Journal of Financial Planning: July 2012
Rick Adkins, CFP®, ChFC, CLU, is president and CEO of The Arkansas Financial Group Inc. in Little Rock, Arkansas. He served as the 2003 chair of the Board of Governors of Certified Financial Planner Board of Standards. (RickA@ARfinancial.com)
If you are a big fan of the financial planning profession, you probably like the winds of change that are blowing through the national advertising campaigns of large financial intermediaries. To put them into context, think back to the advertising campaigns of the 1980s: if you were fortunate enough to find yourself at a major sporting event, the dining room of a prestigious country club, or attending a party on a yacht the size of a whale—and you got really, really quiet—you might become the beneficiary of information available only to a select few (also known as “their customers”). Never mind those pesky insider trading rules (wink, wink).
The other “old school” approach to advertising was to test the waters (do market research) to see what current state of greed or fear would motivate the masses to take action. The companies would then look in their bag of tricks to find the mutual fund in their quiver that might fit the bill, and then advertise to the public: “Oh yeah, we’ve got one, it’s great, you’ll love it!” (think gold funds and GNMA investments). That sort of thinking can lead to “accidental investing,” which we now know causes line charts to knock you off of your motorcycle and bar charts to crush your car!
The newer crop of advertisements are healthy indicators that large financial firms are finally seeing an important truth: the achievement of important financial goals isn’t accomplished by either gaining unfair advantage or randomly throwing money at an investment product du jour, and just hoping you have enough in order to retire. You really need a plan … or at the very least, a number.
The idea of “your number” is very powerful. One guy’s number is $1,086,523 and his neighbor’s number is $GAZILLION—he really doesn’t have a plan. He just blindly throws money at it and hopes something good happens. The idea that “if you are going to need to spend X amount of money each month in retirement, after taking into account Social Security, you’ll need Y amount of money invested at Z return to make it until you die” is mathematically valid and just makes sense. It’s also part of what you and I do.
The green line is also wonderful imagery. It conveys the idea that you aren’t aimlessly wandering through life. Someone’s going to point you in the right direction, help guide your decision making, and if you’ll simply stay on the line, you’ll be just fine! As more and more baby boomers approach retirement, they have a growing realization that they’re clueless about how to convert a portfolio into an income stream. They’re beginning to sense that they need guidance.
I applaud these commercials. They have the potential of motivating prospective clients to think about their game plan rather than the coolest, newest investment product. I suspect that they are causing many to engage in greater self-evaluation than they have in the past. I believe that these commercials raise the very issues that you and I try to help our clients resolve in their own lives.
Challenges to Real-World Planning
As motivators to action, they’re a great start; as behavior changers for spending less, saving more, managing taxes, and investing more efficiently, something is still lacking. That’s where you and I can help. The “real world”—ongoing implementation and modification of these numbers and lines—presents huge challenges. Here are four:
- Not Enough “Real” Financial Planners. There simply aren’t enough of us to do what needs to be done—particularly with the wave of millions of boomers set to retire. When I was first elected to CFP Board, there were about 36,000 certificants in this country. Today, there are only about 66,000, and not all of them actually prepare financial plans. In fact, I would venture to say that many of them have no financial planning software and haven’t actually seen a financial plan. Their role is to “gather assets,” not waste their time delving into the messy world of forecasting and then managing long-term goals. We simply need more professionals who actually: (1) perform the analysis and calculations to help people come up with a valid “number” for retirement sufficiency, and then (2) lead them forward with appropriate advice and guidance, helping them make better long-term decisions and modify their behaviors that are potentially destroying their financial futures.
- Inadequate Client Information Systems. Unfortunately, you and I can’t come up with “the number” if our clients don’t know their real spending patterns. “The number” is simply the present value of a client’s net monthly spending (less other income from pensions, Social Security, etc.), adjusted for inflation and discounted at a rate of return consistent with a portfolio that fits their risk profile. I’ve spent my career writing and using software that does precisely that. Here’s what I’ve learned: if they don’t give us “the truth,” we can’t give them “the number.” The only way to get to the truth of their spending patterns is to have an information system in place that collects those patterns. Like it or not, that means using something like Quicken, Mint.com, iBank, or some other financial data-gathering system. That’s the greatest challenge you and I face in coming up with a meaningful number for our clients, and it’s one that I believe technology will continue to “painlessly” provide.
- The Human Tendency to Wander. Where “the number” requires long-term thinking and forecasting, the idea of the green line raises important shorter-term issues. In contemplating the green line, I love the idea, but I’m not confident that our clients would stay on it for more than a couple of days. By and large, we serve a clientele that is intelligent, affluent, hardworking, and independent. The very idea that someone is going to lay out a green line for them to follow is almost laughable.
Yet, this doesn’t invalidate the concept; it just requires creative adjustments. When it comes to paths, I find it more useful to help clients understand the likely benefits and consequences of the various paths available, let them choose their own path for the moment, and then frequently measure where it’s leading them. They will change their path when they see it’s leading them somewhere they don’t want to go. This is why objective measurement of where their path is leading must be done with sufficient frequency to avoid waiting until it’s too late to alter the course. I would submit to you that it’s far more critical that clients know the consequences of the path they are on than that they know their quarterly or annual portfolio return. - Curve Balls. In tandem with the last two points, the other reason paths and numbers can prove inadequate is that paths can take some unexpected turns. Family situations never contemplated can develop—job loss, poor health, an untimely death can throw a major monkey wrench into plans. Those are the curve balls life can throw at us.
On other occasions, clients are the ones throwing the curve balls. I was recently reading about a study regarding needs and wants. Essentially, the findings from the study were that when humans find all of their needs met, they start unconsciously converting wants into needs because we seem to have an innate need to be “meeting needs.” I guess it comes from our hunter/gatherer ancestors. Those unmet wants (converted into needs) can lead to all sorts of goofy spending that wrecks financial plans. Airplanes, three vacation homes, and other long-term, fixed-obligation spending can turn plans into pipe dreams. Having someone to evaluate the consequences of these impulses can prove invaluable.
Financial planning is not an event or project; it is a messy and ongoing process. From a business-model perspective, it will never be as efficient or scalable as investment management. It requires long-term forecasting under uncertainty, and short-term measurement and management of progress and changes. It forces us to live in the squishy world of irrational feelings, fears, and mistakes that come with being human. Yet it holds out a hand of hope to the clients we serve. When they do their part and we do our job well, magic happens: their number becomes clear, charts quit wrecking their lives, and the path they truly want to follow becomes clear. Don’t you just love what we do?