Years ago,I was approached by an investment advisor seeking to retire and transition his practice. After six months of communication, negotiations and meetings, he decided to transition his business to my firm.

I asked him why he had chosen me from among all the qualified advisors he had interviewed. His answer came as a surprise to me.

He said that I was the only advisor who was “militant about cash flow management and budgeting,” adding that I “walked the walk” with my personal finances.

A sad reality

I learned from talking with other advisors that it’s a sad reality that many live beyond their means. I find it worrisome that budgeting and cash flow are challenging for many. It means they may not be providing guidance on these topics to their clients.

Scott Schutte is a managing director and adviser at Lightship Wealth Strategies.
Scott Schutte is a managing director and adviser at Lightship Wealth Strategies.

In my opinion, a planner who is not providing guidance on budgeting and cash flow management is doing a disservice to clients. Why? Because these are among the main factors impacting the success of a financial plan.

Many advisors feel there are other ways for clients to learn about budgeting. But, think about it. You can’t major in financial responsibility in college. Therefore, it’s up to the advisor to teach clients this skill to ensure they don’t amass bad debt or make poor spending decisions.

teaching clients to help themselves

Here’s what I’ve learned from working with every client and their children on how to budget:

Focus on philosophy, not line items. You want to educate your clients on the why and the how of budgeting, but not be an arbiter of their spending.

You definitely don’t want to be in the middle of a debate between a husband who wants to buy a boat and a wife who disagrees. That isn’t productive for your relationship with your clients and doesn’t help them on their path to better decision making.

Have rule of thumb conversations. Rather than sending your clients an expense worksheet, educate them on guideposts they can leverage. I also refer to these as rules of thumb.

Even clients who are great at managing their budget can learn something from these tried-and-true principals. I often suggest they use them to educate their children. The teacher can become a student when they talk to their kids about spending and realize their own habits may not be as ideal as they believed.

Some rule-of-thumb topics to discuss include: 1) the 50-30-20 budgeting rule; 2) the 20/4/10 rule when purchasing a car; and 3) save 10% of your income for retirement.

We know rules of thumb are not a substitute for customized financial advice, but I have used them to change budgeting behaviors for multiple generations of my family and my clients.

Offer to educate clients’ children. I usually do this when the children are first entering the job market. It helps them get on the right track and our firm captures younger investors who will grow assets over time.

Let’s face it, budgeting is not particularly fun or exciting. But it is a critical element of financial planning that advisors need to teach and practice.

My passion for this topic has helped my clients and my business. Win-win.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access