[IMGCAP(1)]The biggest mistake that both clients and planners make is not realizing that the client needs guidance. Wealth and a healthy cash flow mask many problems until something happens.

There are many occasions where I’ve met with very wealthy clients who confidently look at me with the following lines playing in their head: “Who needs you, Mr. Advisor? Can’t you see that I have enough money to do whatever I want? That I’ll never want or need for anything? How can you possibly make things better for me?”

They sometimes really do have all the money and cash flow that they need to do whatever the heck they want. But then my suspicions are also confirmed when I see their investments titled in joint name, or that their will has the most gravity when it comes to their dispositive documents, and if they have trusts that there is no legacy protection built in to protect generations against stuff like divorce, illness or reckless management of their hard-earned assets.

Here, unfortunately, I blame the advisor more than the clients. The clients are surrounded by bright people, including their CPA (you), an attorney, an investment professional, insurance agent and so on. Yet each professional is so content with their individual domain and subject matter area, that they really don’t appear to care about making sure that all the loose ends and gaps are properly covered, as long as their bills get paid.

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 any 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. The planner needs to help them get a better handle on the costs of both their wish list and their need list.

Common areas that bust a family’s budget are gifts to kids and grandkids, and large unexpected purchases such as boats, second homes or remodeling of an existing home. 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 offerings to lower their insurance premiums. Any agent can get your clients 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 in the marketplace, they frequently find themselves with higher odds of having inadequate protection. This is most frequently seen in auto insurance, and 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 may be asking for trouble. This client is also frequently underinsured 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 now used less by the family than in the past may be rented out for brief periods during the year. If that property is not properly insured as rental property, and suffers a big loss, especially one with a significant liability claim, it can take the wind right out of you.

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.

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 owner is because they need to be a named insured under the policy. It gets even riskier if mom put her home with no mortgage into one or more of her children’s names without informing the insurer.

The planners’ mistake with their clients’ property & 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 replacement cost coverage for the home, adding flood and earthquake coverage, obtaining umbrella liability insurance, and checking with your 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 the client’s life.



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 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. 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. If your client went to cash during the last market decline, and still sits there today, the same education may be called for.

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 an annual or quarterly investment meeting. 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.

Another common error of planners is to ignore investment assets not managed or overseen by you. Whether it is a 401(k) plan not yet eligible for rollover or money that they have somewhere else, keeping those assets in the conversation and being mindful of their overall allocation can be helpful.



Estate planning is probably the area with the most mistakes of any. Clients err in their estate plans in many cases by simply having old or obsolete documents. I see clients all the time with documents over 20 years old that are absolutely useless for their current facts and circumstances. Even more shocking is the high percentage of the population with no estate documents.

For those with current documents, a common problem is not fully utilizing these documents. It is disheartening to see a client with well-drafted living trusts who still holds title to their assets in joint name. I find it equally irresponsible when these old documents leave large sums of money to their children outright. Do you think that your life would have turned out differently if someone put a huge sum of money in your checkbook at age 21?

Planners frequently make this same mistake. After all, it is frequently the planner who opens up investment accounts for clients. That same planner asks the questions and fills out the applications for IRA rollover accounts and knowingly acquiesces when the client suggests that the children become the outright contingent beneficiaries of this large retirement account. For the CPA who hasn’t yet conducted a financial planning engagement for the client, shame on you. You see the 1099s every year and should realize that a single owner or joint ownership is not the most efficient way to plan an estate.

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 successful 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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