All Things Financial Planning Blog


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I Don’t Understand My Financial Plan


Get Your Questions AnsweredRecently reflecting on some of cinema’s greatest intellectual quotations, I was reminded of movie Detective James Carter’s infamous query in 1998’s Rush Hour. Chris Tucker’s character eloquently asked Jackie Chan’s character, Chinese top cop Detective Lee, “Do you understand the words that are coming out of my mouth?”

Ok, maybe not one of the most memorable moments on the silver screen, but a funny movie that stands up well fifteen years later. But, that’s not what we’re here to discuss. The quote actually jumped into my head during a discussion about how we communicate with one another, especially in advice-based relationships.

A seemingly infinite amount of information is available on virtually every issue known to humankind, all searchable within seconds from any place with access to the World Wide Web. How we process this information, understand its meaning and filter the good, the bad and the ugly really depends largely on whether or not the information is communicated in a manner we can comprehend.

This certainly has its applications in the world of personal finance. I’d argue the personal finance industry at-large, more often than not, adds layer upon layer of complexity to relatively simple concepts in order to add an air of sophistication and justify an unnecessary amount of cost. I won’t go further on that today except to say that if something sounds too good to be true, you can’t understand it, what it costs and what risks are involved, run away.
Instead, I want to focus on the authentic struggle many financial planners and advisors have in working to develop the right communication strategy based on their clients’ needs.

Scalability allows a company to grow, taking a successful model and increasingly diluting it for consumption by an increasingly growing audience. The problem with scale in the financial planning business is that those seeking advice are all at different points in their lives, with different goals, different resources to meet those goals and different ways to achieve success in meeting those goals.

We also all comprehend things differently, learn through different stimuli and apply concepts to our daily lives at different speeds. Confused? Me too. What does all this mean?

It means that we have a gap in the relationship between financial planning professional and client that both sides have to work to fill. Financial planners need to ensure they have a process in place to help identify how best to communicate concepts and recommendations in a manner that best suits each client involved.

The client, on the other hand, has the duty to speak up when they don’t understand something in their plan, be it an investment recommendation, the path to reach a savings goal or a concept or term used to illustrate a point or answer a question. “I don’t know” or “I don’t understand this” are not only acceptable responses to questions posed or information presented by a financial advisor, but should be a welcome opportunity for the advisor to take an improved approach in helping the client comprehend, thereby teaching the advisor a little more about communicating with their client and challenging them to find better ways to illustrate concepts in the future.

The bottom line is, we all need to be more vigilant about what we understand about the decisions we make and are made for us in our daily lives. When it comes to an advice-based relationship, the more we question, challenge, and discuss, the deeper, more rewarding the relationship will be. Wowing someone with the ability to use big, complicated words to make a point isn’t a talent. Effectively communicating in a manner that gives your audience the best opportunity to understand is.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH


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Mutual Accountability


Business CoachWe talk a lot at the financial planning firm I work for about mutual accountability. In fact, it is part of our vision statement. What it means to us is that there are responsibilities for both the advisor and client in maintaining a healthy relationship designed to successfully meet our clients’ goals.

For advisors, that means being diligent and putting together sound advice and plans that serve the best interest of the clients and families we gratefully spend our careers serving.

But, we must also expect clients to be accountable for carrying out those plans and letting us know when goals or situations are in flux. Without proper execution, the advice we offer will never amount to much. Despite what many think, long term success occurs less in the swings of the stock market and more in the mundane financial decisions we make every day.

So what happens when we deviate from those plans?

See if this analogy hits close to home. You’re making an ongoing effort to eat less. Maybe you’ve consulted with a dietician, attended a Weight Watchers meeting or sought advice on the Internet. You put a plan together designed to meet your goals. Then, one night you decide to splurge. It might be a trip to the fridge for an extra bite of leftovers or a quick cookie in the pantry.

Do you own up that you’re making a conscious choice to go off plan? Or, do you “sneak” the quick indulgence? Hide it from a spouse or your children? Claim ignorance at your next meeting as to why the pounds aren’t melting away?

Have you ever thought about why?

It’s ridiculous, really. That cookie isn’t adding calories to anyone else’s diet. It isn’t breaking their rules. The person you’re really hiding from is yourself. You’re avoiding accountability.

Are these types of indulgences the end of the world? It depends. Does one cookie become a whole sleeve? Does twice a month become a nightly ritual? How badly are you willing to sabotage your long term goals for short term enjoyment?

The same is true with our personal finances. We all have places we turn for financial planning and advice. Financial planners, investment managers, and sources like this blog or other Internet resources can be full of valuable, insightful information. Either way, we might receive some useful advice or read a particularly relevant article and decide to commit to making a change in our financial lives, just like with our diets.

What happens next is crucial. Do we carry it out? Do we save a little more? Spend a little less? Or do we quickly find ourselves back at square one after too many instances of whatever the financial equivalent is to an extra bite of cheesecake when no one’s looking?

Unfortunately, like our waistlines, accountability will eventually rear its ugly head. We can spend that extra dollar when no one’s looking and cheat our responsibility to our future selves all we like. In the end, we will have no one else to answer to when important goals go unmet. No one has the kind of stake in your future that you do.

There are wonderful advisors and tools out there to help you build a path to meet your lifetime goals, but the path is really all they can show you. The decision to walk down the path is yours. Sure, you’re going to stray from time to time, just don’t get so far off course that you can’t find your way back. Keeping those diversions to a minimum and letting your trusted sources know when they occur will help ensure the needed corrections will be relatively minor.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH


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The Four Elements of Financial Planning


Ron Lieber, who writes the “Your Money” column for The New York Times, wondered what kind of tough questions clients were asking their financial planners after last year’s financial crash. To find out, he moderated a panel with five of my colleagues at this fall’s FPA convention in Anaheim, CA. His article about that session appeared online on October 16. Read the article.

Lieber asked the financial planners three questions:

  1. Did their clients feel they should have seen the crisis coming?
  2. Did they feel the philosophy of asset allocation failed?
  3. Because of scandals like the Madoff debacle, were clients trusting them less?

The planners’ responses (No one really saw this coming; asset allocation didn’t fail; there are thieves in every profession.) didn’t surprise me. Some of the reader comments did. If these comments indicate what the public understands about financial planning, the profession has a lot of educating to do.

I’ve divided a selection of the comments into four areas of concern: trust, compensation, investment advice and education.

Trust

  • “Do it yourself and don’t trust a soul besides yourself.”
  • “From all I have heard about financial advisers over the last couple of years, I am grateful that I am not one and I have not used one.”
  • “I’m not paying a financial planner to help me and my spouse through these times at all.”
  • “Stay away from these people, who apparently can’t weed thieves out from their own ranks.”

Much was written about money manager Bernie Madoff, who defrauded investors out of billions of dollars. This underscores a fundamental misunderstanding of the difference between a money manager and a financial planner. Money managers oversee large pools of money owned by multiple investors, such as mutual funds, pension funds, managed accounts and limited partnerships. Financial planners provide advice on a broad range of financial areas including taxes, retirement, cash flow, estate planning and investments.

Compensation

  • “The only ones who are making money…are the professional mutual fund managers and financial planners who collect fees for their alleged investing expertise.”
  • “It is my belief, after working with several, that they are only out to fatten their wallets at your expense.”
  • “Work longer, save more, invest in TIPS, the market is random, risk cannot be diversified away. You will never hear this from financial advisers. They wouldn’t make any money.”
  • “I put my money with a financial advisor. He makes money off every trade whether it makes money or loses it…but he’s the devil I know.”

These folks may have been looking for unbiased financial advice in the wrong places. They seemed unaware of the difference between a financial salesperson and a fiduciary financial planner. 

Investment Advice

  • “[Financial planners] did not see the downturn coming, really? Many, many folks did.”
  • “Stay away from these people, who apparently can’t predict major, obvious macroeconomic trends.”
  • “After paying $2,500 a year to a financial planner and having her recommend investments that tanked 60-70% during the past year….I say: skip the financial planners.”

This thinking shows a real misunderstanding of financial markets, long-term investing and the role of a financial advisor.

Education

  • “[Financial planners] don’t need college degrees, just a certificate of training.”
  • “Anyone can do this on their own.”
  • “Don’t waste your money on financial planners as they [know] nothing more than you.”

True, anyone can use the term “financial planner.” However, a Certified Financial Planner® must have at least an undergraduate degree in financial planning and three years of experience.

Yes, the financial planning profession certainly has some educating to do.

rickKahlerRick Kahler, CFP®, MS
President
Kahler Financial Group
Rapid City, SD