This week I want to share with you a simple example one of our advisors uses to walk through his income planning strategy with high net-worth clients. He shared that as his average client surpassed $1 Million in net-worth, he realized the simpler he kept his explanation, the more his prospects understood (and more importantly) implemented his planning philosophy. It's a very simple story where he compares his income plan to that of a house and how it's structurally built. He calls it his "Fiscal House"...
1. He starts with the below conversation with the client. (As he draws out a foundation on a white board)
"So, if you take $500,000 and went to a builder and told them you want to put 450,000 into the roof, what would they tell you? They would tell you you're crazy, right? So what we always do when building a financial plan is we start with the foundation. Have you watched the news lately? It seems like every day there is a new natural disaster, most recently the tornado in Joplin, MO or a little while back the earthquake and tsunami that followed in Japan. What is the one thing you notice in all of the before and after pictures??? The one thing that is still remaining after all of that massive destruction that you always saw stood up and withheld these violent storms and changes? It is always the foundation, right? That's how you can tell where the houses and buildings once stood. Well, that's the same way we build a financial plan. We start with the foundation, that way it can withstand anything like the market downturn we faced as recently as 2008 when the market dropped by almost 50%. I call this a "fiscal tsunami" and you want to make sure your financial plan is able to withstand anything the market might be able to do, like what we saw back in 2008. No matter what happens, you have a solid base. Before we do anything else, we start here. You have no reason to decorate the walls until you've started with the foundation, and there's a formula that tells us how much needs to go into this." (Rule of 100 Explanation)
2. Next we build the walls. (As he draws the walls out on the white board)
"They need to be strong and support the roof. You've all heard the stories of the houses built with Chinese drywall and all of the class action lawsuits that situation brought about. When constructing our walls, we want to make them out of sturdy material that won't crumble, so what I like to use here are nice, high-dividend paying stocks. Sturdy blue chips companies that have been around a long time, or perhaps REITs that produce a lot of income and pay nice, strong returns."
3. Lastly, we construct the roof. (As he draws a roof on the house on the white board)
"Now, if you think about the roof on your house, what happened the last time a hailstorm or big wind storm happened? What was the very first thing that was damaged? It's always going to be your roof, right? You're not going to be up on your roof shielding it with an umbrella are you? It's no different in our financial plan, one of the things we know going in is that the roof is subject to being the first thing that takes damage whenever there's a storm, there's nothing you can do to control it. So, this is where you're going to have your high-risk, high reward assets. They'll be the first to take a hit, but at the same time, they'll be the first to have bigger financial gains in an up market. These are the riskiest holdings you have, because it's exposed to things we can't control, and you need to be ok with that going in."
"Terrorist attacks. Nothing you can do."
"Nuclear meltdown in Japan, nothing you can do."
"Greedy bankers on Wall Street, nothing you can do."
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