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Critical Talks: Financial Advisors and Client Blindspots

Carl Irico, CFP® Director of Financial Planning

Financial Planning Blindspots

In the complex world of personal finance, every individual has unique needs and circumstances that can sometimes create blindspots – areas where they may not fully understand or even be aware of certain risks or issues. As financial advisors, it is our responsibility not just to manage our client’s investments but to become an advisor, a partner, and in some ways a coach to our clients.

At Sowell, we encourage you to shine a light on these areas with your clients so that you can guide them toward sound decision-making. 

Here are some commonly overlooked financial areas that may cause problems for your clients – now or in the future. 

Insufficient Personal Liability Coverage

It’s unusual for a P&C agent to ask about a client’s net worth, which is why so many people have the standard 100/300/100 or 250/500/250 dollar limits for Personal Liability Coverage.  But if your client has a net worth of $1 million plus, they could be in for a rude awakening from a liability claim.  A trip & fall at your house party.  A Dog bite to a child’s face.  A teenager driving a car you own.  So many things can bring on a claim and most people don’t really think about those possibilities.  Why?  Because they are rare!  Hardly ever happens.  Which is why extra liability coverage is not expensive.  If a client had a new $50/month premium for a $2 million dollar liability policy, would that new expense change their lifestyle?  Of course not.  But if the registered letter from a law firm informing them of a $1,200,000 liability suit is sitting on their desk, the first thing in their mind is “Am I covered?”  And if they lost the liability suit, would that change their lifestyle?  If your wealthier clients have something that could be lost in a claim, reviewing that exposure and recommending a visit with their P&C agent is bonus advice for you.  The “I never thought about that” look is the blind spot.  Once aware, they can make an adult decision if they would rather pass that risk on to an insurance company or keep the risk for themselves.  The policy doesn’t change the risk of a claim, just the potential financial consequences of a claim.  One benefit of being insured is the insurance company may pay to defend your client against the claim.  If your clients must defend themselves, they could be out thousands of dollars in legal fees even if they win the court case.

Potential Risk of Owning the Vehicles of Your Age 18+ Family Drivers

In addition to the above, the scenario where parents own the vehicles driven by kids who are age 18+ is worth discussing with your clients. In the unfortunate event of an accident, the vehicle’s owner will ultimately be named in a lawsuit.  Recently, Alex Murdaugh was sued because his 19-year-old son, Paul, used his dad’s boat and was involved in a fatal boat crash. If the child owns the vehicle, they may have far fewer assets to lose in such situations.  It is unlikely this kind of scenario is discussed, and that’s why it’s a blind spot.  Advice from a qualified P&C agent can help parents and teenagers make informed vehicle ownership and insurance coverage decisions.

Inadequate Homeowners Insurance

It seems obvious once you say it, but market value of a home is not necessarily the replacement cost.  Construction costs have risen substantially over the last few years and in some areas has increased faster than the market value of the home.   If client’s have their home insured only for its market price and experience a total loss, they might be underinsured when rebuilding.   A top-notch P&C agent will have brought this to their attention, but I don’t see if very often.  For one, client’s shop insurance companies for price, getting a quote on-line, and using market value as the coverage amount.  That may be just fine but when you bring up the possibility it is not, it’s another “I hadn’t thought about that” look – the blind spot – that you pointed out. 

POAs (Powers of Attorney)

As your clients age, it becomes even more crucial to ensure that they have Powers of Attorney (POAs) in force.  Ideally, the POA document would name successors to provide backup in case the original choice cannot carry out their duties. It is also essential that all parties involved have easy access to the POA document, ensuring seamless and efficient management of their financial affairs. 

Clients have their 3-ring binder estate documents somewhere but the blind spot is “how would this actually work?” –  especially the POA.  It’s not uncommon that the POA is being called upon during a time of stress.  Does the attorney-in-fact have a copy in hand?  Do they know what it means and what to do if they ever had to use it?  Is there a copy on file with the custodian?  If not, it may take a while to authenticate the document, confirm what powers have been granted and affirm the identity of the attorney-in-fact.  This takes time all while there is a financial hurry.  This leads to frustration for everyone.  By proactively addressing this process and ensuring that the POA is set up in advance as much as possible, including the custodian, the advisor can transform a negative experience into a positive one for the client.  

Beneficiaries

Beneficiaries are a crucial aspect of financial planning that warrants regular review, ideally on an annual basis. Things change.  In particular, is the ongoing addition of grandchildren.  If there is more than 1 child and there are grandchildren, the blind spot is not knowing what would happen in the case where a parent and child die together.  Certainly rare, but not a zero risk.  Would they want deceased daughter’s share to go to her children or to her siblings?  Are any of the grandchildren adopted and do they want the adopted child in the same inheritance plans?  Explaining how “per stirpes” works or discussing a Bloodline Trust can offer enhanced control and protection for future generations. While it’s important to emphasize that you do not provide legal advice, discussing these possibilities with your clients may push them to actually set an appointment with a qualified attorney. Consider accompanying them to the attorney’s office to ensure a comprehensive and tailored approach to their estate plan.

How will income and expenses change at first death? 

Who wants to think about that?  That’s why it’s a blind spot.  “ Mr. and Mrs. Client, we have a solid plan in place for your future income – but most of the assumptions have both of you here.  But we need to consider, and plan for, the eventual situation when it’s just one of you.  Then outline how income will change and then discuss how expenses will likely change.  It won’t be half.  Real estate taxes and homeowners’ insurance will be the same.  Utilities will drop a smidge, but not half.  Food sometimes goes up, depending on who is still here. But let’s talk this through.”

Summary

Your role as a financial advisor is more than their investments.  Bringing to their attention some potential blind spots is caring and meaningful.  Who else cares enough to ask?  By taking the time to look at potential blind spots you are doing an even better job of setting your clients up for success and positioning yourself as a valued and trusted advisor on their financial journey\.

BLOG DISCLOSURE: This website blog is published and provided for informational and entertainment purposes only.  The information in the blog constitutes the content creator or guest blogger’s own and it should not be regarded as a description of services provided by Sowell Management. The opinions expressed in the blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry.  The views reflected in the commentary are subject to change at any time without notice.

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