Using Contextual Reporting in Tracking Financial Planning Goals

By Jay G. Sanders

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The planning process has four components:

• Understanding the client’s goals;
• Analyzing the client’s cash flows;
• Identifying the necessary actions to meet goals within the limits of cash flows; and
• Tracking results.

Setting goals requires knowing what the client values and wishes to accomplish, which can include maintaining a particular lifestyle, having adequate funds for retirement, and paying for college. In the planning process, goals are reduced to cash flows. Cash flow analysis involves the quantification and planning for cash coming in and going out, including tax attributes, inflation, and probability. It also includes investment planning, income tax planning, estate planning, transfer tax planning, and risk management (insurance). After comparing client goals to the cash flow analysis, action can be taken to meet the goals. Finally, there is goal tracking, the methodology employed to stay on target.

Goal tracking takes place after the first three steps have been executed. Tracking is the premier activity required to achieve goals, and it should facilitate the continuous refinement of the process. Reports should be designed to provoke client interest and dialogue. Tracking tells us when goals need to be amended, expanded, or retired.

For example, John Smith, 35, is an unmarried male with a life expectancy of 89. His current savings are $110,000, and he thinks he can save $10,000 per annum until retirement. John believes inflation will be 3% per year, and he expects an investment return rate of 6% preretirement and 5% postretirement. John doesn’t want to consider any benefits from Social Security. Finally, he wants to retire at age 65 and believes he’ll be able to live on $80,000 per annum in today’s dollars.

Number crunching results in the following calculations:

• Future value of $80,000 at John’s retirement age will be $194,181.
• Expected savings value at retirement will be $1,412,366.
• Present value of dollars needed in retirement (adjusted for inflation) will be $3,768,883.
• Additional savings required to meet shortfall will be $29,681 per year, or $2,336 per month.

Discussing these findings can lead to positive dialogue about the key variables affecting the result. John decides to take no action, but asks for a mechanism to report back to him annually. His planner establishes a simple amortization schedule and places it in John’s file.

Exhibit 1 shows John’s contextually based goal report three years later. The contextual report contains significant and relevant information that the brokerage statement (Exhibit 2) does not. Primarily, it keeps the individual’s goals front and center. It tracks actual savings versus planned savings, current value versus planned value, total returns versus planned returns, and total returns versus a benchmark customized by investment style. It reports over the entire goal period rather than annually, as the brokerage statement does. All reported items are kept in context with the original goals. The contextual report fosters a conversation with the client; the brokerage statement does not.

Professionally, contextual reporting falls under the definition of assurance services. The driving concept behind assurance services is that people use high-quality information to make decisions. Goal reporting is an area where planners can apply assurance services concepts in the financial planning field.