesses the amount of risk that is appropriate for a client to take based on their financial and personal situation.

Bert’s example to us was working with entrepreneurs. He didn’t feel like he needed to understand their risk tolerance because as burgeoning business owners, they are certainly comfortable with risk. His job really is to help them build a portfolio and financial structure to offset the risk taken in their businesses.

Risk tolerance asks the client how much pain they can handle, whereas risk analysis asks how much risk is appropriate.

4. Reinvent goal setting

Too often in the institutional financial world, Bert saw people creating lofty, unrealistic goals and depriving themselves in order to reach them. This struck him as a problem as he began thinking about new ways to set and stick with goals. 

For him, it is important that goals are set by first analyzing what is happening in both the financial and personal realm of the client. After the client knows where they are, they begin to visualize future goals and think through some questions:

  • How do they see their lives unfolding in 5, 10, even 20 years?
  • What do they really want from their lives?
  • How can their finances be set up in a way to bolster them to reach those goals?

Once you have this information, you and the client can set a future objective which they can work toward. This is the opposite of deprivation, rather it enables the clients to create a vision for themselves which is realistic and grounded in what is happening in their lives.

For this goal-setting technique to work, you’ll need to put a few things in place. 

  • The goal should be focused on making the client happy, not a singular feature of their financial life.
  • The goal needs to be concrete and specific enough that once the client reaches it, they know, and it is clear to them that they have reached it.
  • The goal needs to have realistic objectives and time tables. 

5. Know the financial lifecycle

The financial lifecycle is an important tool to help measure personal financial progress. There are four stages to be aware of:

  1. The foundation stage
  2. Early accumulation stage
  3. Rapid accumulation stage
  4. Wealth distribution stage

The financial lifecycle is all about understanding where your clients are in their lives, namely the relationship between their earnings and wealth. These different phases make the lifecycle measurable and can help inform how you give them advice as they move through these different phases. 

6. Employ functional asset allocation

Asset allocation is another popular investment strategy that seeks to balance assets in a person’s portfolio which will yield the highest return at the lowest possible risk. This is an important strategy that can transform your client’s investments. 

What do we mean when we talk about asset allocation in a functional sense? This adds another layer of depth to the plan, prioritizing tax-efficiency, risk analysis, and balance. Let’s take a closer look at a few examples. 

Traditional institutional investors view asset allocation as the proper mix of stocks and bonds. While important, this viewpoint misses a few other key aspects of a person’s assets.

One function of asset allocation is making the most of your client’s liquidity. Bert suggests this liquidity comes in the form of cash and bonds while also advising clients to take the least amount of risk in this area. Safety is more important than yield, especially where liquid assets are concerned.

Another function of asset allocation is home equity. Institutional investing overlooks the lucrative asset of homeownership and all of the benefits it can bring clients. Homeownership allows clients to build equity and leverage interest rates as time goes by. This is an important measure to consider. 

The last function we are going to talk about today is maintaining a simple balance of stocks. Bert mentioned that he found many people to be over diversified in smaller, emerging markets adding more complications and tax responsibilities than need be. The tax consideration of asset classes brings us to our seventh and final core concept.

7. Create a strong asset location strategy

Our last core concept dives into the world of asset location. Asset location is an investment strategy that seeks to optimize the tax-efficiency of each asset class in a particular account. Bert talked to us about maintaining a simple, yet strategic focus on asset location and here is what he advises. 

  • Assets invested for liquidity should be placed in a tax-deferred account like a pension or life insurance, etc. This allows any accrued interest to grow tax-free.
  • When appropriate, invest in real estate. It is a tax-efficient vehicle that allows for large capital gains to go tax-free on the sale of the house. No other investment has that tax advantage.
  • Sometimes large-cap stocks are best when the advisor manages them. This allows for a better tax-loss harvesting strategy and an opportunity for clients to donate appreciated assets to charity, bypassing capital gains.
  • For small-cap stocks and international investments, consider storing those in a Roth IRA. While taxes are required on contribution, all gains and qualifying distributions are tax-free.

Remember, these points are guidelines and provide a framework for you to think about when managing a client’s investments. Each client has their own unique set of financial needs; be sure to tailor your strategy to meet them where they are. 

At the end of the day, a smart investment strategy has a strong tax plan supporting it. By analyzing the tax situation of different investments, you will be able to help your clients build a portfolio that is efficient and sets them up to achieve the results they want. 

The ACP Way

People behave differently than institutions. They have a unique set of personal and financial needs, both of which are integral to creating a holistic financial plan that works for them. 

Our community at ACP is driven by smart, talented advisors like Bert who view clients as people and not accounts. These are folks who work in the best interest of their clients and help them build a plan that aligns with their goals and values. 

These seven concepts we have illustrated for you today epitomize the difference in holistic financial planning and can help provide you with a framework for creating a strong financial planning practice that works. Interested in learning more about this and other ACP resources? Set up some time to talk with us today