[IMGCAP(1)]The worst part about the mistakes made by both clients and planners is that they all focus on the little ones that are in plain sight but probably don’t realize that bigger issues may be totally out of whack.

For purposes of mistakes, I’m looking beyond some of the day-to-day inaccuracies in the forecasting business — as forecasts and projections are made for extended periods and not in 90-day increments.

Let’s approach this topic in a way that presents an issue and then shows both sides of the mistake at hand, rather than completing the client side and then traveling over to the planner side.

One such mistake that is in plain sight each and every month is the client’s spending habits. Whether a client is still in accumulation mode or in retirement, the entire foundation of the financial plan is built around cash flow, so these numbers need to be reliable. From the planner’s perspective, not understanding and planning your client’s cash flow to the level of detail needed may hide future problems. Assumptions about retirement or accumulation needs may be completely off base if you are starting with inaccurate information about spending.

The common mistake made by clients is not asking for help with cash flow today and in the future. Clients frequently work with rules of thumb regarding how much they’ll need to retire comfortably or pay for major life expenses such as university educations and weddings. Helping a client get more serious about cash flow may literally take more than a year. Some will want you to gather this information the slow, old-fashioned way: Take their income, subtract taxes, savings and investments and call the balance spending. It would be beneficial to have an unwritten agreement with your clients to set a spending limit above which they should consult with you regarding the best way to fund that purchase.



The next issue where mistakes persist is in the area of insurance. Starting with the client side, the first mistake that I see is clients responding to direct advertising offering to lower their insurance premiums. In many cases, they are able to get lower premiums by avoiding or lowering the limits of their coverage.  When a client buys insurance with 100 percent of the buying decision made based on the lowest cost, they frequently find themselves with higher odds of having inadequate protection than the client who focuses on the proper protection for the best price with professional guidance.

This is most frequently seen in auto insurance and largely brought on by families choked by high premiums for younger drivers who may be attracted to the onslaught of direct marketers using creative techniques to market their insurance. One can easily buy great coverage from any company, but if the client limits their telephone agent to only the lowest-cost alternative, than that’s exactly what they may get: the lowest legal amount of coverage for the lowest cost.

In homeowners coverage you frequently see the same thing — a client who buys solely based on the minimum to satisfy the mortgage holder at the absolute lowest rate. This client is also frequently under-insured for something. Whether it is exclusions for valuable artifacts, no flood or earthquake coverage, or no coverage for the office in the home, something is often missing and they don’t know it until they file a claim and are informed that their claim is denied.

This do-it-yourselfer low-price shopper is often terribly exposed to liability. Sometimes they have no umbrella or catastrophe insurance, and sometimes they’ve got too little. It’s tough to say how much is enough, but this coverage is so affordable that we often see risk professionals recommend an amount of umbrella liability coverage that matches the client’s liquid net worth.

And last, but not least by any stretch on the property and casualty spectrum is that clients forget to inform their agent or carrier of changing circumstances. For example, the vacation cottage that is used less by the family than in the past now gets rented for a few months during the year. If that property is not properly insured as rental property, a big loss, especially one with a significant liability claim, can take the wind right out of you. This is common when someone buys a new home and begins to rent the old one or for homes that get inherited.

A few other common changes that frequently go unreported are changes in the title or improvements to the property.  If you do a significant addition or upgrade to your home, and you have replacement cost coverage, you want to make sure that your insurer is aware of the additional value that you’ve added to the home.  Not notifying them of the changes could leave clients under-insured under their co-insurance clause and having to participate in any losses above and beyond their deductible.

A title change can be as simple as taking the home out of joint name and putting it into one name or a trust. The insurer needs to know who the current owner is because the owner needs to be a named insured under the policy.

The planner’s mistake with their clients’ property and casualty coverage is that most planners do not do a thorough P&C review for their clients. I’ve reviewed financial plans prepared by reputable planners where the advice in the risk management section was limited to encouraging the client to get replacement cost coverage for the home, add flood and earthquake coverage, obtain umbrella liability insurance and check with their agent to be sure that there are no gaps in coverage. To me, this leaves the planner exposed to a ton of liability. If a client hires a planner, whether there is a separate planning fee or not, that planner has a fiduciary liability to review the risk side of their client’s life.  Shortcutting the P&C analysis because it is not a strength of the planning firm is not an adequate defense in court. If a planning firm does not possess the subject matter expertise to do the risk management topic justice, then they need to get the outside expertise needed in order to give the best advice. This can be obtained from a quality P&C professional that you’ve had a good experience with, or from the client’s existing agent.  



The investment world also has its share of mistakes from clients and planners alike.  Clients’ most common mistake with investments is their emotional reactions to volatile markets. Let’s face it, people are not institutions. People have emotions, a finite time span on this earth and cannot invest in perpetuity riding out long and enduring bull and bear market cycles like institutions can. People are often constrained, unlike institutions, and cannot simply put more money into the fund to support it during times of stress or need.   

As a result of these quite real human emotional frailties, individual investors sometimes fail to achieve their desired results over a long period of time as they emotionally react to both good times and bad times. Intuitively, everyone knows that you make money when you buy investments at a low cost and sell them at a high cost. Frequently your emotionally charged clients buy when euphoria strikes in any particular market, and sell or capitulate when that market declines in value and the sky seems to be falling.

The mistake manifests itself as poor market timing, but the real culprit is knowledge. The clients often mistake luck or headlines for knowledge.  They feel because they made a good pick, or a lucky pick, that they are the next investment prodigy. The knowledge that clients need is a lesson in history and volatility.  If a client wants to hang their neck out to obtain equity-like returns from their portfolio, then they need to understand standard deviation, probability and mean reversion.

The planner’s mistake with investing is not communicating enough with their clients. It’s not good enough to send out a quarterly performance report or to set once-a-year or quarterly meetings. Clients want to communicate with you when they feel that something significant is happening that may impact them. That could be market volatility, new tax laws or world unrest.

Neither clients nor planners make these mistakes on purpose; they are typically errors of omission. Maybe that’s why they call it errors and omissions coverage for professionals. But who cares what they call the protection that planners need to own — the prosperous, fiduciary-minded planner is more concerned about being the proactive and holistic financial head coach that their clients need.

John P. Napolitano CFP, CPA, is CEO of U. S. Wealth Management in Braintree, Mass. Reach him through JohnPNapolitano on LinkedIn or (781) 884-2390.

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