Behind the Financial Planning Curtain
Analytical wizardry hides the deep challenges that financial planners face
See the bottom of this post for important disclosures.
Here is a general idea of an “ideal” financial advisor-client relationship.
The client finds the right advisor that meets the client’s needs.
The client helps the financial advisor understand all aspects of the client’s financial life and goals.
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.
The client agrees on the plan, and the advisor and client work jointly to implement the plan.
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.
Clients want financial confidence.
Advisors providing advice confidently enables clients to feel confident.
But the advice offered is often much more subjective than clients imagine.
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.
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.
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.