Paula Hogan is that rare advisor’s advisor. She’s read the theoretical literature, and she’s contributed to it. But she is also a veteran advisor who’s compared her practical day-in and day-out experience working with flesh-and-blood clients to the theories and has strong views about how things really work.

In a recent Pension Research Council working paper published this month with fellow advisor Rick Miller (the final paper will be published as part of a book in the fall), Hogan and Miller offer an advisory perspective on the relative merits of modern portfolio theory, life-cycle theory, prospect theory and life in the advisory trenches.

In an interview with AdvisorOne, Hogan identifies four key areas of divergence between the theory and practice of financial advice.

1.    Average Results Are Not Relevant to Individual Clients

The traditional advice model, which draws heavily from investment management, places heavy emphasis on averaging, Hogan says. That paradigm says stocks are safe in the long run so the message to advisors, as Hogan characterizes it, is “build the biggest portfolio you can and it will work out okay.”

But the Milwaukee-based advisor and principal of Hogan Financial Management says this approach is dangerous to clients’ financial well-being. “Our clients don’t have a chance to come out on average. [They] have one shot at financial security.”

Since clients can lose all they’ve worked to save in a stock market downturn, advisors must think about managing risk more than about managing returns. The way to do that, Hogan says, is to “take your [highest priority] goals, and fund them in the most conservative manner.”

Hogan laments that people “hear” this idea as simply being “conservative.” But she says this oversimplifies the approach, adding that advisors should be prepared to more aggressively invest assets that are supporting clients’ lower-priority goals.

The key point, she says, is that “there is some standard in retirement that you do not want to go below, so you fund that very securely.” Life-cycle investing, which Hogan advocates, says advisors must help clients determine their goals, and then fund them in priority order, making sure that essential priorities do not bear market risk. She cites Zvi Bodie, Moshe Milevsky and Laurence Kotlikoff as key proponents of this school of thought.

2.    Sub-Optimal Decisions are Just Par for the Course in Dealing with Human Beings

But let’s say you’ve adopted the life-cycle approach, and you’ve clarified your client’s goals.

“If you lived in a textbook world, you would solve for optimal funding,” Hogan says. “But that ignores that we work…with human beings. Human beings don’t always want just a solved answer. A new widow doesn’t want an answer. She wants someone to understand [her situation] and what pace she’s able to move at.”

In other words, a strictly theoretical approach implies that one can technically derive an answer to a problem, but good advising is more about process than problem solving.

“Clients are always in a state of change. They’re ready to hear a new idea or not,” Hogan says. “So much of the art of advising is being able to catch a client when they’re ready.”

3.    Process Is Key to Implementing Financial Advice

Let’s assume there is a knowable, optimal answer to a client’s problem. Even still, Hogan says advisors need to migrate from the paradigm of being the authority laying down the solution to being the advisor facilitating a process.

“A lot of our clients are couples, and that’s different from working with an individual,” Hogan says. “There the advisor sometimes ends up being mediator: What if one person likes to take a lot more risk than the other?

“We make sure everyone’s voice is being heard,” she adds.

Experience has taught Hogan that the “best answer” is meaningless if it is not implementable, and implementation depends on having a process that addresses “personal values and personal readiness for change.”

She cites psychologist James Prochaska’s Stages of Change model, saying clients go through distinct stages on the route to taking decisive action—from “pre-contemplation” to “contemplation” to “preparation”—sometimes relapsing along the way.

By facilitating discussion of solutions through a process, an advisor can eventually help the client make the best financial decisions they are prepared to take when they are ready to take it, rather than what an advisor may think is the objectively best decision at the optimal time.

4.    Biases Distort Advisor and Client Thinking

A final area where advisors may stumble in their efforts to help clients is through behavioral biases on both sides of the conference table.

“As behavioral finance goes mainstream and begins to be incorporated in best practices, we’ll see filters and biases that go into client behavior and advisor behavior,” Hogan says.

“You are going to hear information and absorb data through a filter,” Hogan continues. “Behavioral finance lays out some of the particular ways that human beings are particularly irrational.”

As an example of such a filter that can distort financial planning, Hogan offers this warning: “extrapolating from your own personal experience and thinking that’s the true reality.”

While these biases affect advisors and clients equally, the possibility of irrational error is particularly relevant to the financial planning profession at a time when policy is not yet firmly set on financial planning practices and standards, Hogan says.

In the current environment of widely varying standards, “it’s so much easier for advisors to believe their own bias. With more experience do you get better [as an advisor], or do you just get more entrenched in your own views?” she wonders.

When [clients] go to an advisor’s office, they should know what the product will be and what the standards will be,” she says.

Overall, Hogan’s message is that there is a difference between pristine, theoretical answers and the more complex fruit cultivated in the vineyards of client engagement.

It starts with a process of values clarification, goal setting and a greater awareness of behavioral finance knowledge, but the end result is not a checklist of products.

“We’re morphing from delivering a product to delivering a process, from being an authority figure to being a facilitator,” Hogan says.