Many accountants find that they are called on occasionally by their clients to handle things beyond the scope of bookkeeping and tax preparation. One such service requested is that of a financial advisor. Which makes good sense, since finances are your wheelhouse as an accountant.
Today the Rules of Thumb blog from MoneyThumb would like to discuss how you can help your accounting clients handle their debt as their financial advisor. We have compiled a list below of several ways you can help them handle their finances and get out of debt.
A person overwhelmed with debt is like a person bleeding from an open wound; the first step is to stop the bleeding. As your client's financial advisor, you can map out their cash flow and identify the problem areas.
Advise your client to collect all relevant papers to make sure you are aware of the full picture. This includes bank statements, credit card bills, installment loan statements, pay stubs, tax returns for the past few years and anything else that may have an impact on the situation. You can then draft a new balanced budget that covers the essentials while not adding more debt to the pile. This typically involves trimming off any unnecessary expenses, so any excess funds are available to pay down existing debt.
Analyzing and Restructuring
There are many different types of debt. Some are relatively benign, such as mortgages (low-interest rate and full tax deductibility,) while others are certainly toxic, such as credit cards with very high, interest rates, and delinquent accounts generating penalty fees on top of exorbitant interest.
After analyzing the client's debt, as their financial advisor, you can proceed to prioritize the client's debts. The most expensive and delinquent accounts go on top, while the more modest ones go to the bottom. For example, if a client has $600 a month to pay off existing debt in the new budget, the bulk of it should go to pay off the debts causing the most additional costs. It is important to continue making minimum payments on the lower-interest accounts too so that they don't backslide into the delinquent status and start racking up penalties.
A financial advisor also looks at the options for restructuring debt into more beneficial options. For example, a homeowner with equity in his property may be able to take out a second mortgage and use that money to pay off three credit cards in one fell swoop. The lower interest rate on the second mortgage then enables the homeowner to pay off a chunk of the new principal each month instead of just keeping up with the interest payments. Be prepared to make the phone calls yourself, though; most financial advisors just tell their clients what to do, leaving the legwork to the clients.
Another benefit of getting the debt under control is that the client's credit score suffers every month he has high-balance or delinquent accounts. As the new budget takes effect, the accounts become current and the balances gradually sink. His credit score increases accordingly, which opens the door to renegotiated terms with creditors (at lower interest rates) and may even lower seemingly unrelated things, such as insurance premiums.
Planning For the Future
Your goal as your client's financial advisor isn't necessarily to help them pay off all debt as quickly as possible. While the initial focus is debt reduction, there are often other considerations that arise once the immediate fires are put out. Each situation is different, and it's the financial advisor's job to take a holistic view in order to establish a long-term plan suited to each client's specific needs.
For example, a person with dependents may need life insurance to provide for them in case of his premature death. As their financial advisor, you may recommend paying down a couple of high-interest accounts first and foremost, but then slow down the debt payments to start a sturdy life insurance policy. The next step may be starting retirement savings account once a few more debts are fully paid off.
The client should walk away after your initial consultation with a written plan explicitly spelling out the course of action. Ideally, the financial advisor should provide milestones to check off and red flags to watch out for so that the client can check his progress and catch any potential missteps early.