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Financial Planning > Behavioral Finance

Future Imperfect

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Tarot cards, the flight of crows, Ouija boards, horoscopes, animal viscera: The past is a hodgepodge of attempts to read the future. Even though none of this has been known to work, we humans keep trying to predict tomorrow in hopes of being able to prepare for it and thrive.

Thanks to the 24/7 fire hose of the Internet, we now know way more than we might like about what could happen. The cataclysmic changes of the past few years have deluged us with so much information that it’s hard to know what is truly meaningful.

To help you find your way toward this uncertain future, I asked several well-respected thinkers and planners about the most significant challenges that financial advisors will face. From the deeply philosophical to the practical, and from global issues to community concerns, I think you will be interested in what Mary Malgoire, Dan Ariely, Shlomo Benartzi, Dick Wagner, Elissa Buie, and Dick Vodra have to say.

OM: Mary, what can you say about the industry today?
Look at every other profession that is a true profession. They have no conflict of interest. Today, we’re at this crossroads, and I’m not sure the regulators really understand what’s at stake. We want the consumer to be able to walk into a planner’s office and know that they can trust this person without question.

I helped found NAPFA in the early 1980s and served on the board from 1984–89. [Malgoire was re-elected this year –Ed.] Back then, nobody knew the term “fee-only,” so we had to educate the public, the media and the regulators—with no budget. It felt like Sisyphus pushing the rock up the hill. We would read Money magazine articles that said fee-only planners were too expensive, so we had to call up and educate them. Consumers and even financial planners did not see the drag [of commission payment] because nothing was disclosed. That began a process of asking for full disclosure. In the early ’90s, we fought an SEC proposal to put financial planners under the NASD. We said, “No, we are fiduciaries.” It’s sad that we are still fighting this battle today.

In the future, let’s see a true profession without conflicts of interest. Let’s make sure financial advisors are employed only by their clients.

OM: What are some of the positive things advisors have done that will improve the future?
I think financial planning has evolved a great deal. We now have a business model that serves the high-net-worth population quite well. The question is whether this advisory-intensive model can also serve low-net-worth and middle-net-worth clients effectively.

What I see is that technology and the Web can deliver much more efficient service for these lower-net-worth consumers. If I’m a middle-net-worth person, I should be able to go on the Web and, at a trusted site, be connected with an advisor I can completely trust. I share my personal, confidential financial data (perhaps in a standardized and widely acceptable format) and the person can advise me—I can see them on video—and they recommend the most cost-effective product to me. I can get everything I need: life insurance, a mortgage, index mutual funds, asset allocation for my 401(k), and I can talk to a real live person. So I see the delivery of advice for that client in the future being very different from that of a high-net-worth client who comes in with a crate of documents and sits down with one of us personally. That level of service can’t be delivered to low- and middle-net-worth people.

This is why I think investing can be commoditized. The vast majority of investors don’t need anything fancy. They would do just fine by implementing a basic vanilla portfolio.

OM: What can you as planners do about this?
It will be a challenge; we will have to be more efficient. As Joel Bruckenstein has pointed out, we need to make sure that the systems advisors need to do their work well—CRM, document management, portfolio management, and so on—are integrated so they talk to one another. This should bring down the costs. A trusted Web platform to serve the low-net-worth to middle-net-worth client will drive fees down.

OM: What are advisors doing that may come back to haunt them?
The decision that the SEC makes about who is or is not a fiduciary will haunt us if it’s not the right one. If they allow the fiduciary concept to be applied to people who sell products, it will haunt us for years to come and may damage our credibility irreversibly.

OM: What should advisors be doing to prepare clients for the future?
The only thing we can do is to encourage our clients to be financially flexible. They need to be willing to adapt to an uncertain world. To say, “I don’t really have to remodel this kitchen” or “My kids can find alternative ways to pay for college.”

This means being mentally and emotionally agile. With the Visionary Dinners I offer to my clients every year, I’m trying to say, “Here’s some far-out stuff that we should allow ourselves to contemplate.” Of course, we tell them we are not in the business of predicting the future. Above all, we want to steer them away from treating investing like gambling.

[Read more about Mary Malgoire's Visionary Dinners.]

I think financial advisors are finally getting this. It ties in with the whole life planning trend: being a coach; helping your clients through difficult transitions.

We will always need to be good listeners and trusted advisors. But the investing thing—you may be able to pluck that off a shelf.

OM: Dan, what should advisors be doing to prepare clients for the future?
At some point in the near future, they will have to accept that the benefit they are providing their clients, in terms of balancing their portfolio, cannot justify the amount they are charging for their service. It’s easier and more accessible for clients to do that on their own.

The good news is at that point financial advisors will have to look more broadly at what they can provide their clients.

OM: Dr. Benartzi, I’ll ask you the same question I asked Dan Ariely: What should advisors be doing to prepare clients for the future?
I’m not as pessimistic as Dan. But the issue is that advisors in the past have only sold performance: returns, and picking the right funds. Advisors were brokers. That misses the human element of the client. It’s not about picking the right fund, but about managing client behavior.

What we will see is that successful advisors will provide a more holistic approach. In addition to this, they will realize the human element that they need to provide. It’s about integrating behavioral finance into the entire process of the investment advisory business, from prospecting to closing to setting a plan to servicing the client and dealing with referrals. In each step of the process, you can see how behavioral science can make a huge contribution. How much risk can a client really stomach?

This will differentiate successful advisors from less successful advisors. It’s not unlike the real estate business: Those who incorporate the human element in serving their clients will win. It’s also about how they manage their business.

Given what we’ve experienced, there are more opportunities than ever for advisors to add value to their clients over the next few years.

OM: What are advisors doing, or not doing, that may come back to haunt them?
So much can go wrong. Take financial terrorism; how many advisors talk to their clients about that? Maybe a client should always have $500 in the house. You need to go back to take three or four rules of thumb that your grandma and grandpa used. Grandma would have said, “You should have some cash in the house. If someone breaks in, you can always give them cash.”

Does it mean we need to create a list of all the possible risks and how to deal with them? I don’t think that’s possible or realistic. You can’t overwhelm people with too many risks and fears. You have to prioritize. I would focus on the major financial risks like inflation risk, longevity risk and investment risk.

Even then you might apply some of the rules your grandparents followed. Grandma might have said, “You have too much debt!” You know, rules like this might indirectly affect how we deal with the credit crisis.

OM: Richard, how do you see the state of the industry today?
I came to financial planning out of law. I was a lawyer for five years, but really didn’t like it. Lawyers spend most of their days dealing with the rough edges of human conflict, whereas financial planners spend their days dealing with people expressing their love of others, financial responsibility and duty. I think part of the challenge of financial advisory work is to help people make decisions in tune with their values.

But one of the things I noticed when I came into financial planning is that there’s no theory. It’s still too linked to selling product. In reality, it’s considerably more profound than that.

Financial planners are operating in a theoretical vacuum, and are still the agents of industry. We haven’t established our own independence yet. ICFP has tried. When we founded the College for Financial Planning in the 1970s, five subject areas were set up, and people are still being tested on the same five subject areas, which are all financial products: insurance, securities, taxes, estate planning and retirement planning. There’s been a remarkable lack of originality.

OM: This may be a good point to ask what errors or oversights of advisors will come back to haunt them.
My problem with life planning is that it’s too smiley-faced. It avoids the dark, conflictual side. I’ve seen too many people in tears over money to believe that it’s all positive. It doesn’t take in financial trauma, or where money fits into our culture, or people’s life choices. Dennis Miller, the comic, has said, “Money is not the most important thing in our life, but it’s right up there with oxygen.”

The challenge of money is that it’s the most powerful and pervasive force on the planet. We assume it’s found in nature, but it isn’t; it’s created by humans. It does an amazing job of creating cooperation and self-organization between human beings. In fact, it’s the only force that allows us to cooperate with each other without violence. We see it as material, something that causes greed and fear; but it’s the anti-material, literally without substance.

OM: What do you see as some of the hopeful things advisors have done (or that have happened) that will improve the financial future?  
We’ve got a dedicated corps of professionals who consider themselves fiduciaries who are providing wisdom and insight and skill to their clients, and, frankly, serving society at large by looking at money from the individual’s perspective. But we still have a lot of work to do.

It’s pretty cool that our profession, which started from nothing a little over 40 years ago, has come this far. A lot of people deserve credit for that, real heroes who created something from nothing.

In particular, I think the Nazrudin Project is pretty amazing. In 1995, George Kinder and I founded it with Spring Leonard, who’s passed away, and Dick Vodra, who brought their own leadership skills. We sent out 100 invitations: “Be at the YMCA in Estes Park.” Thirty responded, and that was the birth of Nazrudin, which has generated a lot of the intellectual and theoretical underpinnings of financial planning. The open architecture was entirely Dick Vodra’s idea. You come in without an agenda, and the retreat starts with setting up an agenda. It’s essentially a leaderless think tank.

OM: Can you tell us more about your work in creating better language to express people’s relationship with money?
It’s an issue I’ve been thinking about since before 2001, when I wrote an article called “In Search of the Elusive Word.” How do you talk about this stuff? How are we going to have a conversation among ourselves? How can individuals understand the water in which they swim? Literally, there are no words in the English language to describe the relationship between people and money.

I think we might have been able to avoid the housing bubble if financial planners had shared what they knew, if we’d had political sophistication and spoken up. This business of “no words” is a huge deal. That’s on us: Why haven’t we developed a vocabulary to talk money and relationships? We have deferred to “Somebody else will solve this problem.”

OM: Say an article is written about you 10 years from now. The reporter writes, “Back in 2011, he was a voice crying in the wilderness.” What are you trying to call people’s attention to?
It’s a real problem that most people have no idea where money comes from, what it is, and how it works.

I don’t think people realize how much money has changed since World War II, or how we have been asked to adapt to its demands since then. The first generation after the war had defined benefit pension plans; Social Security was heavily subsidized. That’s not going to happen for us, but we still think this stuff grows on trees. Even financial planners are dealing with canoes and sunsets instead of the heavier aspects of aging. People really do lose the ability to generate income. We’re going to be asked to live 20 to 30 years on unearned income, and we’re not ready.

I think each of us has a responsibility to “seek the light”—to understand what money means to us. It’s not just a matter of inequities between rich and poor, but about the richness of our lives.

OM: Elissa, do you think advisors are overlooking anything or making any mistakes that will haunt them later?  
First of all, I think what we’ve done to date is phenomenal. We’ve built a profession that changes people’s lives. To the extent that we’ve made errors, it’s been with the best of intentions, and for lack of a crystal ball.

As far as the things that we could do better—even though we’ve tried, we haven’t succeeded in getting our educational system to commit to teaching financial life skills to school-age children. I’m going to write a letter to Michelle Obama applauding her mission to eradicate childhood obesity, but skinny adults with no financial life skills are still going to risk having miserable lives.

One more thing: Financial planning is a high-credence service. It’s very difficult to measure the value, and we need to become more successful in communicating to the public and to politicians that there’s a difference between financial planning and other stuff. They need to regulate us, too; but not like asset managers or insurance consultants.

OM: What do you see as some of the things advisors have done that will improve the financial future?  
There are so many things, but I’ll pick a few. First, we (the profession) have funded a very successful foundation, the Foundation for Financial Planning, which has granted millions of dollars to projects designed to help people make better financial decisions. Also, we have recently created a number of policy-based systems to help people make good ongoing financial decisions. For example, investment policies, debt policies and spending policies are available through financial planning to help people make good decisions as their circumstances change.

OM: Do you think that 10 years from now, people will say you were a voice crying in the wilderness? If so, what about?
I’m more of a trend spotter than a trendsetter, but I have two things that I’m trying to call attention to: the importance of what we do being evidence-based; and that people cannot live their lives fully without financial life skills.

Yes, we will have more volatility, but I don’t believe we need to be burying gold in the backyard or buying canned hams. We do need to be vigilant about how much our clients spend and how much they have in reserve, but we don’t need to panic.

Humans are so adaptable and resilient. If oil runs out, it will first become more expensive, but then we will tap other sources: coal, wind, solar. People will make money developing other sources of energy. That’s how economics works.
So I don’t see the future as bleak at all. We have lots to do: We’ve got to dig out from under our national debt; figure out our health care situation; focus on global warming and the rest of the environment, including energy. But we have consistently created challenges and opportunities for ourselves as human beings, and there’s nothing different about this time.

OM: Dick, can you describe your planning approach?
My personal approach is summarized by what I call the 5-100 Rule, which states that any number projected five years into the future is 100% unreliable. I learned that from one of my early colleagues. We were then talking about insurance projections, but what I came to understand is that what we do as planners may be significantly wrong, but we don’t know by how much. It’s amazing how many people who are deciding whether to convert their IRAs to Roth IRAs are basing their decision on future projections that are completely unreliable.

OM: What do you see as some of the positive things advisors have done that will improve the financial future?
I think the conversations about values, and the understanding that money is not the most important thing, will be very helpful when the money stops growing. If your only method of scorekeeping is about whether the money goes up or down, then you’ll be depressed or even devastated when it goes down. But if your measure of success includes family, community, creativity, health, involvement—if all of those count in evaluating your life—if money is useful, but not the main scorekeeper … this is hopeful, because I think that financial prosperity is coming to an end.

OM: Are there errors or oversights in what advisors have done or are doing that will come back to haunt them?
In the world I’m in, there are probably three things that come to mind immediately: first, the financialization of everything. The role of finance in society is much greater than it was 30 years ago. That has led to the number two problem, which is the overconcentration of wealth in a very small number of people and the stagnation of living standards for almost everyone else. And the third problem is our fundamental belief in cheap energy and endless economic growth.

OM: If an article 10 years from now says that in 2011 you were a voice crying in the wilderness, what would it have been referring to?
That article was actually written in 2008, and it pointed out that I’m the only financial planner (to my knowledge) who takes peak oil, climate change and other resource constraints seriously.

We are reaching the limit right now of how much energy we have available to us on a global basis. As that starts to decline, the total amount of economic activity will also decline. In addition, climate changes are accelerating, but most of American society and the world don’t take that seriously. These will both have a tremendous impact on every aspect of our lives.

We need new economic models; we need new expectations. This extends to personal planning, as well as on national and global levels.

OM: What can planners do about this?
There are two ways to prepare under the life planning model. One is non-financial. It relates to getting out of debt, insulating your house, living close to your work, reducing your need for energy in other ways, growing some of your own food, and building a more vibrant community. If we look at these at collective problems, we can join together to try to address them.

It’s harder on the investment side, because it’s not clear what investments are going to be successful in a world without a lot of economic growth. Further, the future is going to be increasingly volatile and unpredictable.  

All planning requires you to have a view of the future. So what kind of world are you planning into? The consensus view of increasing growth and prosperity based on plentiful cheap resources is what I call Worldview One. I think we need to plan for a different future, which I call Worldview Two. We’re just starting to figure out what that might look like.    

Olivia Mellan, a speaker, coach and business consultant, is the author with Sherry Christie of The Client Connection: How Advisors Can Build Bridges That Last, available through the Investment Advisor Bookstore at She also offers money psychology teleclasses and facilitates intergenerational retreats for wealthy families. E-mail Olivia at [email protected].


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