Planning is a lot of work for the advisor and for the client – so how can you make the payoff as positive and effective as possible? How can you make your advice useful?
The pivot point in a planning relationship happens when you propose to a client how they can change their behavior to use their financial resources to achieve their goals and live the life they dream of. The relationship is in place, trust is building, data has been collected and recommendations are ready.
For advice to be useful, it must:
Address a problem;
Be understood;
Be sensible and accepted;
Be acted upon; and
Have measurable results and work over time.
Let’s look at each of those criteria.
Address a problem
Until there is a problem that both the client and advisor agree exists, there is no need for a solution. Based on your experience, you may understand that the client’s current course will lead to difficulties down the road (or right away), but unless they see it, there is no motivation to do something difficult, unpleasant or complicated to make a change. Many “change agents,” from politicians to doctors to city planners to advertisers, believe they know how to make your world better. But they fail first to show that the status quo needs to be fixed in a way that is worth having people change their lives.
Never underestimate the power of denial.
Your client already knows how their world works, and it may not seem terrible to them. The biggest obstacle to adopting your proposals is not because it is financial advice. It is Nordstrom (and United Airlines, Hilton Hotels, Lexus, Whole Foods, and their needy child and cute grandchildren) – all the places and ways they spend money today and get immediate gratification instead of setting it aside for the future.
Further, everything is connected. One of the tenets of ecology – including the ecology of money – is that you can never do just one thing. Family, health, optimism, career choices, housing, and community are all going to be affected by every major decision someone makes, often in ways no one can predict at the start. (Think of how Uber has disrupted traffic patterns at airports across the country, for example.) By helping a client create resilience as part of your plan, they can respond better to the second-order effects of their new plan.
Help your clients understand that there is an urgent need to do reasonable things. Once they know that their life should and can be better, and that the steps required are not extreme, they need to implement the changes required.
Be understood
The core of a good financial plan should fit on one side of a sheet of paper, written with a crayon. Find the one or two goals or changes that will be key to their plan, and never allow the client to lose sight of them. At least in the first round of planning, every proposed action should be in service of those critical goals. You found out early in the relationship (I hope) what your client is most concerned about – a wish to help their children, or fear of running out of money, or wanting to create a business or start a new career, or assurance that the surviving spouse will be safe if something happens to their partner. They are dealing with the emotional impacts of FOMO (fear of missing out), YOLO (you only live once), FOBO (fear of better options) and the other ways we make bad decisions. They may feel that it’s all too complicated. You can help with both tangible and “procedural” goals, and show the benefits of making better money decisions.
We describe money in the language of numbers. We use calculators and computers to project the likely outcome of one decision or another. Yet when it comes time to make a plan, it is behavior we need to focus on, not numbers. Talking about behavior can be scary or seem intrusive. Changing behavior creates the opportunity or need for accountability, which few people like, especially over outcomes they don’t have full control over.
As I said earlier, new behaviors ripple throughout someone’s life. They take time to incorporate and can have unpleasant side-effects. Even an increase in a 401k contribution, usually a good thing, leads to less take-home pay, usually a bad thing. Be sympathetic and supportive in showing how to implement the change. Is there a financial planning equivalent to physical therapy, where full functioning is gradually restored? Perhaps you can create it.
Be sensible and accepted
When it comes to the specifics of your recommendations, it’s best if you suggest actions that are:
- Easy to understand and implement;
- Durable, so frequent changes are not required;
- In round numbers, not requiring or suggesting precision; and
- Based on flexibility, so changes can be made if circumstances change.
When designing a program for a client, “smart” is much more effective than “clever.” Too often advisors come up with a complicated tax strategy or an “alternative” investment plan that has a great story, but turns out to be much less effective than a more simple plan based on a balanced portfolio, regular savings, and low fees. The entire hedge fund industry is founded on the premise of selling something the client can brag about or feel special and exclusive in owning, even though the returns to the clients turn out to be disappointing. Advisors have recommended a variety of special products, from “government-plus” mutual funds to tax shelters to “multi-strategy” funds. The returns have rarely matched the hype.
It can feel that an effective way to advise and retain clients is persuading them that you are different from the others – that you have a “special sauce.” Clients may feel that they could “do it themselves” if the plan seems too simple, but in fact they were not doing it themselves without you, and likely need your ongoing encouragement to stay the course. There is a level of net worth where complication can be justified, but it is higher than we usually assume.
Investments or plans that are based on fixed, multi-year payment requirements or that have steep withdrawal penalties or limited liquidity may be appropriate for small parts of their money if the opportunity is available no other way, but do not overpromise.
Be acted upon
Implementing the changes you and the client agree on can be complicated. Getting to “yes” is only the first part of the process. Client competence in navigating the financial world should not be taken for granted. You may need to walk them through a process multiple times before it is clearly in place. Since recommendations differ widely between advisors (and kinds of advisors), it is hard to be more specific here.
Be measurable and effective over time
Establish up front how you and the client will measure results. What will you look at, and how frequently? This is an important long-term process, as the memories of the benefits of their old habits (the “Nordstrom effect”) will likely return more than the memories of the frustrations they felt.
Remember “Yhprum’s” law
Yhprum is Murphy spelled backwards. Murphy’s Law states that if something can go wrong, it will. Too often we err in the opposite direction.
Yhprum’s Law is the expectation that everything will go right the first time, on time, and under budget. There will always be money to do what we’ve proposed. No one will get sick or lose a job or have a child in trouble or get divorced, so all our (and now their) great ideas will be successful. They will never run out of gas, miss a plane, or hit a red light. The markets will continue to rise on a regular (if not straight-line) basis, and insurance policies will be issued as applied for. The GPS will never go into “recalculating” mode. If it looks like there’s a problem, somebody else will invent something to take care of it.
Yhprum’s Law is never true.
Yhprum’s Law is a useful source of hope in hard times, but it is dangerous if it substitutes for perseverance, care and resilience. Some or all of those bad things happen in every life. Your client will be well served by useful advice that allows for bumps in the road, or even a major detour, a washout or a crash.
A “useful plan” is not a document. It is a relationship and a dance, always changing in detail but not in principle, that keeps clients moving as much as they can toward the goals that they’ve told you will give them the life they want.
Richard Vodra, J.D., is the president of Worldview Two Planning of McLean, VA. He is retired from a 27-year career as a personal financial planner, and received the 2019 Lifetime Achievement Award from the National Capital Area chapter of the Financial Planning Association. He is an original member of the Nazrudin Project. He currently focuses on the linkages between financial planning, climate change, and resource constraints. He can be reached at [email protected].
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