(Source: ChatGPT / DALL-E)

See the bottom of this post for important disclosures.

Tony Kornheiser is a sports journalist best known as the co-host of a well-known daily sports talk show on ESPN. However, he is also the host of a popular eponymous sports podcast, which he launched in 2016. Soon after he started the podcast, Kornheiser bought a local restaurant that provided a location to record the podcast in front of a live audience.

One of the running punchlines of the podcast during this era was Kornheiser recounting his financial advisor’s prescient advice that purchasing a restaurant is almost always a terrible financial decision, especially for someone with no experience owning or operating restaurants. Kornheiser kept repeating this story as the restaurant’s losses kept piling up. Two years after purchasing the restaurant, Kornheiser and his fellow investors decided to close the business.

Tony Kornheiser has plenty of wealth, so this poor investment probably had little impact on his finances. But it does bring up an important question: how hard should an advisor encourage a wealthy client to not spend their money on a “white elephant” endeavor that the advisor thinks the client will regret?

Put another way: if the point of buying the restaurant was to have a place to record the podcast and have fun, is it the really the advisor’s role to say no? What if the client instead wanted to spend $500,000 on a high-end sports car? What is the difference between that and buying a restaurant?

That’s the trouble: it is sometimes very hard to disentangle “financial advice” vs. “life advice.” And when the lines blur, financial advisors are put in an awkward position of potentially needing to opine on certain life decisions because they have financial ramifications.

The Growing Influence of Planning-Centric Financial Advisors

Over the last couple of decades, financial advisors have been broadening their advisory role from simply “advising on investments” to “advising on the big picture financial plan.”

This transition from “investment adviser” to “financial planner” has increasingly enabled the financial planner to displace the tax accountant or the estate attorney as the advisor who has the deepest understanding of clients’ financial and personal lives. The Exit Planning Institute released research in 2023 year noting that the financial advisor is now the most trusted advisor among business owners. Ten years ago, the financial advisor was only the 5th most trusted .

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Consequently, clients are discussing a broader set of issues beyond investments and retirement planning with their financial advisor. As clients feel comfortable with the broader range of financial advice that they receive from their advisors, clients increasingly solicit personal advice, especially when the personal topics are intermingled with financial considerations.

So for instance, to get back to the example of the illustrative sports car purchase above, many clients might not only ask, “Can I afford to buy the high-end sports car?” but the more personal question, “Should I buy the high-end sports car?” Obviously, these two questions have very different meanings, and the second question is a treacherous one for the financial advisor to answer.

The No-Go Advice Zones That Aren’t Always “No-Go”

There are three types of advice that are generally problematic for finance advisors to provide:

• Mental health-related advice: This should be an obvious point, but very few financial advisors are either trained or licensed mental health professionals. And most advisors know that they cannot and should not provide mental health advice.

• Interpersonal advice: Financial advisors clearly aren’t experts in helping clients manage their relationships with family and friends.

• Career advice: Similarly, advisors are generally not great career counselors. This is especially true because a lot of financial advisors have spent their entire career in the financial advisory industry and therefore have an uninformed view about different work environments.

In practice, however, it isn’t clear that even these obvious “no-go” topics are in fact always “no-go.”

For instance, advisors often have a suspicion of a client’s potential mental health issues or memory issues where they believe consulting a doctor or mental health professional could be beneficial for a client. But is it the advisor’s role to advise a client to seek a medical or mental health professional? While suggesting that a client should perhaps see a mental-health profession is not by itself medical advice, offering such counsel may be highly risky in terms of relationship management. Many clients may push back on this and suggest that the advisor stay in their lane.

However, there are definitely cases where mental health or memory issues become so obvious that not speaking up could actually hurt the client’s financial interests. In particular, clients with memory issues often becomes easy prey for scammers, and it really is a financial advisor’s duty to discuss these concerns with the client in a frank manner.

Then there are the interpersonal issues, especially the intra-family issues. As you can imagine, financial advisors learn about a lot about flawed relationships, years-long grudges, and “troubled relatives” within client families. The challenge is that money issues and fraught family relationships often go together.

Especially fraught is clients asking advice on whether to use their financial resources to facilitate repairing relationships and supporting loved ones that need money. This is especially tricky when clients limited financial resources and supporting a family member has the potential to impact the client achieving their goals.

Another touchy situation is a prospective divorce. The question of whether to seek a divorce is obviously a highly personal question. But what should an advisor do if one spouse asks an advisor what the financial impact of a divorce would be? (Note: the clear answer here is this isn’t something that the advisor can discuss with just the one spouse in an advisory arrangement that includes both spouses.)

Finally, career management is another topic where personal goals and financial goals often interact with each other. A very typical situation is a client saying, “I make a lot of money in Career X, but I want to follow my passion in lower-paying Career Y, but I also want to have enough money to retire and to send my kids to college.” Even after having done the financial planning analysis, it is really hard for an advisor opine on a particular course of action. The money is a consideration for the decision, but not the sole basis for the decision.

“I Only Lay Out the Options. You Choose.”

The way that many financial advisors get themselves out of some of these tricky situations is essentially not providing any advice at all, but instead offer a list of alternatives and the financial implications for each.

A typical example is the potential purchase of a second home. For instance, let’s say that a working couple in their mid-50s with $1.2 million of savings wants to retire in five years. But they also really want to buy a second home at the beach. Although second homes have asset value, they are almost invariably a huge expense, not just because of the mortgage payments but also because of the ongoing costs related to maintenance, insurance and property taxes.

A financial planner in this situation would perhaps run some analysis on three scenarios:

• Option 1: Don’t buy the house - with this option, the analysis shows that the couple has plenty of money to retire at age 60.

• Option 2: Buy the house, don’t rent it out - with this option, the analysis shows that the couple may not be able to retire until age 70 at the earliest.

• Option 3: Buy the house, but rent it out for part of the year - in this option, the analysis shows that the couple may be able to retire in their mid-60s…but only if they could achieve their rental income goals.

I can tell you that if the couple is really emotionally committed to buying the house, they’re probably going to choose Option 3. And the client is going to look at the financial advisor and ask them permission to buy the beach home.

The challenge is: I as a financial advisor know that “achieving the rental income goals” part of the Option 3 is often easier said than done. I have had many real estate novices buy a rental property only to find out that rental real estate is not “passive” income. Major repairs are needed, tenants leave, the rent gets negotiated down, etc. And what seemed like a money-making venture in the planning stage suddenly becomes a drain on the household’s retirement savings.

In other words, although the best-case Option 3 has them retiring at age 65, the realistic retirement age is likely to be closer to age 68-70, and that’s assuming the stock market does reasonably well.

But this scenario assumes the spouses agree on all aspects of the beach house decision. In practice, this isn’t always true.

The Presentation of the Analysis Can Drive the Client Decision

Sticking with the beach house scenario, now imagine a situation where the spouses have different opinions on whether to buy the beach house at all. One spouse is looking for an “optimistic scenario” from the financial advisor that makes the beach home purchase feasible while the other spouse is looking for a “pessimistic scenario.”

This brings up the issue of the hidden power that advisors have to shape client decisions through two big levers:

• The assumptions used in the analysis; and,

• How the analysis is actually presented.

Obviously, assumptions are an important input that determines whether a proposed course of action will be projected to succeed financially. In particular, projected stock market returns play a huge role in determining whether a plan will be successful. Quite often, a financial plan over 20-30 years will fail if projected stock market returns are 6% per year but will succeed if projected returns are instead 8% per year.

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How the analysis is presented also plays a role. There are many different ways that advisors can present the analysis, for instance focusing on the “most likely outcome” or alternatively emphasizing the downside scenarios. This choice of data presentation can shape the client viewpoint and chosen action.

Most financial advisors actually don’t want to tilt the scales for the client (unless the advisor does have a strong view on what the correct course of action is, in which case it shouldn’t be necessary to tilt the scales). In most cases, financial advisors just want to provide all the information so clients can make the informed choice. For instance, a financial advisor could present to the couple fighting over the beach house an optimistic scenario and pessimistic scenario.

However, in practice, presenting both scenarios when the spouses disagree doesn’t usually move the ball forward in terms of decision making because each spouse will attach themselves to the analysis that supports their view.

That’s when the clients look at the advisor and ask, “What should we do?”

The Slippery Slope to Life Coaching

It’s at this point where the advisor has a choice:

• The advisor can continue to push the decision back to the clients; or,

• The advisor can opine on the best course of action, which may incorporate a qualitative projection of the client’s future life wellbeing.

As an example, let’s say that a client with modest wealth and no restaurant operating experience suggests that they’re thinking about opening a bakery cafe to find more life fulfillment. And let’s say that this client can probably afford to put $200,000 into this venture, but no more.

I, the financial advisor, know two things:

• It is likely that this business venture will fail.

• It is likely that the client will regret pursuing this venture.

For my perspective, I would have no choice but to strongly discourage this client from pursuing this venture. For me to say something noncommittal like, “Well, it’s your money and you can do with it whatever you want” is bad advice, even if the client states that they’re willing to lose all the invested capital into the venture.

And the reason I have to give this advice is not just because of the financial considerations; it’s because most people who jump into entrepreneurial ventures without the proper experience regret doing so.

In other words, I’m giving life advice, and I’m ok with that in this situation, because I have high confidence that my life advice is correct.

However, there are other times where I have high confidence in what the right life decision is, but I have have to hold my tongue. This is especially true when it comes to family-related matters.

For instance, if a client has an adult child who is struggling to make it in the world asks me if they should continue to provide financial support to the child, that’s a difficult question for me to opine on, even if I feel like the parent should take a more considered approach in providing that support.

At best, I can listen and ask questions. But if a client asks me my opinion, I cannot answer that question for the client, even if I have strong view on the right answer.

Muddling through the thin line between financial advice and life advice

The above examples highlight two situations where I have decent confidence that I am making the right decision in whether or not to provide advice. In between, there are a lot of closer calls.

I’ve tried to come up with a framework for where to draw the line between saying, “You decide” and “Here’s my advice.” But I’ve concluded that constructing such a framework is impossible. But here are some rules of thumb:

• Avoid providing advice on situations that don’t involve money.

• Be very wary of the “no-go” situations that have a heavy interpersonal situation component.

• Suggest that the client reach out to other professionals for advice outside of a financial advisor’s expertise.

• Don’t get too worked up about relatively modest burning of financial resources. For instance, if a client with $1.5 million of net worth wants to spend $25,000 on a “white elephant” project that they’ll probably regret, I’m not going push back hard on that, because while $25,000 is a lot of money, in the larger scheme of things, it’s probably not going to have a material impact on the long term financial profile of the client.

• However, to follow up on the above example, if I start seeing a pattern of bad behavior that is financially harming a client, I will speak up about that. So for instance, if a client does 3-4 “white elephant” projects within the span of two years, I have to alert clients to this behavior, talk about it and advise them to change how they’re using their resources.

• And if a client is intent on spending more than 10% of their net worth on anything and I feel strongly that it’s an idea that they’ll likely regret, I will consider opining on that. But in this situation, it depends on (i) how much money it is; (ii) the interpersonal dynamics of the decision and (ii) how bad of an idea it is. I will note that most of my clients’ plans that involve spending a large amount of money are completely fine, from home renovations to year-long vacations. It’s just that every so often that there are are some proposed major outlays that are not a great idea.

Muddling through the thin line between advisory and caring

Most financial advisors worth their salt truly care about not just about financial outcomes but life outcomes. If I help a client achieve a successful financial outcome, but they don’t have a fulfilling life, I’m uncomfortable with that. And if clients pursues something that I think they’ll regret, I’m also uncomfortable.

It’s that discomfort that tempts advisors to stretch into life advice, especially when we think clients are choosing an action that they’re likely to regret. This can be especially tempting in cases where an advisory arrangement has evolved beyond just a professional relationship into a personal relationship as well.

But it’s important for advisors to distinguish between appropriate and inappropriate advice. Each advisor has to set their own rules for when they step back on the personal advice. But it’s important for advisors to have thought about these rules before they face a challenging quasi-financial advice / life advice situation.

Disclosure

Lindsey Young is an investment adviser representative at Quiet Wealth LLC, a registered investment adviser.

The commentary on this website reflects the personal opinions, viewpoints and analyses of Lindsey Young and should not be regarded as a description of advisory services provided by Quiet Wealth LLC or the perspective of Quiet Wealth LLC.

The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Nothing on this website constitutes tax advice or legal advice.

Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Past performance is no guarantee of future results.

See the bottom of this post for important disclosures.

Here is a general idea of an “ideal” financial advisor-client relationship.

1. The client finds the right advisor that meets the client’s needs.

2. The client helps the financial advisor understand all aspects of the client’s financial life and goals.

3. The financial advisor crunches a bunch of numbers using a variety software tools to come up with an optimized financial and investment plan for the client.

4. The client agrees on the plan, and the advisor and client work jointly to implement the plan.

5. The client and advisor meet regularly to review the investments and update the plan based on changes in the client’s life situation and finances.

Ideally, from the client’s perspective, a financial advisor’s work seems like magic. The advisor quickly understands each client’s unique problems and efficiently comes up with customized, optimal solutions.

But behind the curtain, financial advisors have a lot more internal doubts than what may come across to clients.

Take, for instance, a very common judgment call that all advisors must address: recommended portfolio risk. Almost all advisors use some sort of risk tolerance tool to measure a client’s psychological willingness to bear risk. And most risk tolerance tools provide a high-level recommended portfolio for different risk tolerance scores.

In practice, however, measured risk tolerance is only one factor in determining a recommended portfolio. For instance:

• How do you determine the correct portfolio for a household whose two spouses have very different risk tolerance scores?

• What happens if a client has high risk tolerance, but has low capacity to take risk? Example: a young couple with high risk tolerance has $200,000 in savings, but expects to have three children and needs to reserve a lot of the savings for near-term childcare costs. Almost certainly, even a risk-seeking client in this situation should not have too much of their savings in the stock market.

• What if money market funds are providing risk-free 4.5% returns (like now)?

Portfolio choice is just one of many technical areas where the recommendation is based on more than something that a planning tool spits out. That’s where the art of the planning profession comes into play.

But like most art, what is good is in the eye of the beholder. And in a planning relationship, there are two beholders who may have very different perspectives on what “good advice” is: the advisor and the client. (And if there are two spouses, that adds a third beholder!)

Effective advisors must not only consider what the technically right advice is (which in itself can be a challenge), but also the advice that is most likely to lead to the client accepting the advice and following through on it.

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As an advisor, I struggle with how transparent I should be with clients about advice uncertainty. Clients come to advisors to get confidence about their financial future.

But when I get into the weeds about the various factors that I consider in making my recommendations, I find that the complexity of such a discussion can be unsettling for clients. Making my clients “unsettled” is NOT what I’m aiming for.

That’s why we advisors often provide our advice with more confidence and less nuance than is warranted - because confidence from the advisor is valued. And confidently delivered advice makes it more likely that a client will buy in to the advice and complete the recommended action items.

And to the extent that there really isn’t a clearly superior recommendation, advsiors need to present a limited set of alternatives that may brush away some of the subtle complexity of the choices involved.

Ultimately, however, I think it is helpful for clients and the investing public to have a better understanding of the work and the thoughtfulness that happens behind the scenes for financial advisors that are very serious about providing comprehensive financial planning. To be clear: as of today, only a small minority of financial advisors provide true comprehensive financial planning. But advisors who provide this level of planning must constantly deal with complex tradeoffs in developing and communicating advice.

While there have been many financial planning experts, like Michael Kitces and Carl Richards, who have thought deeply about these topics, I haven’t found a place on the web that exclusively delves deep into the trickiest, most subjective areas of financial planning.

Moreover, writing about this topic helps crystalize my thoughts about the intricate and subtle aspects of creating and providing financial planning advice.

I also don’t think that my company blog over at Quiet Wealth is the best place to write these blog posts. I am not afraid of clients finding these posts, but I think that a web publication focused on these topics is better suited to be on a separate web property.

That’s why I decided to launch Financial Planning Unfiltered, which provides a behind the scenes look at some of the more challenging areas of providing comprehensive financial advice.

Over the coming months, I hope to provide an insider look at some of the greatest challenges / conflicts that I and other advisors confront in our day-to-day work. Whether you are a fellow financial planner or simply someone who wants greater insight into what financial planners do each day, I hope you will join me in this journey. You can subscribe and receive new posts in your email through the button below.

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Disclosure

Lindsey Young is an investment adviser representative at Quiet Wealth LLC, a registered investment adviser.

The commentary on this website reflects the personal opinions, viewpoints and analyses of Lindsey Young and should not be regarded as a description of advisory services provided by Quiet Wealth LLC or the perspective of Quiet Wealth LLC.

The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Nothing on this website constitutes tax advice or legal advice.

Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Past performance is no guarantee of future results.