While managing investments is part of financial planning, it is far from the only thing you need to be thinking about. Factors such as risk management through insurance, optimizing your employee benefits and minimizing your taxes also come in to play, as do retirement planning, estate planning and debt management, says Norman M. Boone, founder and president of Mosaic Financial Partners Inc.
“Too often, people put all of their efforts into their investments when they should be spending more time on other parts of their financial picture,” he says.
Smart Business spoke with Boone about how financial planning goes far beyond investments, what you need to be thinking about in your approach and how an experienced adviser can help you meet your goals.
How does retirement planning factor in to the big picture of financial planning?
The biggest question many people have is whether they have enough money to retire, and, if not, what sum do they need and what steps can they take to get there. To help answer those questions, your adviser should collect your balance sheet information (which is a list of everything you own and everything you owe) and your personal income statement (how much you make and where it comes from, your taxes, the payments to your retirement and savings accounts, your regular payments and everything else you spend money on). You’ll also need to inform your adviser about any expectations you have for inheritances or future income sources as well as changes you expect in the future in your income or expenses. Your adviser needs to know as much about your money as possible.
To assess how much money is enough to support your lifestyle for your remaining years, a good adviser will then make an attempt to project your cash inflows and outflows for every year for as long as you might live. This projection will tell you if your plans will work (i.e., you won’t run out of money before you die). If not, you should test various assumptions to determine what you need to do differently in order to get it to work: stay employed longer, save more money, spend less in retirement, or get more aggressive with your investments to help boost returns.
Knowledge is empowering. With your financial projections and knowing what you need to do to make things work, you can confidently modify how you do things so that you can achieve your retirement goal.
How important is estate and philanthropic planning?
You don’t have to be rich to need an estate plan. Documenting your wishes can be one of the most loving acts you can do, because, without guidance, your loved ones will have to pick up the pieces, which very often leads to arguments, hurt feelings and worse. Whatever level of your wealth, having a will or trust will provide important guidance that your family members want from you about your assets. You also will need powers of attorney for health care and for financial matters, so that if you are incapacitated, people you trust can make decisions within the parameters you set. For most parents, the first criterion after providing for the spouse is deciding how much is enough for the kids upon your death. Beyond that, it is possible for many of us to do important good for our communities and the causes we believe in, both by giving while we are alive and by leaving a portion of our estate to charity after death. There are planned giving techniques that have specific tax aspects that bring benefits to the donor, to the charity and often to the family.
What is the role of savings, budgeting, cash flow management and debt management in financial planning?
Usually, the biggest factor under your control as to whether or not your retirement plans will work is your level of spending. You can’t control the markets and most people don’t have much control over their income. But, you are fully in charge of how you spend your money.
On the surface, how much you save is determined by how much of your income you spend. Instead of waiting to find out how much is left, good savers decide up front how much they want to save and automatically put it away before they start spending.
With debt management, the more debt you take on, the less flexibility you will have to make choices in the future. Under the right circumstances, using debt can be very beneficial, but borrowing too much or borrowing in the wrong way or for the wrong purpose can ruin a person’s life.
An adviser can help you think through these issues, based on what you want in the future, and help you implement good practices so you can be more in control of your finances, and your life.
What should people look for in a financial adviser?
When you are seeking a new adviser or have an existing one, you have a right to know about things that affect you — for example how much he or she will be paid if you buy a product that is being recommended. I believe clients are best served by advisers who are independent and thus avoid the conflicts of interest inherent when they have products to sell while at the same time offering advice. Do not hesitate to ask hard questions for your own information, but also as a test to assess whether the kinds of answers you get are ones with which you feel comfortable. The openness with which questions are answered can be key to ongoing trust.
You want an adviser experienced in your kinds of financial challenges and opportunities. Just because they’ve been around for a while doesn’t make them good at what you need. Relevant experience, education and training are critical.
Finally, and perhaps most importantly, you want an adviser who listens well. You are going to be talking about some very personal issues; you want them to pay attention, absorb it and learn from what you are telling them. They have to understand you before they can determine what the best advice is for you.
Norman M. Boone is founder and president of Mosaic Financial Partners Inc. Reach him at (415) 788-1951 or firstname.lastname@example.org.
When people talk about financial planning, they often think first about their investments. But there is much more to consider when planning your financial future, says Norman M. Boone, founder and president of Mosaic Financial Partners Inc.
“Investments are important, but investments on their own leave the picture short,” says Boone. “The biggest mistake people make is they don’t start with the big picture.”
Smart Business spoke with Boone about how risk management, tax planning and employee benefits fit into the big picture of financial planning, and what you should do now to ensure that you don’t outlive your money.
How does risk management play into the big picture?
Risk management for almost everyone should include consideration of possible insurance needs for life, disability, medical, homeowners’, auto, umbrella, liability and long-term care insurance. For many professionals, it can also include errors and omissions insurance, directors’ and officers’ insurance, business interruption and similar coverages.
Homeowners’ insurance is something that virtually all homeowners have, but, too often, it’s not given much attention. People buy a house, they get insurance and 10 years later, most still have the same contract. But a lot of things have probably changed, and the coverage is no longer applicable. It’s important to keep it current and relevant.
If someone has accumulated wealth over the years, he or she should seek out an insurance company that is experienced in handling the issues of wealth, like having multiple homes, or unique aspects such as insuring antiques or an art collection. Insurance needs change as circumstances change and all too often people fail to keep coverages current.
Part of the problem with insurance is that it’s complex and hard to understand. It can be critical to have someone you trust and who can help you stay on top of these issues and, if needed, advocate for you.
What do people need to think about in the realm of employee benefits?
Employee benefits vary widely from one company to another. The higher up you get on the company ladder, usually the more benefits you have available. While companies generally make a good effort to educate you, executives are often so busy they don’t take the time to understand their choices and they often fail to take full advantage. Whether it is making sure that you are fully getting the 401(k) employer match, determining if and how much to participate in deferred comp, or utilizing the stock option programs, it’s important to not only make the right initial choices, but also to monitor the program so that you make sure you maximize your personal benefits. Many people don’t have the time or interest to do this for themselves.
Many seniors may have moved on from their companies, but they still have decisions to make about government benefit programs, like Social Security and Medicare and how to effectively withdraw money from their IRA. Making optimal choices involves a number of complex considerations. Having an experienced adviser can provide important help with those decisions.
How does tax planning fit into the big picture?
Taxes have an impact on almost all financial decisions. It becomes especially intricate when you own a business or two, you have rental properties, you have timing decisions about stock options or income recognition, or you are considering moving money from an IRA to a Roth IRA, as just a few examples. Taxes impact investment decisions, not just whether to own muni bonds, but in other areas, like how to allocate each asset type among your taxable or tax-deferred accounts, since those choices can have important tax implications. Similarly, when you are withdrawing money, which account should it come from?
CPAs are good at preparing tax returns, but not every CPA is well informed about each client’s overall circumstances and not every CPA is good about planning ahead for such decisions. We believe that financial advisers who offer financial planning as a central service are often best positioned to help with the kinds of decisions identified here.
How important are investment management and investment strategies to overall financial planning?
Investments are really important, of course, but it’s a mistake to start by worrying about what investments you are going to buy when the big picture is much more important. For example, how much of your portfolio do you want exposed to the risk of stocks, or to the lower income but typically lower volatility of bonds, or the time-consuming demands of owning real estate? How much cash should you keep on hand? How should ‘alternatives’ fit into the mix? Do you want to do the investing yourself or hire someone who presumably has that expertise? Do you want to invest in individual stocks and bonds or do mutual funds or exchange traded funds suit you better? Do you think the prospects for growth are better in the U.S. or overseas, and what does that suggest about your geographic allocation? Finally, it’s important for you to assess whether you are trying to beat the market (an ideal goal, but one which many argue is highly unlikely), or are you willing to just get market rates and returns and keep expenses (the one thing you can control) as low as possible?
Many investors hire more than one manager to help them with the management of their assets. One of the problems that often arises in this situation is ‘overlap’ — when two or more managers are investing in the same things at the same time, undoing the very diversification that you were trying to gain. When they are buying or selling the same security at different times, potential tax benefits can also be lost. It’s critical that there be one party responsible for oversight to help you avoid the problems of managing multiple managers. Having an investment policy statement that sets out your expectations and the different roles for each manager and how those will be coordinated can be extraordinarily helpful.
Norman M. Boone is founder and president of Mosaic Financial Partners Inc. Reach him at (415) 788-1951 or email@example.com.
Bringing children into a family business, if not done correctly, can cause undue stress upon the family and negatively impact the business.
“Parents may wonder if their child will have what it takes to be their successor, worry about creating a sense of entitlement or be concerned that company managers may resent having to train a family member who might take their job in the future,” says Ricci M. Victorio, CSP, managing partner at Mosaic Family Business Center.
“Any time you mix family and business, you are going to be challenged,” Victorio says. “Family is all about unconditional love and acceptance. Business is all about results and productivity. The challenge is to define your expectations for your children at work so you can protect your relationships at home.”
Smart Business spoke with Victorio about how to successfully bring your children into your business without risking family harmony or business success.
When should a child ideally enter the family business?
We usually recommend family members work outside the business at least two to five years in an industry-related field, other than for part-time or summer jobs. If he or she has gained experience and had success on his or her own elsewhere, making the transition from scholastic to professional life will help avoid the stigma of also being the ‘boss’s kid.’ Doing so will give children a chance to prove themselves professionally and allow them to contribute new insights to the company, and they will have earned the right to be there with the other employees.
What are the first steps for bringing a child into a family business?
A succession professional with experience facilitating and integrating family members into family-owned companies can help structure this process. The consulting adviser will want to first interview the parents to get a clear understanding of their respective objectives and perceived obstacles. Next, one-on-one interviews with family members and key managers should be conducted to discuss their goals, expectations, education and work-related experiences. Even high school students can benefit in knowing what they need to do to be prepared, what skill sets and education they need and what requirements they will be expected to fulfill if they want to be considered qualified for a future leadership role in the family business.
The management team will provide perspective on the family goals of bringing young members into the company, the current strengths and opportunities within the team and how the family currently interacts in the business, and provide insight for developing interested and qualified family members.
As part of the interview process, we have found that profiling personality styles is very useful to gain an understanding of the potential strengths and challenges within the family and business team dynamic.
How important is it to find the right position for a child entering the family’s business?
Whether it is your child or someone you hired off the street, you want to do everything you can to ensure a good fit between the new employee’s personality and skills and the demands and characteristics of the job. Parents typically make one of two mistakes. First, they think their child should be just like them and can’t understand why they’re not, creating frustration on both sides. Or, they sometimes demand too much of their children, all too often causing them to quit, fail or give up.
Failing to match individuals with the right entry position and not providing a helpful training program to give them the skills they need usually undermines success and will strain family and business relationships.
How do you get the buy-in of managers?
Your management team is the leadership bridge to the next generation. Let them know they are critical to building the success of the business, with or without you. Match the right manager to mentor each family member to provide optimum opportunities to have positive experiences together. And never manage your own child if there is any way to avoid it.
How can families balance working together without damaging family relationships?
Draw up an agreement of expectations detailing how you want everyone to work together. Create mentor teams with executive managers and a development plan for how each family member is going to progress and learn the business. Unmet expectations will poison a golden opportunity, so it is vital to communicate what is expected of all involved. Having an experienced facilitator to help with this is essential.
Why do we need an outside adviser to facilitate?
Your succession adviser can raise issues you can’t and help you to have the honest discussions that very few families have the skills and experience to do on their own. A good facilitator will be able to get everyone together to communicate their expectations and help untangle the issues that inevitably tie families up into knots. An outside adviser offers objectivity and fairness to all parties, and will help avoid the predictable traps and pitfalls of family conversations.
What if you don’t think your child would be a good fit for the business?
Keep in mind that family and business are two separate entities. Not every child is suited to work in their family’s business and a bad experience can stress family relationships beyond repair. Most parents are very concerned about doing the right thing by their kids as well as needing to protect the success of the family enterprise. Ultimately, you may have to decide whether or not the adage is true that, ‘there is no business gain worth a family loss.’
Ricci M. Victorio, CSP, is managing partner at Mosaic Family Business Center. Reach her at (415) 788- 1952.
While having your personal finances in order is vital for any business owner, it’s important to look beyond just the money. How you approach your money, your family and your own life decisions can have a big impact on your kids and on the legacy you will leave behind, says Norman M. Boone, founder and president of Mosaic Financial Partners Inc.
“The more money you have, the more complex your life is, but, at the same time, money creates opportunities,” says Boone. “Most of us don’t learn how to be thoughtful, purposeful and intentional about the choices that we make about money and, as a result, most of us miss opportunities to make a difference. For example, we want to pass money to our children, but if we haven’t taught them how to make good money decisions or to have the discipline in their lives that we ourselves needed to get where we are today, the money can do more harm than good to our kids.”
Smart Business spoke with Boone about how to effectively deal with wealth and be purposeful and intentional, not only for today but for future generations.
How does a family start with the financial planning process?
Usually a family begins by asking how much money they need so that ‘work can become optional.’ That forms the basis of retirement planning. The basics also include tax and estate planning, insurance, philanthropy considerations, investment management and a few other things. However, that isn’t where most families fail. For families with money, the more frequent failure comes in not being purposeful and intentional about establishing and carrying on the family’s values, history, vision, stories and principles.
It’s these intangibles that are important because it’s around them that a family is created and continues. Each family needs to consider what is important to them as a family, where their challenges exist, what they value and what their priorities are. Those things create the foundation for the decisions you make with regard to the family business, philanthropy, how you spend your money and how you choose to pass it on to your children and grandchildren.
An adviser can help families discover themselves. As each family member begins to appreciate how the family is important to them, those insights become the basis to help the family members communicate with one another and to build truly valued relationships.
How does this process assist in financial planning?
It’s critical to take care of the foundational financial details — having a good investment program, a well-thought-out estate plan, effective insurance, steps to keep our taxes low and purposefulness about taking advantage of attractive opportunities. Effective families and their advisers take it to the next level.
Family members need a forum to think about the issues that are important to them. Their adviser should be able to help them communicate and explore their real concerns and needs. That process often clarifies the values and stories that families hope will get passed down to children and grandchildren. Part of being a family is about practicing and experiencing together so that those values and guidelines become a part of the kids as they grow up.
How can an adviser help through this process?
The adviser can be a facilitator. It starts with good questions and good listening. Every family and every business owner is different. What are their issues? What do they want to see and feel and experience that they aren’t now? More often than not, they know their own solutions, but most of us need help to get them out in the open so we can apply them.
It’s amazing how little thought most people have given to their own future. Most people take what happens and react to that and do their best. But evidence suggests that as people create goals for themselves, as they write down their visions and create their goals, they are more likely to have gratifying lives. A good adviser can help you through this process, both on an individual and a family level.
Is this an ongoing process?
Creating a strong family and a strong foundation for the future is typically a multiple-year process. It starts with a discovery phase while the adviser gets to know each individual, their stage in life, their motivations and priorities. Helping families record their histories and to begin to learn to enjoy one another’s company are critical early steps.
Strong families have regular meetings. They learn to talk about the family, how they are doing, whether they’re being inclusive and having fun together, learning to truly appreciate each other’s strengths and personalities.
For families of wealth, philanthropy can be an important tool to teach family and personal values to younger family members. For adult children, philanthropy can be an opportunity to experience their parents as equals, as they decide together which causes to support. Philanthropy can be a very effective way for the business owner to teach kids critical life skills like investments, decision-making, research and due diligence and how to prioritize multiple options.
How can a financial adviser work with other advisers to help a family accomplish its goals?
All families need good advisers: one or more lawyers, a CPA, an insurance person, a financial person and perhaps a rabbi or minister. To best serve the family, the advisers need to be involved not just with the family, but also with one another. They should work together to integrate their different skills and perspectives so the family is well served in an aligned way.
It’s basic human nature to want to pass on not just what we have, but also who we are — our stories, our values, our experiences, life lessons and traditions. By developing your family, you have the opportunity to pass along those things to your children and grandchildren and to help them be more successful and more involved in the world in ways that are meaningful to them, helping them feel good about themselves.
Norman M. Boone is founder and president of Mosaic Financial Partners Inc. Reach him at (415) 788-1951 or firstname.lastname@example.org.
Most people are not comfortable talking about their finances, even with family members. Parents especially can have a fear of sharing their estate and succession plans with their adult children; they’re afraid of upsetting harmony in the family, or they’re sometimes avoiding the perceived greed of hearing their heirs talk about “I want this, I want that...”
Yet, if they’re not communicating, then really it’s an artificial harmony, and the family won’t understand the effort the parents went through to create a fair plan, says Ricci Victorio, managing partner of the Mosaic Family Business Center.
“One of the most important aspects in planning for your family legacy, whether there’s a family business or just significant wealth, is communication,” she says. “Parents often use the family holidays, like Thanksgiving, to explain their gifting strategy. But these kind of family settings are almost always inappropriate for discussing emotional or delicate issues. The result is that the family will dread attending the next holiday or family event because they remember the blow-up that happened last year.”
Fortunately, discussing finances with the family and maintaining family harmony don’t have to be mutually exclusive. A better setting for those kinds of discussions is in a “family council” meeting.
Smart Business spoke to Victorio about using a family council to tackle the often daunting task of communicating with family members about estate and succession planning.
How can the process of family decision-making become easier?
One of the best venues to discuss the business of the family is in a ‘family council.’ What we’ve learned is that people should separate family gatherings from family business discussions. A more formal setting encourages a more professional and organized approach, often by having advisers and a facilitator present to help explain things in a way that won’t upset or confuse.
Unmet expectations or anxiety about the unknown can seriously undermine family harmony. Whether there is conflict or not regarding the succession plan or the division of assets you can sidestep potential years of tension and upset by tackling these tough discussions step by step with the guidance of a trained facilitator. Knowing, even if you don’t like the answer, is most often better than being in the dark.
How does a family council work?
Once a family makes a commitment to using a family council, I like to help them develop a ‘Family Charter.’ It’s a statement of purpose and vision and helps to define the core values that are important to communicate to the next generation. Objectives and goals are defined, which helps to keep everyone focused on creating an agenda for each meeting. With regular meetings and the integration of younger family members as they mature, this mechanism for problem-solving and planning for the future will be passed on to each generation long after it was initially created, contributing to building the family legacy.
Once I get to know the parents and their plan, what they want to communicate and what they’re comfortable communicating, I survey each of the involved family members. I ask such questions as: What do you know about your parents’ estate plans? What do you want to know? What is your vision of the future? If there’s a family business, to what do you attribute its success, and what are some ways you can think of to perpetuate that?
Another way families can better communicate is to learn one another’s personality styles. Understanding what kind of leadership styles are natural to each individual can make it clear where there might be points of tension. Often, conflict happens due to different personality styles, rather than it being intentional. Initiating a family council by learning about the best ways to approach one another as difficult decisions are made makes it much easier to talk about other complicated issues.
What kinds of issues are discussed?
In laying out an estate plan — especially one that is quite involved or intricate, where a family business or any kind of considerable assets are involved — the more complicated it gets, and the more you need to layer in the pieces of information. We can explain the concept of the estate plan and the succession plan without using numbers. Then it becomes more clear why, for example, siblings who are involved in the business are going to inherit voting stock in the business, and the non-active kids might either receive non-voting stock or other assets like real estate or securities or something of a fairly equitable range.
A family council can’t just be convened one time. It really needs to become a part of how you address the business of the family. And it may not always be related to estate planning — it could be used to talk about difficult family matters, charitable gifting, or other ways to support the community. You can also use it to introduce family members to a financial planner or to broach the subject of insurance or investing to help the kids learn how to handle the money they’ll inherit. A family council sets an atmosphere where everyone knows they’re going to be professional and courteous, even when making difficult decisions.
Who should consider a family council?
There are various levels of family councils, and I would suggest that families of more than one generation who have a family business or significant assets absolutely must consider this kind of vehicle. Every family needs to be able to communicate what their planning is to those impacted. The worst thing that can happen at the time of loss of a parent is to also experience the shock and surprise of not understanding what they had intended. You don’t want your kids resenting each other because they didn’t understand why Mom and Dad made the decision they did.
When someone says, ‘I’d rather just let them figure it out when I die,’ it’s setting the stage for eventual conflict. What kind of legacy is that? This isn’t the way you want to be remembered. Leaving a legacy of love and harmony, and then security and business success, would be any business owner’s dream.
Ricci Victorio is managing partner of the Mosaic Family Business Center. Reach her at (415) 788-1952 or email@example.com.