RPF-0019

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00:00:15.040 | Radical Personal Finance, episode 19.

00:00:19.520 | On today's show, a discussion of the value of cash in your portfolio.

00:00:25.680 | A discussion of whether or not it's possible for financial experts to find common ground.

00:00:30.640 | Some information on the upcoming podcast movement conference and the upcoming FinCon

00:00:37.120 | conference. And the bulk of today's show will be an overview of the financial planning process,

00:00:43.520 | which will be helpful to either do-it-yourselfers who are looking to work their way through their

00:00:48.400 | own financial planning process or CFP students.

00:00:52.000 | [Music]

00:01:08.640 | So thank you for being with us for today. Today's show is Monday, 7/14, so Monday, July 14, 2014.

00:01:16.400 | That's a cool number. I didn't realize that until I hit record. That's a cool number.

00:01:20.560 | 7/14/14. And as I said, the bulk of today's show will be a discussion of the financial

00:01:26.560 | planning process. And I think it'll be helpful to either do-it-yourselfers or to CFP professionals

00:01:32.080 | or those who are studying to become CFP professionals. But before we do that,

00:01:36.640 | a little bit of discussion about those topics from last week.

00:01:39.280 | [Music]

00:01:45.520 | And over the weekend, I was considering Friday's show. And if you didn't get it,

00:01:48.960 | you might want to go back and listen to the Friday Q&A show. Episode 18 was Friday's show.

00:01:53.440 | You can find it at RadicalPersonalFinance.com/18. And on Friday's show, I took five or six questions

00:01:59.520 | from the audience, but several of them had me thinking over the weekend. And I was just

00:02:04.080 | reminded again of how incredibly individualized financial planning is or should be and how

00:02:10.640 | difficult it is to lay out big-picture planning ideas to say, "This is what you should do. This is

00:02:17.760 | what your plan should be," without actually knowing an individual situation.

00:02:21.760 | So that was really fun for me, was to answer those questions. However, it was pretty challenging.

00:02:26.320 | And one of the things that I was thinking a lot about over the weekend was just

00:02:30.160 | the positioning of cash in a portfolio. And I was struck by how, you know, if you were in a

00:02:37.920 | situation where you were hanging on to a good amount of cash, I was struck by how different

00:02:42.560 | the advice could be in different circumstances. And so in the first scenario, I was thinking about

00:02:48.960 | a couple of scenarios. And this had to do with some people that I was talking to and some

00:02:52.320 | discussions that I was having. And in the first scenario, I was thinking about a young person,

00:02:58.400 | you know, a young family, a young couple, a young man or woman who's just setting out to build up

00:03:03.680 | their financial plan. And they're trying to figure out what to do.

00:03:08.000 | So let's say this person has an income. That's the step one, is to build an income. Essentially,

00:03:13.840 | all financial planning comes down to cash flow planning. That's a topic for another day. But

00:03:18.080 | let's assume the person has an income. And if this person has an income that they can rely on,

00:03:22.960 | then we look at it and say, "Well, what should we do?" Well, then you say, "Can we save some

00:03:26.720 | out of it?" So you save some out of it and you build up some surplus. Now, the question is,

00:03:30.400 | what do you do with that surplus? I'm just struck how different my advice would be in a couple of

00:03:34.640 | different scenarios. So the first scenario would be, what if you had a large amount of cash and

00:03:38.800 | maybe you were investing in some other venues such as IRAs or 401Ks, things like that. You had a 401K

00:03:45.920 | at work and you're doing that, but then you still have cash on top of that. What should you do with

00:03:49.680 | it? And I was struck by, you know, I guess the standard advice would be to dump it into an

00:03:54.640 | investment. But the problem is, what investment? And here's where you get into a topic that's not

00:03:59.520 | really discussed that much in the financial world. And I'm not sure that I have the answer for it

00:04:03.600 | because it's a very individualized answer, but do you think of your cash as something that needs to

00:04:08.160 | be gotten rid of? Or do you think of it as dry powder, to borrow the metaphor? You know, is that

00:04:15.120 | your reserves? Is that your supply? We all know about the topic of having an emergency fund. And

00:04:19.200 | yes, that is certainly valid. It's a good idea to have an emergency fund and have cash reserves.

00:04:24.560 | But once you get past that point in time, then what do you do with it? And, you know, I was

00:04:29.840 | thinking it's not always a bad idea to have cash if you're just waiting for an opportunity. And so,

00:04:36.400 | one of the things that always was difficult for me when I was working in the mainstream

00:04:41.520 | financial advisory world is that sometimes a client would say, "What should I do with my money?" And I

00:04:46.720 | would say, "You should invest it in stocks," or "You should invest it in this, this other

00:04:50.720 | opportunity you have." Sometimes I would say, "I don't know." And it's very difficult to be able

00:04:54.640 | to say, "I don't know," but the reality is a lot of times, "I don't know." First of all, it's not

00:04:59.200 | my money. It's your money. So, you know, I'll give you some ideas, but at the end of the day,

00:05:02.800 | I don't know what you should do with your money. I'll just lay out the options and the opportunities

00:05:06.240 | for you. But a lot of this is very time-specific. And hanging onto cash is certainly not a bad plan.

00:05:12.720 | My experience has been you never know where, you know, you never know where life will take you.

00:05:18.640 | One personal anecdote about this, you know, my wife and I bought a house about a year and a

00:05:23.920 | half ago. And we bought that house. We had been saving for a while. We had been saving money for

00:05:29.040 | a down payment. We had been saving and doing the things that we needed to do financially to be

00:05:32.720 | prepared for it. We'd spent a lot of time thinking about what would be an intelligent type of

00:05:36.880 | property to buy. We were absolutely thrilled with the plan that we had of what we were doing and

00:05:44.240 | where we were going to be. And we were absolutely thrilled with this. So, we went ahead, we shopped,

00:05:51.520 | we got a fair deal on a house. It was exactly what we were looking for. But then, what, a year after

00:05:58.720 | we bought the house, then I decided to make this change in my own business life and close one

00:06:04.880 | business and open a couple of new ones. And so, when I decided to do that, we had put down a

00:06:09.440 | massive down payment on the house with the goal of minimizing the mortgage amount and because we had

00:06:14.880 | been saving the cash for that. And a year after we did that, it's not that I could no longer afford

00:06:19.600 | the house, but a year after we did that, then I had the idea to make this business change. And I

00:06:25.840 | sure would feel a lot better if I had more dry powder, more cash in my reserves. As it is, it's

00:06:30.800 | fine. I've got a plan. Everything's working out. I can still plan, but I had to go through some

00:06:35.840 | extra steps to figure that out that I wouldn't have had to go through if I'd had some cash on

00:06:41.040 | hand. Now, I was just struck. If you go back and you look and you start reading the biographies

00:06:45.600 | or the autobiographies of people that have had great financial success, oftentimes you'll see

00:06:51.280 | that they spotted an opportunity. They saw something that needed to be done and they had

00:06:57.200 | the ability to move on it. I think lots of people have seen opportunities but not had the ability

00:07:02.080 | to move on them. And sometimes having cash in your portfolio, just having reserves, money that's not

00:07:08.000 | committed can allow you to buy the franchise in the new hot, I don't know, franchise that's

00:07:14.880 | available, whether that's a new restaurant or a new frozen yogurt shop or a new kids' game

00:07:22.080 | emporium or whatever it is, or the new bounce house rental or the new video games in a trailer

00:07:27.600 | thing or whatever it is, that can allow you to have the opportunity. It can also allow you when

00:07:31.840 | you see the deal on the investment opportunity. So if you're looking for an inefficient market,

00:07:36.160 | so let's say that you say, "Well, in general, maybe the capital markets are fairly efficient,

00:07:42.480 | but where is there an inefficient market? Maybe you see an inefficient market in automobiles in

00:07:47.120 | your location." Well, that's what automobilers do, is they see an inefficient market, they buy cheap,

00:07:53.920 | they sell high. And so if you have cash to get started in a business like that, you can get

00:07:57.360 | started and you can do those sorts of things on the side and they can be very profitable,

00:08:00.320 | more profitable than delivering pizzas. So just consider it's not always bad to have cash.

00:08:05.040 | And on the other hand, sometimes if cash is for fear, someone is holding on to cash,

00:08:10.560 | then on the other hand, it can be really bad. And so then if you were advising somebody,

00:08:15.440 | you would advise them to try to get out of the cash position and get into an investment situation.

00:08:20.160 | Because if you're 50 years old and you're looking forward and you're trying to figure out

00:08:23.840 | how you're going to invest for retirement and you're scared of the market and you're not just

00:08:27.520 | sitting on cash, that's not going to work. You got to get over the fear. Or if you can't get over

00:08:31.600 | the fear, you got to find some way to get over the fear through some alternative strategy. Maybe

00:08:36.080 | it's a private investment instead of in publicly traded companies or something like that. So just

00:08:40.800 | was considering. It's kind of an interesting nuanced discussion. Is cash considered to be

00:08:45.120 | dry powder or is cash a liability that's just sitting there losing money to inflation?

00:08:50.320 | Interesting concept. I'm sure we'll explore further. All right. Next, two conferences that

00:08:56.800 | I'm going to over the weekend. And this has gotten me for an article that I want to lead

00:09:00.080 | off with before we move into the primary discussion of the day, which is to talk about

00:09:04.800 | the financial planning process. I'm calling in August to the podcast movement conference in

00:09:10.560 | Dallas, which, by the way, if you ever considered starting a podcast, I think it's a great idea,

00:09:14.480 | even though mine is brand new. I see podcasting as this incredible new frontier for people to

00:09:20.080 | explore and for us to just knock down the barriers of entry that have existed in so many industries

00:09:26.560 | and get good quality information that's out there where people can pick and choose and the best of

00:09:31.280 | the best can rise to the top, not because they were good at compelling the station manager to

00:09:36.320 | get them on the air or even because they were good at drawing audiences. Drawing audiences,

00:09:40.720 | popularity is not necessarily a sign of accuracy. So if you're interested in starting a podcast,

00:09:48.720 | I think it's a great idea. I'm really enjoying this process for me. And you might enjoy going

00:09:53.280 | to the podcast movement conference in Dallas, which will be August 15, 16 and 17. Just registered for

00:09:59.120 | it last week, decided to go. I'm really looking forward to it. There's going to be some big names

00:10:02.560 | there in the podcast community and check it out at podcast movement dot com. I've set up you had an

00:10:09.680 | easy option on your checkout to set up an affiliate link for for going. So I've gone ahead and set that

00:10:16.320 | up just because I had to click one button and set it up. So I'll go ahead and include the affiliate

00:10:19.520 | link in the show notes. If you're interested in going, consider using my affiliate link and

00:10:24.480 | meeting me there. I'm looking forward to it. Maybe if any of you are, we'll set up some kind

00:10:27.840 | of meet up while we're there and have an opportunity to meet there at the show.

00:10:32.080 | Number two is I'm going to the FinCon conference in September, which is in New Orleans. This is

00:10:38.640 | September 18 through 20. And FinCon, I think it originally was the financial bloggers conference.

00:10:43.280 | I wanted to go in the last couple of years, but wasn't able to because of,

00:10:47.520 | you know, my my business and everything. So this year we'll be going to FinCon. I'm looking

00:10:53.040 | forward to going there for the blogging conference. Now, FinCon was soliciting authors,

00:10:58.560 | people who are attendees. They were soliciting people to write an article for their for their

00:11:03.680 | magazine that they will distribute at the show. And as part of that magazine, I was thinking,

00:11:11.600 | what what do I really have that I would like to say? You know, and certainly I could sit down

00:11:15.040 | and write six tips for how to save money or eight tips to saving for retirement or

00:11:18.880 | four underutilized tax planning strategies or the most useful way to do blah, blah, blah.

00:11:25.440 | And I may do that kind of stuff in the future. But I was thinking, what message do I really have?

00:11:29.760 | And it really gave me an opportunity to sit down and write and sit down and think. So I wrote an

00:11:33.440 | essay. And I'm not going to talk too much about that essay just in case they publish it. I don't

00:11:37.840 | want to steal their thunder and we'll talk about it later. But basically, the message that I

00:11:41.520 | realized, one of the major messages that I have in my mind is to try to get the financial community

00:11:47.600 | to come together and talk with one another. And this is in large part what my show is designed

00:11:54.240 | to do. I don't expect my show to appeal to the average Joe on the street, although I shared my

00:11:59.520 | dream about being able to take somebody who has an above average interest in financial topics or in

00:12:05.920 | building wealth. I shared my dream of with a goal of bringing them and being able to take them up

00:12:11.920 | from no knowledge to multi-billionaire with the information that I share. And I do definitely

00:12:19.120 | hope to do that. However, I wouldn't expect that my kind of in-depth, long show would really appeal

00:12:25.920 | to the average person with just an average interest in money. I would expect this to

00:12:30.080 | appeal to someone with an above average interest in money, someone like a financial blogger,

00:12:34.480 | someone like a financial podcaster, someone like a financial advisor, someone like an insurance

00:12:42.000 | agent, or an individual who's interested in entrepreneurship, interested in business and

00:12:49.120 | in money. And so that's the reason for some of the content that I plan, which is going to go

00:12:54.480 | pretty much in depth. And I was just thinking about it. My mission, one of the missions that

00:12:58.560 | I hope to accomplish with the show is to help people find common ground with one another and

00:13:02.800 | help people have more intelligent discussions. It's okay for us to look at exactly the same

00:13:08.560 | situation and get different answers. And it's okay to look at different situations and get

00:13:14.240 | different answers. And this was one of the things that I learned coming back over to the media side

00:13:18.720 | from, again, six years of financial planning, working with hundreds and hundreds of families,

00:13:23.120 | is that financial planning, in order for it to be effective, needs to be exquisitely unique.

00:13:29.120 | Your plan should be your plan and your plan only, which leads into the main topic of the show,

00:13:33.360 | to open up and talk about that planning process. But two planners are going to look at a situation,

00:13:39.200 | and they may agree on, I don't know, 75 percent. But then the 25 percent, they may have different

00:13:44.320 | suggestions, and that's okay. But all of us can work together to educate the public

00:13:48.960 | and to educate people, to give them language to have a more intelligent conversation.

00:13:55.040 | If we didn't have, you and I, if we didn't have a grasp on the English language,

00:13:59.360 | we wouldn't have an ability to discuss something or debate something or argue something.

00:14:04.240 | This is what happens in financial planning, is that when people have a limited financial

00:14:08.320 | vocabulary, perhaps -- and there's nothing wrong with that, we've all been there -- but if you have

00:14:13.040 | a limited financial planning vocabulary, then you become intimidated, largely, by financial topics.

00:14:19.280 | And you don't have an ability, you don't have a framework, a construct, a mental model

00:14:23.520 | through which to work, through which to see the world. If you have language and a basic

00:14:28.160 | understanding of the meaning of terms and the nuances and both the explicit meaning and the

00:14:33.920 | implied meaning, the connotations of terms, and you also have a framework, a mental model,

00:14:39.120 | through which you can view topics, then you can have a much more intelligent conversation.

00:14:43.840 | And on the basis of that conversation, it's perfectly okay for different people to

00:14:49.680 | disagree with one another. And so I just share that with you. And I was reminded while I was

00:14:55.520 | writing that essay, I was reminded of this article. And I went and Googled it and found it.

00:14:59.360 | It's back from June of 2013. So I first read it, I think, a year ago. And this was an article

00:15:04.320 | in Forbes magazine by -- the author's name is Tim Maurer or Marer or something like that.

00:15:10.400 | So I've actually just reached out to him for an interview. I hope to talk with him. He has a book.

00:15:13.680 | I haven't read his book yet, but I thought it was interesting. He is a financial advisor,

00:15:17.520 | but he's also involved a lot in some public speaking and public financial education.

00:15:22.560 | I'm going to read this article from Forbes, and you'll find a link to it in the show notes.

00:15:25.600 | Title, "Can Financial Experts Agree on Anything?"

00:15:29.520 | The level of public disagreement in the financial kingdom, which adds financial media,

00:15:34.960 | gurus, educators, authors, and bloggers, on top of the behemoth financial industry,

00:15:41.280 | has become so prominent that the public doesn't know who or what to believe.

00:15:47.680 | I say amen to that. That is so true. I can go to the bookstore today, and you give me the topic,

00:15:53.440 | and I will show you two books -- or to Amazon, probably, because it's a local bookstore,

00:15:56.720 | and I'm going to have the volume. You give me the topic, and I will show you two books

00:16:00.240 | written by a "financial expert," and they will emphatically disagree with each other.

00:16:06.080 | And if you read both of them, and if you didn't have the context of the other one,

00:16:08.960 | you would probably be persuaded of the truth, the veracity of the one author.

00:16:14.720 | But if you had the other one, you might be confused. So you have to step back and understand

00:16:18.960 | more, understand the realities of things, the subtleties of things, and then ask yourself

00:16:24.720 | about the situation. And this is the common ground, and this is where my show will fall short.

00:16:29.040 | This is where all financial blogs will fall short. This is where all financial TV shows,

00:16:33.920 | all financial radio shows -- this is where all financial punditry that's not individualized

00:16:42.160 | financial planning will fall short. Because if you were a personal financial planning client

00:16:46.400 | of mine, and I spent, say, five to six hours with you over the course of a period of weeks and

00:16:51.520 | months, I would have a much greater understanding of your situation. And then I would draw on my

00:16:56.960 | background of financial knowledge to give you recommendations and suggestions.

00:17:02.080 | This show is not financial planning. It's not personal financial planning. This show,

00:17:07.680 | the way that a show like this can be effective is to give you ideas and tips and things that you

00:17:12.720 | can incorporate and you can consider what will work for you. But then you have to take that

00:17:17.360 | information and you have to go back and ideally talk to your own financial advisor, talk to your

00:17:22.800 | own financial planner. And I really believe that everybody needs their own financial advisor.

00:17:28.080 | Now, this may be a formal relationship or an informal relationship. It may be a paid relationship

00:17:32.880 | or an unpaid relationship. But it may be your spouse. But we all need somebody that, just as I

00:17:38.000 | said on Friday, view your life like a business. We all need somebody to whom we can defend our

00:17:43.280 | business plan. Continuing with this article, differentiation. Disagreement, or put more

00:17:48.640 | politely, differentiation, pays the bills. It puts us on the map, drawing attention to us and our

00:17:55.040 | ideas. Differentiation isn't inherently bad, but it's certainly not always good. The thing is,

00:18:03.200 | quote, "The thing is, differentiation is selfish," says Seth Godin, marketing author and guru

00:18:08.240 | extraordinaire. Most customers, of course, don't have the same selfish view of the market,

00:18:13.120 | the same obsessed knowledge of features and benefits. We as financial experts might consider

00:18:19.360 | acknowledging that those whose patronage we seek don't care nearly as much as we do about that

00:18:24.960 | which differentiates us. Their lives do not hinge, as ours often seem to, on the difference between

00:18:31.360 | passive and active investment strategies, term and permanent insurance, fee-only and fee-based

00:18:36.960 | planning, fiduciary and suitability standards, capital gains and ordinary income tax rates,

00:18:42.240 | and the list goes on and on. Even though we may be willing to sacrifice our very livelihood devoted

00:18:48.080 | to differentiating on one or more of these issues, most people who seek the opinions of financial

00:18:53.360 | experts just want a better life. I'll interrupt again. Amen. These are the debates that endlessly

00:18:59.920 | go around in the financial world. With these debates, is it healthy to have them? Yes. But

00:19:06.560 | the reality is I am absolutely convinced, open to being unconvinced at some point in the future if

00:19:12.400 | I can find the evidence, but I'm absolutely convinced that most of these arguments are

00:19:18.640 | unnecessary. Or if they are necessary, they're necessary largely within the context of

00:19:25.920 | professionals because the key differentiate, for example, active versus passive. I was having an

00:19:31.680 | email discussion with a friend of mine this morning and we were going back and forth on

00:19:35.200 | this long-standing debate of active versus passive. And in active versus passive, is it

00:19:40.880 | important? I think it probably is, the differentiation and the discussion over this.

00:19:45.840 | However, can you understand it without a background in this debate? I don't think you can.

00:19:51.440 | Number two, it's not nearly as important as the fact that someone's actually saving and investing

00:19:55.680 | money. And it's not nearly as important as the fact that the person understands their strategy

00:20:00.800 | and that they stay invested through the downturns if that's a component of their strategy. And it's

00:20:07.440 | not nearly as important as it is that they're saving enough and they're doing it in a well--in

00:20:12.480 | an efficient way. So no matter what your opinion is on this active versus passive debate,

00:20:20.960 | it's only one piece of the debate. And it may be the most important one to you, but it's only one

00:20:26.880 | piece of it. Continuing with the article. The Financial Common Ground Project, the Financial

00:20:31.840 | Common Ground Project. The differentiation frenzy came to a head a few weeks ago when Dave Ramsey

00:20:37.600 | reared back and threw a roundhouse tweet at a collective of financial planners who aggressively

00:20:42.880 | questioned the validity of his investment approach. In case you didn't see this, this was

00:20:46.560 | about a year ago. And this was--Dave said something about helping more--I help more people in 10

00:20:52.480 | minutes than you financial planners help in a year or a lifetime or something like that. And he took

00:20:57.040 | on a bunch of people on Twitter and it really ticked a bunch of financial advisors off. And

00:21:01.040 | that's the debate that he's talking about. Google it if you want to see the exchanges.

00:21:08.000 | I wondered in a blog post response if a diverse group of financial experts would come together

00:21:12.320 | to find common ground, to affirm what we jointly believe to be the foundational principles of

00:21:17.600 | personal finance, to momentarily set aside our differentiation and speak in a single voice

00:21:23.280 | for no commercial benefit. Over 30 experts from a wide variety of specialties in four different

00:21:29.040 | countries answered with a resounding yes. Together we co-authored a list of 12 unifying principles

00:21:35.120 | of personal finance that we hope experts and consumers alike can support and benefit from.

00:21:41.040 | The only question now is, are we the only ones? Please read the list below and follow this link

00:21:46.000 | to show your support for this initiative. And I'm going to read these principles and just consider

00:21:49.920 | them. I thought they were excellent. I went ahead and signed on to--I went ahead and signed on to

00:21:55.120 | his--as a supporter of these. To me, these make all the sense in the world. And I think it's a

00:22:00.320 | good--a good starting point to further this conversation. The unifying principles of

00:22:06.080 | personal finance. One, progress. The benchmark for success in personal financial planning is

00:22:13.280 | progress, not perfection. Excellence is more a product of good habits than a revolutionary event.

00:22:20.160 | Two, discipline. A household must consistently spend less than it earns, regardless of the level

00:22:28.160 | of income. The foundation of financial success is a disciplined cash flow system, such as a budget,

00:22:34.560 | which is designed to make household spending decisions purposefully and in advance.

00:22:39.200 | Debt. Debt wisely used can help build wealth, but fueling unsustainable lifestyles with borrowing

00:22:48.240 | is the quickest path to financial ruin. We are well served to pursue an eventual debt-free path.

00:22:54.720 | Buffer. Changes, surprises, and failures are guaranteed, but their impact can be minimized

00:23:02.640 | through the creation of a financial buffer. This buffer, a cushion of cash savings,

00:23:08.000 | will help lessen the burden of emergencies and other unexpected events.

00:23:11.840 | Risk. It is better to make an informed risk management decision than to act on a consequential

00:23:20.080 | reaction. Many risks can be adequately managed through risk avoidance, risk reduction, or self-

00:23:27.120 | ensuring through risk assumption. However, the potential for catastrophes from which a household

00:23:32.400 | could not survive financially should be transferred through insurance.

00:23:36.400 | Investing. Investors have succeeded utilizing strategies on a continuum ranging from entirely

00:23:44.800 | passive to surprisingly active. None succeed purposefully, however, without following a

00:23:51.040 | disciplined strategy. Taxes. Taxes are an important element of financial decisions,

00:23:57.680 | but rarely the most important. Tax minimization is wise, while tax evasion is illegal.

00:24:04.240 | Giving. Giving of time and money is good for everyone, donors and recipients alike,

00:24:11.040 | and may also result in a reduction of taxes. Future. Plan for tomorrow, live for today.

00:24:18.320 | Failure to plan for major expenses, such as education and retirement, is folly,

00:24:24.640 | but deferring all gratification for the future strips the joy from life today.

00:24:29.520 | Estate. Everyone, with very few exceptions, should have well-conceived and clearly written

00:24:37.040 | estate planning documents, including, at minimum, a will, with or without a revocable trust,

00:24:43.680 | a durable financial power of attorney, and advanced directives, including a health care

00:24:48.560 | power of attorney and living will. Legacy. Leaving a legacy, a relational impact on friends,

00:24:56.320 | family, and community, is as or more important than leaving an estate. The sum of your assets

00:25:02.640 | less your liabilities at death. Guidance. Whether from a book, blog, article, class,

00:25:09.360 | radio program, TV show, advisor, or specialist, financial advice is only beneficial to the degree

00:25:16.640 | that it is consistent with your values and goals and leads to action.

00:25:20.640 | As far as I'm concerned, that's a great place to always take just about all financial planning

00:25:29.280 | conversations. And so I would challenge, if you're interested in finance, consider through and see

00:25:37.120 | if you could agree with that list. You can jump over there and sign on. Will it make much of a

00:25:40.400 | difference? I don't know. But these 30 people who came together to write this, I'm impressed with

00:25:45.440 | how comprehensive that is. And in reality, I can fit just about any financial planning

00:25:50.640 | conversation into it. And then you get to differentiation. So on one blog post, you read,

00:25:57.360 | spend lots of money to maximize enjoyment. On the other blog post, you read, don't spend a lot of

00:26:02.160 | money to maximize your later enjoyment. Or you hear one person say, increase your income. And

00:26:08.560 | the other person, decrease your expenses. They're all valid. It's just looking at different parts.

00:26:12.880 | And it's fun to be differentiated in the marketplace. And don't get me wrong,

00:26:17.920 | differentiation, there's nothing wrong with it. I'm certainly trying to differentiate. A,

00:26:21.040 | the title of my show is called Radical Personal Finance. B, it's every day. C, it is long. And D,

00:26:29.280 | it goes in depth. So out of the dozens and dozens and dozens of great, I'm sure, podcasts that you

00:26:35.440 | can find on iTunes on finance, I'm trying to differentiate myself in hopes that you'll spend

00:26:40.080 | a lot of time with me. However, I wish that all of the other podcasts would continue doing what

00:26:45.440 | they're doing and keep on educating because we are not each other's enemies. Those of us who

00:26:51.280 | are interested in and talking about and educating this, we are not each other's enemies. And a lot

00:26:56.400 | of times, people are very critical of our, very, very critical of our political leaders,

00:27:02.560 | constantly looking and saying, well, why can't they work together? And yet we do the same thing

00:27:06.720 | in our own industries. If we're going to be upset at Congress for not working together,

00:27:10.240 | why don't we start by leading by example? Because the politicians, there's nothing wrong with them.

00:27:15.040 | The politicians and the way, the politicians, our government, and the way that they govern

00:27:20.560 | is a perfect representation of the American people. Now, you may not want to admit it. So

00:27:26.560 | if you're in the minority of the American people like I am, you might get a little upset at saying,

00:27:31.680 | well, this is a perfect representation of the American people because it's not a representation

00:27:34.960 | of me. It's not. It's not a reputation of me. But it's a perfect representation of the American

00:27:39.600 | people. What kind of people in the American society allow their government to go $17.5

00:27:46.720 | trillion in debt directly and $222 trillion in debt indirectly through, if you count in

00:27:54.080 | the unfunded liabilities of various government promises that have been made, those figures that

00:27:58.800 | I'm quoting, $17.5 trillion is based upon the national debt clock, usdebtclock.org,

00:28:05.440 | and the other figures are Professor Lawrence Kotlikoff's figures. He's a professor at Boston

00:28:10.640 | University, an economics professor who is, that's his estimate of the total indebtedness and the

00:28:16.800 | total liabilities of the US government. So what kind of people allow that to happen?

00:28:22.080 | The same kind of people that allow their own spending to get out of control. Just a little

00:28:26.000 | bit. Not that much. Reality is $17.5 trillion is really not that difficult for our tax money to

00:28:31.280 | pay. The $222 trillion is not that difficult for our tax money to pay over the long term.

00:28:36.080 | But it is a major problem if something doesn't change. And this is how many people run their

00:28:41.200 | finances. So our enemy is not each other. Our enemy is financial illiteracy, financial ignorance.

00:28:48.080 | And we can work together on that and then have spirited debates about differentiation within

00:28:53.040 | that. But why don't we tone it down a little bit and, not to be all kumbaya, but why don't we tone

00:28:57.840 | it down a little bit and be friends? And again, look at your opponent's argument and understand

00:29:04.320 | it to the point where you could debate it and argue it for him, and then at that point go ahead

00:29:07.920 | and make your decision. Don't figure, "Well I'm in this camp because my guru says this, and me

00:29:13.200 | included. I don't want to be a guru. I want to be a teacher, but not a guru." So don't say, "Joshua

00:29:17.520 | is my guru and he says this." Uh-uh. Understand for yourself and make your own decision. If you're

00:29:22.720 | interested in reading those, I think it's 12 unifying principles. I didn't count them. If

00:29:29.040 | you're interested in reading those unifying principles of personal finance, you'll find them

00:29:32.400 | in the show notes with the links to the Forbes article and then also at financialcommonground.com.

00:29:37.520 | And I have reached out to Mr. Tim to invite him on the show, and so I hope I can do that over the

00:29:43.680 | next couple of weeks. Next, the primary topic of today. We are going to talk through the financial

00:29:53.760 | planning process, and as an outline for that, we are going to use the CFP board's job task domains.

00:30:01.360 | So if you are not interested in becoming a CFP certificate or if you're not interested in kind

00:30:07.040 | of the formal side, give me about two minutes to explain for those who are, and then we'll work

00:30:11.280 | together through this information. So if you're interested in becoming a CFP certificate, you

00:30:16.400 | need to understand the job task domains in order to be ready for the test. And you need to

00:30:23.040 | understand these domains. You need to memorize them. And so these domains were the output of

00:30:29.360 | the CFP board's 2009 job analysis studies. They did a study, talked to all the people that are

00:30:35.200 | involved in financial planning, and came together and wrote out these eight things. And it's really

00:30:40.320 | confusing and nuts how they do this all, in my opinion, of these domains and the principles and

00:30:45.040 | all the rest of the stuff. You've got to memorize it for the test, so you just memorize it. But it

00:30:49.440 | is a useful outline for you if you're interested in being a do-it-yourselfer, if you're interested

00:30:53.440 | in just kind of looking through your financial plan to see what a comprehensive outline of

00:30:58.320 | topics would be for a certified financial planner professional. And so the eight major domains

00:31:03.840 | are, number one, establishing and defining the client-planner relationship. And so these are

00:31:08.960 | basically the order that you move through. I don't know why they call it domains, but this is kind of

00:31:12.880 | the phase that a financial planning engagement moves through. So if you were to engage me as

00:31:17.120 | a financial planner in our relationship, if we were doing that, which we're not, but if we were

00:31:21.680 | doing that, then we would move on an individual basis, then we would move through these eight

00:31:25.520 | major domains. So number one, establishing and defining the client-planner relationship. And

00:31:29.920 | I'll go into detail on each of these. Number two, gathering information necessary to fulfill the

00:31:34.880 | engagement. Number three, analyzing and evaluating the client's current financial status. Number

00:31:40.240 | four, developing the recommendations. Number five, communicating the recommendations. Number six,

00:31:45.520 | implementing the recommendations. Number seven, monitoring the recommendations. And number eight,

00:31:50.480 | practicing within professional and regulatory standards. If you are going to be a financial

00:31:55.200 | professional, you will need to know and practice within all eight of these. If you're going to be

00:31:59.360 | a do-it-yourselfer, ignore for the most part number one, work on number two and number three,

00:32:05.040 | and number four and number five, and number six and number seven, and ignore number eight. So

00:32:09.680 | we'll go through those in detail. But I'm going to read these from the CFP document. The document

00:32:15.920 | is listed in there, and I'm going to talk about them as we go through, because I do believe it

00:32:19.680 | provides a useful outline. But then also, if you're not interested in reading the document,

00:32:24.160 | at least it'll be here in an audio format so you can listen while you're doing other things.

00:32:28.080 | So the main one would be establishing and defining the client-planner relationship.

00:32:32.480 | And so if you're a do-it-yourselfer, you can ignore this one, because you're the client and

00:32:35.680 | you're the planner. But if you were a professional, then you would first identify the client. So this

00:32:41.520 | is really important. Who is the actual client? Is it an individual? Is it a family? Is it a business?

00:32:47.200 | Or is it an organization? Or is it something else, like an estate? Is it a trustee of a trust?

00:32:53.040 | Who is the actual client? And so depending on who the client is, if the client is an individual,

00:32:58.400 | so a single person, that would be a difference. If the client is an individual husband in a married

00:33:04.880 | relationship, that would be a difference. If the client is the whole family, in one way,

00:33:08.320 | it's easy. That's fine. But then what do you do if your clients disagree with one another? What

00:33:12.880 | if the husband and wife disagree? Well, that brings in an added element of planning needs.

00:33:16.960 | So you want to identify the client and be very specific as to who your client is. Sometimes

00:33:21.840 | that will be an excellent relationship, and sometimes it'll be a difficult relationship.

00:33:25.840 | B, discuss financial planning needs and expectations of the client. So here,

00:33:30.320 | you have all financial planning engagements. You're going to start off with a discussion of

00:33:34.960 | what are your needs and expectations. Now, in general, this annoys people, because we all do.

00:33:40.240 | All financial professionals do it. And they sit down and they say, "Well, the next guy's going to

00:33:43.360 | talk." It either annoys people if they've been through it before, or it's life-changing. And

00:33:47.520 | they sit down and just talk about what are the needs, what are your goals, what are the ideas

00:33:51.840 | that you're trying to accomplish. So you've got to have a little bit of that at the beginning.

00:33:56.080 | To lead on to number three, discuss the financial planning process with the client,

00:33:59.600 | and then explain the scope of services offered by the CFP professional in his or her firm.

00:34:03.680 | So with these two together, you're going to share what -- here's what I'm able to do,

00:34:08.560 | and talk about the process with it. Next, assess and communicate the CFP

00:34:13.040 | professional's ability to meet the client's needs and expectations. Depending on the type

00:34:17.760 | of planning engagement, this may be very specialized, or it may be very generalized.

00:34:22.400 | And a CFP professional may be able to meet all of the needs of the client, or it may be a complete

00:34:29.840 | referral relationship, where a professional's only brought in to work on one specific area.

00:34:34.640 | Next, identify and resolve apparent and potential conflicts of interest in client relationships.

00:34:40.320 | There are almost always some kind of conflicts of interest. You cannot eliminate -- nor should

00:34:44.560 | it even be necessarily the goal. You cannot eliminate all the conflicts of interest,

00:34:48.720 | but you have to provide for them, and you have to make the client aware of them. There is a

00:34:54.480 | serious ethical duty to make the client aware of the potential conflicts of interest,

00:34:58.320 | and then work through them in some way. Next, discuss the client's responsibilities,

00:35:03.360 | and those of the CFP professional. Define and document the scope of the engagement with the

00:35:08.320 | client. One of the things that people are often not familiar with when engaging a financial planner

00:35:13.920 | is they are not familiar with how planning engagements may have different scopes.

00:35:18.640 | A planner could be engaged to simply do a review of a 401(k) asset allocation,

00:35:22.960 | or a planner could be engaged to do a simple life insurance plan, or a planner could be engaged to

00:35:31.040 | do a comprehensive financial plan, including estate, including asset allocation, including

00:35:36.800 | tax, including retirement, including insurance. It could be comprehensive. You have to define it

00:35:42.640 | so that both the client and the planner are able to work together. Next, provide client

00:35:49.440 | disclosures, provide your regulatory disclosures and your compensation arrangements and associated

00:35:53.600 | potential conflicts of interest. That is domain one. Domain two. Do it yourself or tune back in.

00:36:02.480 | This is where we get to why I'm doing this, which is to say, here's how you can plan your own way

00:36:08.000 | through your own financial situation. Domain 2A, identify the client's values and attitudes.

00:36:15.040 | So here we're going to explore with the client their personal and financial needs,

00:36:19.360 | priorities and goals, explore the client's time horizon for each goal, assess the client's level

00:36:24.960 | of knowledge and experience with financial matters, assess the client's risk exposures,

00:36:29.680 | example, longevity, economic, liability or health care, and assess the client's risk tolerances,

00:36:35.440 | example, investment, economic, liability or health care. So you need to understand who you are as a

00:36:41.600 | person or who the client is if you are a professional working with the client. This makes all

00:36:46.400 | the difference in the world. And this is why I'm tying this tied in the financial common ground

00:36:50.720 | and decided to do this topic today. Is that two people are going to be radically different. You

00:36:56.400 | and I are going to be radically different. I've got different risk tolerances. I've got a different

00:37:00.640 | time horizon for my goals. I have radically different financial goals and financial needs

00:37:05.440 | than you do. No matter even if we look similar from the outside, our values may be completely

00:37:10.160 | different. So never assume that, and this is why it's so difficult to write financial topics,

00:37:16.480 | is that when you're writing, you have to assume a certain thing about your audience. If you know

00:37:19.360 | your audience, you can make a general assumption, but you can't assume that the client or that you

00:37:27.680 | are the same as the next person. Everyone's going to have different abilities. Everyone's going to

00:37:32.960 | have different options. Everyone's going to have different assets, whether that's financial assets

00:37:37.600 | or other assets, which is coming up in the next section here. So the next section, domain 2B,

00:37:42.160 | is gather data. Number one, summary of assets. For example, cost basis information,

00:37:47.840 | beneficiary designations, and titling. This is important for the financial planner on the

00:37:53.440 | technical side. However, I would encourage you, if you want to be a do-it-yourselfer,

00:37:58.000 | what are your assets? So for example, do you have a high degree of education? Is that an asset?

00:38:03.920 | You would want to exploit that. Do you have certain skills? Do you have sales skills? Do you

00:38:08.960 | have marketing skills? Do you have writing skills? Do you have speaking skills? Think about those

00:38:14.240 | assets. And as you're designing your financial plan, you need to incorporate into your financial

00:38:18.800 | plan the idea of how do I earn an income? And in that situation, you need to make a complete

00:38:24.240 | summary of your assets. Next is summary of liabilities. So on the financial side,

00:38:28.800 | this would be the balances of liabilities, the terms of the loans, the interest rates,

00:38:33.200 | so that we can figure out what debt should we pay faster, what debt should we pay slower.

00:38:38.400 | But we want to list that out. But then on a personal level as well, what are your liabilities?

00:38:44.080 | I'll let you take it from there and not beat this into the ground, but what are your liabilities?

00:38:48.640 | It's very important to look not only at balances and interest rates, which is what many people do,

00:38:55.040 | but also at terms. And so this, if you read financial information, you'll often see a debate.

00:39:00.720 | This is where I want to point out one of the debates. There are other aspects to it. One of

00:39:04.800 | the debates in financial planning is in what order should I pay off my debt? So one way would -- there

00:39:10.080 | are many ways, but one way would say, well, you should pay it in the lowest balance first. This

00:39:15.440 | was called the debt snowball, made most popular by Dave Ramsey. Pay it with the lowest balance

00:39:20.080 | first. And the idea is by paying your debts with the lowest balance to the highest balance,

00:39:24.320 | then you really can benefit from the behavior modification of the psychological boost of

00:39:30.560 | making quick progress on those debts. And this is extremely powerful. This is amazingly powerful.

00:39:37.600 | But then you also have the interest rates. And so with the interest rates, the idea here

00:39:41.760 | is that the higher the interest rate, the more money you're spending in interest every month.

00:39:45.680 | And since you've already purchased whatever the purchase is, there's no cost savings to you.

00:39:50.720 | There's no reason not to get rid of that interest rate at the highest rate first.

00:39:54.000 | But the challenge might be if you had a large balance, a large debt, and you were looking at --

00:39:59.680 | if you had a large balance on a high interest rate, you may be spending a very long time paying

00:40:06.640 | that one debt off and focusing any extra money towards that versus the other, versus the low

00:40:11.840 | balance one where you could get that psychological win. But the terms oftentimes people don't hear.

00:40:18.000 | So here what I would explain is I would say, "What are the terms of your debt?" So first of all,

00:40:21.840 | how is the note structured? Do you have a balloon payment on the debt? And this balloon payments may

00:40:27.840 | not be common for every day, the average consumer, so to speak. But they are very common in certain

00:40:33.920 | industries or in certain situations. So do you have a mortgage with a balloon payment after a

00:40:39.120 | certain period of time, five, seven, ten years? Do you have a business loan with a balloon payment?

00:40:46.000 | That's very common in business planning. If so, you need to be aware of that and you need to

00:40:51.600 | factor that in. Another aspect of the terms would be what are the rates? Are the rates adjustable?

00:40:56.800 | Do you have a rate that is on a low rate for now and that's going to adjust later that you need to

00:41:01.040 | be planning for? Or is it for a fixed rate? Is the debt recourse debt or is it non-recourse debt?

00:41:07.440 | So if you default on the loan, does the lender have the ability to come after you personally

00:41:13.600 | for the difference? This would be in business debt. Then what I would say is if your business

00:41:17.760 | defaulted on the loan, can the lender come after you personally? Or is this debt bankruptable?

00:41:23.840 | So for example, student loans versus another debt. If I had the option of, if I had two loans,

00:41:29.520 | each of $10,000 and an equivalent interest rate, and one of them was a personal line of credit at

00:41:34.560 | a bank and the other were a student loan, I would pay the student loan off first because a student

00:41:39.120 | loan debt is not bankruptable. However, my personal line of credit may be a bankruptable debt. So if I

00:41:45.760 | worse came to worse, I'm disabled, I'm forced into bankruptcy due to a medical problem of some kind,

00:41:51.520 | then in that situation I want to make sure that I was doing good planning as far as how quickly I

00:41:56.080 | want to pay back the loans. Is the interest deductible? So this would be, I would rather

00:42:01.440 | have interest that's deductible than interest that's non-deductible. So if this is deductible

00:42:06.880 | on my personal tax return, i.e. my student loan interest, i.e. my home mortgage interest,

00:42:13.520 | I would prefer to keep those and eliminate the non-deductible interest versus paying off the

00:42:22.960 | mortgage and winding up with non-deductible credit card interest. Now, on the other hand,

00:42:27.440 | is this interest deductible in a business account? And so if I'm going to borrow money on a credit

00:42:32.480 | card, is there a way that I can make sure that all of my business expenses go onto the credit card

00:42:37.280 | so that I can set up my liabilities in a way that all of that interest is deductible and also so

00:42:44.400 | that it's bankruptable if worse comes to worse? Many times, at least in my state in Florida,

00:42:49.920 | and I'm not familiar with the other 49 states' laws, but at least in my state in Florida,

00:42:53.360 | whether or not the structure of your debt will have a major impact on whether you can do a

00:42:59.840 | Chapter 7 bankruptcy or Chapter 11 or 13. I always get them confused. Chapter 13,

00:43:06.080 | is that the payment one? Let me Google this real quick. I think that's the payment one,

00:43:12.240 | and Chapter 11 is the business one. This is the value of... Okay, so yeah, Chapter 13

00:43:22.720 | is a payment plan. Good, I got it right. I always freak out, especially when I'm doing podcasts.

00:43:27.200 | It's very intimidating for me to do podcasts because I always freak out for a moment and doubt

00:43:31.440 | myself when I... and doubt myself when I want to have a topic and I need a detail real quick and

00:43:40.320 | I have to call it up and then say it publicly where I'm held to account. All right, so now that

00:43:44.960 | I hopefully got it right here, let's continue our discussion. So Chapter 7 versus Chapter 13. So

00:43:50.480 | Chapter 7 would be a complete dismissal of the debt. Chapter 13 would be a restructuring and

00:43:54.320 | a payment plan. And they each have different advantages and disadvantages. But one of the

00:43:58.800 | things is you're often not eligible for a Chapter 7 debt. So if you are an income earning person,

00:44:04.960 | and you... and I'm speaking in generalities, please don't take this as legal advice, but

00:44:09.840 | you should be aware of it and you should think of it. So if you're a high income professional,

00:44:13.760 | and you are in a situation where you've borrowed a lot of money on personal lifestyle, cars,

00:44:22.800 | credit cards, houses, whatever your personal lifestyle expenses are, and then you've started

00:44:29.760 | a business, but the business doesn't have any debt, well, you're not going to be eligible for

00:44:33.520 | Chapter 7. You have to work out a Chapter 13 workout plan. However, if you had been prudent

00:44:40.880 | with your personal finances, then you... and you had set something up, but you had borrowed to fund

00:44:46.400 | the business. If the business failed, then you would just simply be able to declare a Chapter 7

00:44:50.960 | bankruptcy. And in my state, there are regardless... basically regardless of your income,

00:44:57.200 | then you have a situation where it was a business debt. And so that business debt is forgiven,

00:45:02.000 | or it's not forgiven, but it's expunged and it's done, it's settled, it's gone through bankruptcy,

00:45:08.080 | and you get a fresh start. And so you can go and you can take your earning ability and go

00:45:11.280 | on to the next thing. That can be a major difference for somebody. If you are a highly

00:45:16.080 | compensated individual and you're making $200,000 a year, the difference between having a heavy

00:45:20.880 | amount of personal debt and having a heavy amount of business debt, and it just being able to be

00:45:26.560 | wiped away versus having to spend the next 5 to 10 years paying it off, that could be a major

00:45:30.960 | difference for somebody. Now, the problem is I'm going into depth on something here that very rarely

00:45:35.840 | happens, because generally I'm talking about careful planning. And it doesn't seem many people

00:45:41.600 | who plan carefully don't wind up in bankruptcy. However, you may decide that you're going to take

00:45:47.920 | on a considerable amount of debt to fund a business venture, whether that's a capital

00:45:52.400 | intensive business of some kind, and you need to be aware of how to structure it under favorable

00:45:56.000 | terms. So pay attention to the terms. So if I were doing a debt payoff plan for somebody,

00:46:01.120 | I would probably, if someone said, "Joshua, what do you think about what order to pay off the debts?"

00:46:06.720 | I would say, "Well, you know, in general, then I'm going to do a balance. In general,

00:46:12.960 | I'm going to focus on making sure that we really tie in the behavioral modification."

00:46:18.160 | So if someone has to lose 100 pounds, you're probably not going to start with, "You've got

00:46:22.240 | to change this diet all over the place, and you can't ever cheat." But a small behavior

00:46:26.640 | modification of something as simple as cut out drinking soda might have a big impact.

00:46:30.960 | So same with finance. The behavioral modification is absolutely valid. If somebody has always been

00:46:36.960 | a spender, and they're first trying to turn their ship, the behavioral modification is absolutely

00:46:40.880 | valid. And if you are going to be able to pay the debts off in a short period of time,

00:46:47.120 | under a very intense, as Dave Ramsey would say, gazelle intensity, very intense one to two to

00:46:52.240 | three years maximum, then the interest rates really aren't that big of a deal by the time you go and

00:46:59.360 | actually run the numbers. However, if there is a dramatic discrepancy in interest rates,

00:47:04.800 | and if you've harvested that behavioral amount, you absolutely have to take advantage of the fact

00:47:09.280 | that you can pay off the higher interest rate first. And then if you consider the terms,

00:47:16.320 | in general, the answer will usually emerge. Most people's financial liabilities are not

00:47:22.720 | generally that complicated. So if you just look at it and consider what debts are recourse debt,

00:47:27.520 | what debts are non-recourse debt, which debts are secured, which debts are not secured.

00:47:31.920 | Is there a large difference in the balances? Is there a large difference in the liabilities?

00:47:35.760 | Are there any other extenuating factors? Do we owe somebody that we really don't want to owe?

00:47:39.600 | Do we have an easy creditor versus a difficult creditor? The plan will emerge. It's not as

00:47:43.680 | complicated as I'm making it out to be, but this should be how you make that decision.

00:47:47.920 | And this should be how you make that recommendation for somebody.

00:47:51.120 | Next, summary of income and expenses, all income and all expenses. Someday soon I'm going to try

00:47:57.920 | to create, once I can build the margin to be able to do so, like a do-it-yourself financial

00:48:03.120 | planning guide and through a series of videos. And I think step one of that guide is going to

00:48:07.520 | be track your expenses. Without data, you can't make good decisions. And so most people have no

00:48:12.720 | idea what their expenses are. If you could do nothing else but just simply track and record

00:48:17.440 | your expenses every day manually in some way that forced you to face them, I bet you could probably

00:48:22.480 | coach yourself out of any financial problem. So summary of income and expenses, any estate

00:48:26.880 | planning documents that are still in the gathering data stage. So this is, again, back to the CFP

00:48:30.960 | board situation where take from it if you're a do-it-yourselfer, if you're a CFP person,

00:48:35.280 | just learn the information. Gather estate planning documents, read them. Gather the education plan,

00:48:41.840 | any resources that are allocated towards that with full information on that. Gather retirement

00:48:46.480 | plan information. Gather employee benefits information. When I was a planner, I was always

00:48:52.160 | a stickler for finding out what your employee benefits are. If you're listening to my voice

00:48:56.400 | and you have employee benefits, 95% of you, and so I guarantee that's you, tongue in cheek,

00:49:02.800 | guarantee that's you, 95% of you have no idea what your employee benefits are beyond the fact

00:49:07.840 | that you have them. So you say, well, I think I got some disability income insurance. Okay,

00:49:13.200 | how long does it pay for? How much does it pay for? How disabled do you have to be? How qualified

00:49:17.120 | do you have to be? Find out the information on it. Now, it's really daunting, but that's why my show

00:49:21.840 | is here. So in the future when we do information on disability information, disability insurance,

00:49:26.320 | and you have a couple of shows to listen to, listen to those shows and then go pull out your

00:49:30.320 | policy and you can find it. I always tell clients, I said, listen, you just get me this information

00:49:34.400 | and we'll talk it through. I'll explain what all the terms mean. And so instead of it being mumbo

00:49:38.560 | jumbo written in your employee benefits documents, I'll explain what the terms mean and I'll tell

00:49:42.320 | you this is junk or this is good. And it's very, very simple once you actually understand it.

00:49:46.480 | Number eight, government benefits. So for example, Social Security or Medicare benefits,

00:49:51.600 | pull your Social Security statements every year. Social Security doesn't send them out anymore.

00:49:56.960 | If you haven't done this recently, put an action item on your to-do list, pull your Social Security

00:50:01.120 | statements. Go to SSA.gov, set up a user name and account, pull your Social Security statements.

00:50:06.400 | If for nothing else, you need to check your earnings record. Because if somebody's putting

00:50:10.960 | in fraudulent tax returns on your Social Security number and they're falsely reporting your income,

00:50:16.480 | that can be a major problem. But it's hard to remember if it's 32 years later and inflation

00:50:21.680 | has increased the wage bases so much from $20,000 of taxable income to $120,000 of taxable income.

00:50:29.600 | It's really hard to remember. So you need to do this each year, especially now that they don't

00:50:32.960 | mail them anymore. Any special circumstances, for example, any legal documents and agreements,

00:50:37.920 | any family situations, I would put in here any special needs situations, just find out what the

00:50:43.200 | data is on those or any -- a druggie for a kid, I mean, you got to plan for that. If your kid is

00:50:48.960 | disabled or if your kid is a drug addict, you need to plan for that. Tax documents, investment

00:50:54.400 | statements, insurance policies and documents, life, health, disability, liability insurance,

00:50:59.840 | any closely held business documents, so shareholder agreements, any kind of terms,

00:51:04.880 | buy/sell agreements, any kind of business documents that are associated with it,

00:51:09.680 | bonus plans, stock options, things like that. Number 14, inheritances, windfalls,

00:51:17.520 | or any other large lump sums. This is a big deal. Inheritances, a lot of times people just don't

00:51:22.560 | want to plan on it, but also people don't know about it, so they don't know about them, because

00:51:27.040 | in our society we don't talk about money, which change that, go make it normal to talk about

00:51:31.120 | money in your family. I'm determined with my children that it would be normal to talk about

00:51:34.560 | money, and we could avoid a lot if we could spend a lot more time talking about money and religion

00:51:38.640 | in our culture. So you need to plan on those, or any windfalls or any other large lump sums,

00:51:45.840 | you need to kind of think about these things and plan on them. And the last part of domain

00:51:49.360 | two is recognize the need for additional information. So that's gathering the information

00:51:54.400 | necessary to fulfill the engagement. So if you were going to do this for yourself, go through

00:51:58.240 | that and try to gather any information. Now, this is incredibly daunting. To do an excellent

00:52:03.600 | financial plan for somebody as a planner, it can be anywhere from a dozen hours to hundreds of

00:52:10.560 | hours, depending on the scope of the engagement. Almost very few, very few financial plans are that

00:52:17.840 | large and significant in scope, but it can be. And you can see a good, thorough financial plan

00:52:24.400 | will incorporate all of these aspects. So at least if you're doing it yourself, you've got the time,

00:52:29.040 | go ahead and do it. I'm going to pick it up here, domain three, analyzing and evaluating the

00:52:33.680 | client's current financial status. So A, evaluate and document the strengths and

00:52:39.120 | vulnerabilities of the client's current financial situation. So if you're doing this yourself,

00:52:43.040 | sit down and write down the strengths and the vulnerabilities of your current financial

00:52:47.680 | situation. Number one, financial status. Create a statement of financial position or a balance

00:52:53.440 | sheet. This should be the first document you make. List all your assets, list all your liabilities.

00:52:58.160 | When you list the assets, you want to divide them up into cash or cash equivalents,

00:53:02.480 | investment assets, or use assets. And so these are the different assets that you want to list out.

00:53:08.320 | And if you'll just make those different differentiations, make those different

00:53:11.840 | categories. If you have a car, use asset. If you have a house, use asset. If you have investment

00:53:16.240 | assets, they'll go in that. So cash would be cash or short-term T-bills, things like that.

00:53:22.000 | But if you have stocks, bonds, mutual funds, cash value life insurance, annuities,

00:53:29.440 | other assets that are not very liquid, precious metals, business assets, real estate assets,

00:53:36.320 | those would go into the investment assets. And just by sitting down and making this for yourself,

00:53:40.960 | making a properly formatted financial statement, you'll look at it and you'll say, "Wait a second.

00:53:46.480 | I got this big major house that is worth a million bucks, and I got $20,000, and that all goes into

00:53:52.000 | my use assets, and I got $20,000 in my 401(k). There's no possibility, period, that I'm going

00:53:58.400 | to gain wealth if I keep doing that. Doesn't mean I have to sell the house, but you got to say,

00:54:02.640 | "I got to move some of these assets over onto the investment assets."

00:54:11.200 | So create a statement of financial position or a balance sheet. Create your cash flow statement.

00:54:15.680 | One of my pet peeves on cash flow statements is I have yet to see somebody make one when they're

00:54:20.000 | talking about creating one of these things where they're properly incorporating taxes.

00:54:24.080 | Your cash flow statement has to incorporate taxes, and it should be split out into fixed

00:54:28.960 | expenses and variable expenses. So you should be listing at the top of your cash flow statement

00:54:33.680 | all of your income. Then you should list all of your fixed expenses. Then you should list all of

00:54:38.560 | your variable expenses. Then you should list all of your taxes. And then you should list any

00:54:43.360 | difference. And then if you add all that up, there should be a $0. Now the difference column accounts

00:54:47.760 | for any savings or any surpluses or deficits. And so the surpluses or deficits will lead you to your

00:54:53.680 | natural next step of what do I do? Okay, I've got a $30,000 a year surplus. Even after this,

00:54:59.360 | what can I do? Or a deficit, well, where can we save? How can we save? But include taxes in that

00:55:04.560 | situation and calculate them out because this is what keeps people for is taxes. And if you don't

00:55:10.240 | track that in your cash flow statement, if you don't track that, then you don't have the ability

00:55:15.040 | to be able to project forward and see how changes that you would make can save you.

00:55:20.560 | A good financial planner may be able to make dramatic differences in your situation. You

00:55:25.200 | can do this for yourself. Again, this is not intended to be a pitch on a financial planner.

00:55:28.480 | I just want to tell you how to do it. Or if you are a financial planner, get the vision for your

00:55:32.560 | job and do your job right. A good financial planner should be able to make a dramatic

00:55:37.120 | difference in a client's tax situation. If you can't do that, how do you even -- yes,

00:55:41.840 | there are other aspects that are important. But what's the biggest expense? Until April 16th or

00:55:46.080 | 18th or whatever it was I read the other day, April 18th is taxes. We've got to affect this

00:55:50.480 | number. That's one of the things we've got to make a big deal out of changing so that we can

00:55:54.160 | allow a similar or same lifestyle without paying so much to the government. C is a budget. And so

00:56:00.320 | the budget would be the forward-looking projection of here's what we're going to do. The cash flow

00:56:04.320 | statement is here's what we are currently doing. And the budget would say, well, based upon these

00:56:08.160 | parameters, what could we do? And so if you're going to make a change to the cash flow statement,

00:56:12.640 | if you have a deficit, you're 20,000 bucks in the red every year, then you've got to make a budget

00:56:17.440 | that's going to keep you within it going forward. How to stick within a budget, it's a decision for

00:56:22.240 | a whole other day. But this is the formal part of it. And then you would run a capital needs

00:56:27.840 | analysis. And so capital needs analysis would be your analysis for any insurance needs,

00:56:33.360 | retirement needs, major purchases. The first thing that you've got to do if you're going to

00:56:36.880 | plan for something is figure out what the price tag is. So if you're going to buy a yacht, what's

00:56:40.480 | the first step? Find out how much a yacht costs. If you're going to buy a house, what's the first

00:56:44.080 | step? Find out how much of a house you want to buy and define it. Then decide how you're going

00:56:49.120 | to save for it. And you're going to create your capital needs analysis. How much capital do you

00:56:52.480 | need and when do you need it? And how much can you save and can you hit that goal? It's the same

00:56:56.640 | whether it's for retirement or it's the same whether it's for a life insurance analysis or

00:57:01.520 | it's the same whether it's for a long-term care insurance analysis or it's the same whether it's

00:57:05.680 | for buying a car or it's the same for whether you have a money for going on vacation. It's just

00:57:10.400 | simple. It's a capital needs analysis. Number two, risk management and insurance evaluation. So

00:57:16.240 | take a look at your insurance coverage. Write down any retained risks. So what risks are you

00:57:20.960 | retaining? Risks don't go -- you know, the risk of your dying doesn't go away just because you have

00:57:26.880 | a million dollars and you're self-insured. You're not self-insured. You're just simply choosing to

00:57:31.360 | retain the risk because you're comfortable with that risk. Or you're choosing to transfer the risk

00:57:36.480 | to an insurance company. And it's a completely logical, careful thought process about -- it can

00:57:44.800 | be a completely logical, thought-provoking -- I'll tongue-tie. It should be and can be a fairly

00:57:52.880 | logical, thought-out situation. It is logical that if you don't have a lot of money and you

00:57:58.880 | can't afford to retain a risk, you can transfer that to an insurance company. And it's also

00:58:03.600 | logical that if you can afford to retain a risk, you can go ahead and retain it. We'll talk about

00:58:08.160 | that in an insurance lesson. But it's just simply what risks are you retaining? Next one would be

00:58:13.920 | asset protection. So for example, take a look at your titling. Titling of assets. The titling of

00:58:19.120 | assets can make a substantial difference in your asset protection if you get sued. If you own a

00:58:25.920 | house -- and let's just take an extreme but simple example. It rarely happens, but it does happen.

00:58:30.960 | If you own a house and you get sued and your wife or husband is not an owner on that house,

00:58:37.600 | then that house -- if you lose your lawsuit, that house could get out from underneath you if you

00:58:42.880 | don't live in a state with good protection for -- if you don't live with good homestead protections.

00:58:47.840 | So take a look at the titling of your accounts. Take a look at the trust, any trust that you

00:58:52.320 | have established for the purpose of asset protection. Take a look at the form of business.

00:58:56.320 | If you are in a non-risky form of business, it may be appropriate to do business under a

00:59:03.200 | situation -- under an entity that doesn't provide for business asset protection. That may be fine,

00:59:11.280 | because there may be other advantages. There are advantages to being a sole proprietorship. But if

00:59:15.760 | you're in a business where you have a very risky business, then you would want to be careful to

00:59:19.840 | make sure that your business form would account for that so that you could transfer that risk

00:59:24.960 | to somebody else. And the other thing is you need to understand the difference between personal

00:59:30.160 | risk and business risk. So if you are a professional -- so the most common would be -- we

00:59:35.280 | think of physicians. A physician cannot get rid of their risk of professional liability just by

00:59:40.960 | having a corporation that owns their company. That's why you hear about physicians malpractice

00:59:46.000 | insurance. I as a financial planner, if I were doing financial planning, I could not transfer

00:59:51.040 | my risk for my professional liability of giving bad advice. I couldn't transfer that risk from my

00:59:57.600 | -- I couldn't transfer that risk out just simply by having a corporation. So for me as a financial

01:00:03.440 | planner, it's completely -- if I'm sitting in an office and I have no other forms of risk,

01:00:07.280 | and I'm just concerned about professional liability, that's not going to make any

01:00:10.720 | difference in my -- you know, should I do a sole proprietorship, partnership, S-corp, C-corp, LLC?

01:00:15.360 | That doesn't make any difference because I'm just worried about professional liability.

01:00:18.480 | And so professional liability may be covered with insurance. So for financial advisors,

01:00:24.240 | this would be errors and omissions insurance. For physicians, this would be medical malpractice

01:00:29.360 | insurance. Next would be client liquidity. So this is part of the risk management and

01:00:33.440 | insurance evaluation. Basically, the example here would be an emergency fund. And so notice that

01:00:38.240 | the proper technical financial planning term is client liquidity, not emergency fund. So again,

01:00:44.640 | this is where you have all these articles and all these debates about, well, should you have an

01:00:47.840 | emergency fund or should you haven't one? And so one person says yes, one person says no, how big?

01:00:52.960 | If you've got a million or $2 million or $3 million in an investment account, and those

01:00:57.360 | investments are liquid that they could be sold, and you have some lines of credit or something

01:01:01.840 | backing you up to give you time to sell the investments out, you probably don't need six

01:01:06.960 | months of cash sitting in a bank account. You probably don't. Now, you might still want it.

01:01:11.120 | That's fine. But you probably don't need it. But on the other hand, if you have very illiquid

01:01:16.960 | investments or no investments, then you've got to have some cash. You've got to build a buffer. You

01:01:21.280 | got to build an emergency fund. But the overarching theme to this is liquidity. Do you have liquidity?

01:01:27.120 | Liquidity, how fast can you generate cash if you need to? Some investments are very liquid.

01:01:32.000 | They can quickly be transferred into cash. Some investments are very illiquid. They can't be.

01:01:37.120 | Your house, you're not quickly transforming your personal residence into cash. It's not going to

01:01:41.520 | happen in a week, generally. Or at least you're not going to get the full value. So that would

01:01:46.800 | be a consideration. Those all came under risk management and insurance evaluation.

01:01:51.200 | Number three, benefits evaluation. Take a look at your government benefits. So Social Security,

01:01:55.360 | Medicare, do an analysis of that. Take a look at your employee benefits. We're going to do

01:02:00.400 | extensive shows on Social Security planning. But the biggest mistakes that I see happening right

01:02:04.720 | now, the biggest disasters happening right now, happen in Social Security planning, with poor

01:02:09.440 | Social Security planning. Social Security planning is an amazing tool if used right. And because of

01:02:15.200 | the fact that the payments are annuity payments and they're guaranteed, you can make some dramatic

01:02:24.320 | changes with Social Security that could be very, very significant. Save that for another show.

01:02:29.280 | Take a look at your employee benefits. Number four is investment evaluation. Take a look at

01:02:32.960 | the asset allocation. Take a look at the investment strategies. Take a look at the

01:02:36.080 | investment types. Five, tax evaluation. Current, deferred, and future tax liabilities, income types,

01:02:41.680 | special situations. So for example, stock options or international tax issues. All of these will go

01:02:47.040 | into a good tax evaluation. You're going to figure out, should I go ahead and bring this tax

01:02:51.040 | liability forward, i.e. invest in a Roth IRA, or should I move this tax liability backwards, i.e.

01:02:58.640 | invest in using a traditional IRA? Should I take this income out as wages? Wages will enhance my

01:03:09.120 | Social Security benefits. It will also increase my Social Security tax, but it will enhance my

01:03:15.200 | benefits. Or should I take this out in the form of profits and dividends, which aren't going to

01:03:20.080 | be subject to the Social Security tax, but are also not going to gain me Social Security benefits?

01:03:25.600 | Not right or wrong. It's an individual situation. Are there any other special situations that are

01:03:32.320 | going to occur? So if you're going to -- do you know that in four years you're going to take a

01:03:37.520 | sabbatical and not going to earn any income? Well, in that situation, maybe you could do something

01:03:42.880 | like -- I'm just trying to use simple examples to make sure that everyone can relate to this,

01:03:47.600 | although it could be simple or extremely complex. It can be done at $1,000 a year or at $1 million

01:03:53.280 | a year. It just depends on how you want to time the income. But, for example, a special situation

01:03:57.440 | would be if you knew you were going to take a sabbatical in four or five years, and so you knew

01:04:01.360 | your income was going to go away and you were going to live on investments, then what you would

01:04:05.360 | want to do is you would want to go ahead and defer the maximum amount of income towards that future

01:04:12.160 | year, so using an IRA or 401(k) or things like that. And then if you could arrange this properly

01:04:18.560 | and get the technicalities taken care of, then you would want to go ahead and you would try to

01:04:22.800 | set it up so that you were in a position to go ahead and convert that, maybe convert from a

01:04:29.360 | traditional IRA to a Roth IRA in the year of your sabbatical up to whatever bracket you're trying to

01:04:34.320 | stay under. That could make a difference. But if you don't know that, you've got to think about

01:04:38.160 | this and consider what you're going to do. Number six, retirement evaluation. Take a look at any

01:04:42.480 | retirement plans and strategies. So what are the pension options? Do you have annuitization options?

01:04:47.120 | Take a look at your accumulation planning for retirement. Am I saving enough? How am I saving?

01:04:51.360 | Am I saving in the best way? And then also the distribution planning. You've got to talk about

01:04:55.680 | distribution planning. Retirement distribution planning is incredibly important, incredibly

01:05:01.600 | important, and no one talks about it. Okay, a few people talk about it. We've got to talk about it.

01:05:06.960 | You've got to look at it for yourself. Number seven, estate planning evaluation. Look at your

01:05:10.720 | estate documents. Look at any estate tax liabilities if you have them. Number C is

01:05:15.120 | ownership of assets, beneficiary designations, gifting strategies. One tip for you, go and pull

01:05:21.280 | a copy of all of your beneficiary designations for all of your investment accounts and all of

01:05:25.600 | your insurance policies. Take a look at this. And what I bet 50% of you will find is that they're

01:05:31.280 | out of date. They probably have an ex-spouse listed as the beneficiary of a form. I made all

01:05:36.640 | my clients when I was doing financial planning, I made all of my clients go and pull every single

01:05:41.120 | one of their beneficiary designations from their IRAs, from their 401Ks, from all this stuff,

01:05:47.120 | and invariably we found one or two that were out of whack. You know, they had set up the trust,

01:05:51.440 | but it wasn't on the 401K, so the 401K was going directly to the kids. Why did we spend $8,000

01:05:57.680 | in legal fees if we weren't going to retitle the 401K? Good attorneys will try to make sure it's

01:06:03.040 | done, but at the end of the day, you're the client or it's your situation. So take a look at your

01:06:06.640 | beneficiary designation. Gifting strategies would be if we're trying to transfer money out of the

01:06:10.880 | estate, and don't worry about it if you're not familiar with what that would mean, but we could

01:06:16.000 | give away incredible amounts of money and diminish the size of the estate, and we could do it in

01:06:19.680 | really intelligent ways. Number eight would be business ownership. So what form of business are

01:06:24.160 | we going to own? What employer benefits are we going to provide? Do we have a succession plan

01:06:28.800 | in place and an exit strategy? I love working with closely held businesses. I've looked at some

01:06:35.760 | statistics recently, but closely held businesses are such an amazing planning opportunity, and yet

01:06:41.600 | the problem is that they're very difficult to plan for. How do you transfer an employee, a closely

01:06:47.360 | held business, and gain the full value of it? It's very difficult, and you have to do it carefully.

01:06:53.520 | But yet, what's most business owners' biggest asset? It's their business. So we've got to put

01:07:00.160 | some strategies in place to make the business attractive if we can to set up a -- to build a

01:07:04.880 | market for the business. And if you have a prospective business, make sure that you've got

01:07:09.120 | a plan in place for the disposition of the business. Don't die and leave your spouse the

01:07:13.040 | business that he or she can't run. Make sure that you've got a planner lined up -- or excuse me,

01:07:17.520 | make sure that you have a buyer lined up, and make sure that that's taken care of so that you

01:07:21.520 | can replace the largest value of the asset -- value of the business for your family as an asset,

01:07:26.160 | so that your business doesn't get sold for 10 cents on the dollar because you died.

01:07:29.600 | There are really good, strong planning techniques to take care of this. If you're doing it for

01:07:33.280 | yourself, go learn about them. And then the last one is risk management. So what are the business

01:07:38.160 | risks that we're subjecting ourselves to? We get to a point where the legislation and the laws

01:07:43.280 | and the liabilities become so significant, there's just no point in continuing because the risk is so

01:07:48.000 | high versus the potential profit. Shut that business down and go to another country, go to

01:07:52.640 | another industry, go to somewhere else. There are certain industries -- I scratch my head and wonder

01:07:56.960 | why people keep businesses going in certain industries in this country because of the risks

01:08:02.000 | that are inherent. And I've worked with some clients and they're very poorly protected.

01:08:06.400 | Number nine, education planning evaluation. So take a look at what's the education plan,

01:08:10.720 | take a look at any sources of financing, take a look at any tax considerations.

01:08:14.560 | Number 10, any other considerations. So special circumstances, example, divorce, disability,

01:08:18.560 | family dynamics, any inheritances, windfalls, other large lump sums, charitable planning,

01:08:23.440 | or elder care. So taking a look if we need a continuing care retirement community, long-term

01:08:28.160 | care insurance, nursing home or long-term care and in-home health care, taking a look at those

01:08:32.080 | and planning for those. So this is all part of the analysis. And so a comprehensive financial plan

01:08:38.960 | can and probably should include all of those. Now that would be utterly exhausting if you were a

01:08:44.240 | client and we were to go through all of those things. It would be utterly exhausting to discuss

01:08:49.280 | that. But if you're doing it for yourself, go do it. And then if you were a client, you would just

01:08:52.720 | figure out a way to tackle it in bite-sized pieces. But all of these things interrelate

01:08:58.480 | with one another. And then B, identify and use appropriate tools and techniques to conduct

01:09:03.040 | analyses. Example, financial calculators, financial planning software, simulators,

01:09:06.640 | and research services. This would depend on the situation as far as what the planning situation.

01:09:14.400 | So that was domain 3. And that was the long one. And we're going to buzz through 4, 5, 6, 7, 8,

01:09:21.600 | and very quickly. Because that was domain 3 where I wanted to spend the time and just say,

01:09:25.680 | "Do these analyses." Don't just sit and say, "Oh, you know what? I got a million bucks of life

01:09:29.920 | insurance at work and I'm putting money in my 401(k) so therefore I'm good to go." Think through.

01:09:34.400 | If you care about getting really great results, think through these things. Talk to people. Talk

01:09:38.800 | to experts who are experts in every one of these industries. The problem with financial planning

01:09:42.880 | is you don't know what you don't know until someone shows you or tells you what you don't

01:09:46.320 | know. Because a lot of times you think, "Oh, I'm really an expert on that." You may not be.

01:09:50.160 | I am not an expert on all of those situations. A couple of them, yes. And on many of them,

01:09:54.880 | I've got reference books. But at the end of the day, some of these things are so -- you've got

01:10:00.320 | to do it right. And good advice is incredibly valuable or is very, very valuable. Domain 4.

01:10:08.080 | So from here, these would be for do-it-yourselfers. This would just be -- just listen and I'll buzz

01:10:14.080 | through these quickly. But for financial planners, pay attention to these domains.

01:10:16.960 | Developing the recommendations. So synthesize the findings from the analysis of the client's

01:10:22.400 | financial status. Consider alternatives to meet the client's goals and objectives. So

01:10:26.960 | in alternatives, you would conduct a scenario analysis. For example, could you change some

01:10:30.800 | lifestyle variables? Could you conduct a sensitivity analysis? So could you change

01:10:35.200 | assumptions such as the inflation rate, rates of return, or time horizon? Creating one set

01:10:40.320 | retirement scenario is only one situation. People try to make this simple. And simple is good.

01:10:46.080 | But you try to say, "Okay, I can't retire because I don't have my number." Well, there are an

01:10:51.520 | amazing number of variables that could be adjusted. Can you change the lifestyle? And then let's just

01:10:56.160 | say that you're on track. Well, what happens if we adjust your inflation rate? What happens if we

01:11:00.960 | get a wonky period of abnormal rates of return? We're in one of those periods of abnormal interest

01:11:07.680 | rates and abnormal rates of return. What happens if your time horizon changes? So once you create

01:11:12.240 | a plan, then if that plan doesn't work, you figure out how can we make it work. And then once you say,

01:11:17.600 | "How can we make it work?" then you say, "How can we break it? And how can we put plans in place so

01:11:24.320 | that the plan doesn't wind up broken if those ways that we try to break it occur?" If that made

01:11:29.520 | sense. Number C would be consult with other professionals on technical issues outside of

01:11:33.760 | the planner's expertise. None of us are experts at all of these areas. It's okay. When I was a

01:11:38.880 | new financial planner, I remember being so embarrassed to say, "I don't know." And if I

01:11:43.120 | were to say, you know, a few things that have occurred to me over the years that I've learned

01:11:47.040 | is I always wanted to look like an expert. I wanted to pretend I was really great. And so I

01:11:50.720 | was scared to say, "I don't know." And as my knowledge and expertise and experience grew,

01:11:55.280 | I became just much more comfortable with quickly saying, "Man, I've got no idea, but I do know how

01:12:00.560 | to find the answer." And this is the same with all of our industries. There is so much information

01:12:05.680 | out there. And I'm convinced one of the skills of learning that people have to learn is not to

01:12:10.000 | memorize stuff. In a world of Google on your hip, why do you need to memorize anything? Ask the

01:12:14.800 | Googler. But we need to know how to find information and we need to know how to have a

01:12:20.320 | baloney detector to understand is this good information or not. So consider that. So consult

01:12:27.200 | with other professionals on technical issues outside of the planner's expertise. Develop the

01:12:31.040 | recommendations. And here are the things you have to consider while developing your recommendations.

01:12:36.000 | So don't just tell someone, "Here's what I do and here's why." If you're going to be a good

01:12:39.440 | planner, and whether that means I'm going to do individual financial planning or whether that

01:12:42.960 | means I'm going to give a good advice, whether I'm going to write great articles, I'm going to give

01:12:46.720 | great advice on a podcast. Consider these things. Consider the client attitudes, values, and

01:12:54.240 | beliefs. Consider behavioral finance issues. So anchoring, overconfidence, recency biases.

01:13:01.680 | Behavioral finance is so important and I'm excited about some of the work that I want to bring you

01:13:07.680 | of some of the developments that are happening in this field. There's some awesome stuff going on

01:13:11.200 | in the world of behavioral finance to really bring out this so important psychological side

01:13:16.080 | of things. And it's not just leave all of this to the number crunchers. And three, consider

01:13:21.440 | interrelationships among the financial planning recommendations. Financial planning is in many

01:13:26.320 | ways a balancing act. You take from one, it goes down on one side, the other side must go up. And

01:13:33.040 | you decide where and where those ones go up. Example, social security tax planning. So taking

01:13:38.640 | care of your employment taxes. If you reduce your wages, it reduces your social security tax. It

01:13:44.000 | also reduces your social security benefit. Maybe okay with that. I would be in general because I

01:13:51.200 | would prefer to be responsible for that. But you may not be okay with that. And you may reach a

01:13:56.960 | series at a point in time at which increases. So for example, if you were to look at your social

01:14:02.720 | security earnings record and you were to understand how the formula works and take your highest 30

01:14:07.280 | years, it may be to your advantage to take a couple years of high earnings and run the scenario.

01:14:13.760 | But maybe to your advantage to take a couple years of high earnings and really help out your

01:14:18.000 | benefit formula. Especially if there's any kind of question about it. So it depends. And finally,

01:14:23.920 | document the recommendations. So you want to document the recommendations for the clients.

01:14:27.920 | Now we get to domain five. Communicating the recommendations. And this is really,

01:14:33.200 | really important to figure out how to do this in a way that's going to speak to your client.

01:14:37.520 | Every client speaks a different language. So some are visual. Some are audible. Some of you have

01:14:43.120 | listened to me for an hour and 14 minutes while I've gone on and on about this. And some of you

01:14:47.360 | are not here. But some people, I can't take that. I can't take an hour and 14 minutes. So figure out

01:14:52.720 | how to communicate them. Present the financial plan to the client. Provide education. Review the

01:14:57.600 | client goals. Review any assumptions made. Review the observations and findings. Discuss various

01:15:02.560 | alternatives and then make recommendations. Obtain feedback from the client and revise the

01:15:07.120 | recommendations as appropriate. Provide documentation of plan recommendations and

01:15:11.200 | any applicable product disclosures to the client and verify the client acceptance of recommendations.

01:15:16.800 | Domain six, implementing the recommendations. Create a prioritized implementation plan with

01:15:22.080 | timeline. You can't do it all at once. You can't. It's not possible. So you create a timeline.

01:15:27.280 | Assign responsibilities. So is the CFP professional responsible? Is the client responsible? Is an

01:15:32.080 | attorney or other professional responsible? Support the client directly or indirectly with

01:15:36.240 | implementation of the recommendations. Coordinate and share information as authorized with others.

01:15:42.000 | As authorized, important. Make sure you don't share any information unless you are authorized.

01:15:46.960 | Define monitoring responsibilities with the client. So what will be monitored? How frequently will it

01:15:51.760 | be monitored? And what are the communication methods between the planner and the client?

01:15:55.120 | Are we going to do an investment review once per year or is this going to be a monthly event?

01:15:59.760 | And domain seven, monitoring the recommendations. So 7A is discuss and evaluate changes in the

01:16:06.160 | client's personal circumstances. For example, aging issues, changes in employment. Things

01:16:12.080 | change all the time and you got to make sure that the financial plan stays current.

01:16:15.200 | Almost as soon as the plan is written, it's out of date essentially. And this is why, in my opinion,

01:16:22.480 | the most important thing is not the plan. It's the client planner relationship on an ongoing basis.

01:16:30.240 | And staying informed. Because if you know the situations and you know the rules, you can adjust

01:16:37.680 | to them as time goes on. And if you don't, you need a planner. Someone who can adjust and someone

01:16:42.720 | who's very close to you. Next, review the performance and progress of the plan with the

01:16:46.960 | client. Review and evaluate changes in the legal, tax, and economic environments. Make recommendations

01:16:53.440 | to accommodate changed circumstances. Review the scope of the work and redefine the engagement as

01:16:59.040 | appropriate. Provide client ongoing support. For example, counseling or education. And then finally,

01:17:04.160 | domain eight, practicing within professional and regulatory standards. This one's really boring,

01:17:08.400 | but basically it is important for CFP professionals. Just skip it if you're a do-it-yourselfer. Adhere

01:17:13.120 | to the CFP board's code of ethics and professional responsibility and rules of conduct. Understand

01:17:17.760 | the disciplinary rules and procedures. Work within the financial planning practice standards.

01:17:22.000 | Manage practice risk. So document, monitor your client's noncompliance with the recommendations

01:17:27.520 | so that if your client comes back to you and says this didn't work, you can illustrate, look,

01:17:31.920 | the plan, you didn't follow the plan. And then maintain awareness of and comply with regulatory

01:17:36.960 | and legal guidelines. So that is -- those are the eight domains of the CFP board's job task domains.

01:17:46.400 | I hope that you found that interesting. I tried to make it applicable both to professionals and

01:17:54.640 | to people who are just -- have an above average interest in financial planning. And so I would,

01:18:01.200 | again, I hope I made it applicable. And I hope I gave you some ideas to look for in your own

01:18:06.480 | planning, some of the ideas that are not maybe normal, that are not mainstream, the things that

01:18:11.360 | are not necessarily talked about all the time. I really feel there's tons and tons of these

01:18:15.440 | opportunities that you can look into. So that's today's show. A couple of things here at the end.

01:18:20.160 | I'd love some feedback. I can do -- you know, I was thinking about doing just an article review

01:18:24.960 | of different articles and blog posts and ideas. But I really want to give some of this meat and

01:18:28.800 | potatoes information. And I want to do it to equip you and also to have it here as information for

01:18:34.560 | those who are looking for it in the future. Tomorrow's show, if all goes according to plan,

01:18:39.280 | should be an interview with Jake DeSilis from The Voluntary Life. He and I are speaking at 9 a.m.

01:18:44.560 | So that show should be out pretty early in the day. And if you have any questions that you'd

01:18:48.560 | like me to ask him, I love his show. I really enjoy it. Let me know, and I'll be glad to ask

01:18:52.880 | them. This weekend, interviews have been pushed back. This weekend I'll be interviewing Jacob at

01:18:58.000 | Early Retirement Extreme. So one of my other favorite authors. If you have any questions

01:19:02.160 | you'd like for me to ask Jacob, let me know that. And may I ask a favor of you? If you've enjoyed

01:19:07.200 | today's show or if you've at least gotten through it, would you be willing to leave me a review in

01:19:10.880 | iTunes? I'd really appreciate that. And if you would do that and then just shoot me an email to

01:19:15.360 | let me know, I'll thank you. I've got a couple of ways to thank you for that. I really appreciate

01:19:19.840 | that. iTunes, the way iTunes rankings work is it's all based upon reviews. And so I feel I'm doing

01:19:25.680 | my best to give you good content. If you would just take one moment and check the link at the

01:19:29.440 | bottom of the show notes right on your cell phone, flip over and just leave a review for me, that

01:19:33.840 | would mean the world to me. I'd really appreciate it. And it will help us to get a little bit more

01:19:37.360 | attention for the show. And the more attention for the show, the bigger and better the guests I can

01:19:40.960 | have on. You don't have to listen to me all the time. You'd be able to listen to top shelf people

01:19:44.640 | talk. And so that would just be, I'd really appreciate it. So if you could do that right now

01:19:48.480 | even, that would be really, really neat. Don't do it if you're driving, but make a note

01:19:51.920 | and email yourself and remember to do it. I would so, so appreciate it. And again,

01:19:55.920 | shoot me an email when you do that and I'll find a way to thank you. I've got a couple

01:19:58.800 | ideas for how to thank you. Thanks for being with me with that, with us. And with that,

01:20:02.560 | this is episode 19 of the Radical Personal Finance done. If you want to hear the show notes,

01:20:07.440 | radicalpersonalfinance.com/19. Peace out y'all.

01:20:16.640 | [Music]

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