Executive Summary
When a financial advisor engages a new client, they are analyzing a lifetime’s worth of financial decisions that have brought the client to this point. While this often includes many great decisions, it is also likely that a client has mis-stepped along the way… or at minimum, made suboptimal decisions for their goals. Yet these conversations about a client’s past financial decisions are rarely as simple as correcting a mistake or ‘optimizing’ a portfolio – these are often the best financial decisions a client could have made at the time.
In this 199th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how to have a curious and compassionate conversation about a client’s financial past and help them lay the groundwork for the future.
As a starting point, it’s helpful to remember that every ‘less optimal’ decision carries an emotional and logistical history – at some point, that financial decision seemed to be the client’s best path forward. For example, if a client purchased a life insurance policy that no longer seems to fit their goals, the first question the advisor can ask is what problem the client was trying to solve. The advisor’s recommendation will vary widely if a client purchased that policy as an investment vehicle, was based on a friend’s recommendation, or was to lay the groundwork for starting a family.
From there, there may be an opportunity to recalibrate the client’s finances in the light of their current goals. Often, in the light of current cashflow, insurance, and investment needs, the client may be organically inclined towards change anyway. When possible, advisors can use growth-oriented language, emphasizing how they can help clients get from “here” to “there” with these financial changes – which feels more encouraging and less critical.
At times, advisors may need to be more candid about a poor financial decision, especially if it will have an outsized negative impact on their future. When this happens, it is important to be clear but compassionate about the client’s viable steps forward. And the advisor can emphasize where these ‘suboptimal’ financial decisions created good habits and strengths – for example, a whole life policy may not be the best fit for a client’s long-term goals, but it may have helped the client with building initial habits around consistently saving.
Ultimately, the key point is that when it comes to a client’s past financial decisions, it’s best to start with curiosity and the client’s motivations at the time. From there, exploring whether that decision still fits their goals is generally a viable way to help them adjust their financial reality to their current goals… and make more informed and sustainable decisions in the future!
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***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and YouTube Music.
Show Notes
Kitces & Carl Transcript
Michael: Well, greetings, Carl.
Carl: Hello, Michael. How are you doing?
Michael: I'm doing well. I'm doing well. We are chugging through the summer, probably early fall by the time this episode comes forth. So enjoying the summer season, which actually is not that enjoyable here in DC. We're more of a spring or the fall area, but we're getting a little bit of museums and stuff downtown because it's air-conditioned, which is really nice.
Carl: Right, very good. Yeah, it's been hot out west too. And I just got back from a long motorcycle trip with my son, and one day of it was almost unbearable. Trying to find water anywhere out in the desert of Wyoming is impossible.
Michael: So you were motorcycling across Wyoming?
Carl: Well, we went from Utah through a little bit of Idaho and then up across Montana and then back into Wyoming. And then he rode to New York to school and I rode home.
Michael: He rode to New York from Wyoming?
Carl: Well, from home. First we went, yeah, we left from Utah, went north. And then he rode across a little bit north, through Chicago, that area all the way to Brooklyn to Pratt.
Michael: Which is like a week. How long does it take?
Carl: I think, well, it was more than that. Including the days with me, I think he'll be out about 14 days.
Michael: Wow.
Carl: Yeah. So fun. But anyway, hot. Gave me lots of time to think. I thought a lot because I don't have any music in my helmet. So it was four to six hours a day of just thinking, so lots to talk about.
Michael: Very cool. And I'm going to pick your freshly attuned brain today for one of our wonderful questions from listeners. We take some of these sometimes to bring them right onto the episodes here. I thought it was a very good one because I feel like we all come across this from time to time, and sometimes often. How do you handle the situation where a new client has been making "bad money decisions" for many years and now you need to be the one that breaks the news? So the example he gave was a client who came in in their early thirties. We'll call him Dan because it's easier to have a name to reference. Dan, the new client, comes in in his early thirties, getting his first financial plan, trying to get his house in order because he's getting married soon and starting a family and wants to have all the things in order. So the advisor starts going through his situation, and Dan's primary asset is the cash value in a sizable whole life insurance policy that his college roommate sold him ten years ago.
Carl: Right.
Michael: Because that situation happens. And so he now needs to explain that buying a whole life insurance policy as a 23-year-old single guy and saving into it for the past ten years maybe was not the most ideal wealth accumulation for him. No Roth, no IRAs, no 401(k)s because the whole life insurance policy was consuming all of his dollars. And so the question from the advisor was, how do you graciously open this conversation? I've got a client who may or may not be embarrassed if I have to explain that this was not good. I don't even know what the relationship is with the original person who sold him the policy, who at least then was his college buddy when he did the thing. Now there's a fiance at the table. So we're trying to help them get their financial life in order, and I'm trying to not embarrass Dan in front of his fiance to explain that maybe Dan didn't make some of the ideal savings decisions. I know there's just a whole separate conversation around when are we using life insurance and not, I don't really mean that to be the focus here.
Carl: Because that would be too much fun.
Michael: That's just the context of the situation. But it does come down to... Whether it's the expensive life insurance policy or the mutual funds that was egregiously over-promised and did not deliver at the crazy returns that were promised, the crux of this question is, how do you break the news to Dan? How do you tackle this conversation when you need to open the door to explain about, "Some of the things you currently hold that you were using to build your financial future up until this point maybe were not ideal"?
Exploring A Client's (Suboptimal?) Past Financial Decisions Neutrally [05:44]
Carl: Yeah. Look, there's a lot to talk about. And like always, it really depends on the specific context. And so let's talk about some... Let's back up and broaden this to start, and then we can go into a couple of different examples, Dan being the first one. The first thing I just find interesting is to ask the question of, bad or poor relative to what? Just to have an internal conversation first of like, bad, says who? Bad because it wasn't as good as the optimal plan that you could have created for Dan if you'd met him ten years ago? Okay? Bad relative to the fact that somebody at Dan's stage, the average... You would maybe know the stats off the top of your head. What's the average 35-year-old have saved in America?
Michael: I don't know. I don't know offhand. It's probably not a huge dollar amount, but it tends to be in a retirement account.
Carl: Yeah, sure. But we've all seen those stats of people couldn't come up with $500 to fix their car. So I just think we widen the aperture first and be like, okay, well, is there a way to reframe this? Okay, not optimal. Sure. But maybe there's a way for us to feel a little differently about it. "Hey, you did something for savings in a non-optimal way, but it was for savings. You've done something." First, it would just be mindset; it'd be, "Wow, what could I do to label this a certain thing?" I'd just be thinking that way. And then...
Michael: I want to pause there for a moment. Are you going down this road because we're sounding a little judgy saying this may have been a bad investment decision or, are you literally trying to frame this differently for Dan? Or are we doing some like, well, "Dan, let's start with the good news."
Carl: Yeah. I know.
Michael: I'm not being tongue-in-cheek. That can be a legitimate thing, is that where you're going with this?
Carl: We all know that the strengths of what you're doing is a good place to start. And then we can talk about the weaknesses and then SWAT, some opportunities and some threats. But I'm more thinking, can we just get to a place of nonjudgmental empathy for people? And this is where I would start. No matter what the situation is, in this case, Dan was sold something, but we could easily have gone to... And you pointed to this, Dan and a fiance in a room. And I can't tell you the number of times I was in this conversation where a married couple 10, 20, 30 years. And there's an asset there that one almost... The balance sheet is supposed to be a statement of fact, but actually a balance sheet is actually a nonfiction piece of work woven with a bunch of fictional stories, every item on the balance sheet. And I'm just saying, it helps to start with that position of somebody thought that was a good idea. Somebody at least said yes to that, no matter what it is, even if it went well.
I'm thinking of one specific example where every single time the conversation of money came up, and I knew these people really, really well. And we had conversations for 15 or 20 years about money. Every time it came up, she would say, "I wish you wouldn't have done that." And it was a thing that happened 20 years earlier. Right? And so even if a thing went well, "I told you we should have bought twice as much." Or if it goes poorly, "I knew that was a bad idea." So if we want to start with the idea of, hey, sometimes we just dive into these things as if they're like some unemotional discussion of a balance sheet. No, there's a bunch of there's a bunch of emotion embedded in this balance sheet.
So now if we talk to Dan specifically, I would be, "Help me understand, how did you end up here?" Okay. So I'm trying to do this as principles rather than specific example, and we can do specific examples. But yeah, I think the first place is to say, can we lose the language around bad, poor, bad decisions? I bet Dan was doing the...I can almost guarantee you, Dan was doing the best thing he thought he could do at the time.
Michael: Fair. He's not intentionally making not-good decisions. He may or may not have had all the knowledge and learning or gotten the best guidance on this, but...
Carl: And in this case, actually, got sold something...
Michael: ...he's this 22-year-old figuring out his life. So we make the best decisions we can with the information we've got at the time. Fair point.
Carl: Yeah. And in this case, he actually got sold something by somebody he trusted who also was probably not malicious. I mean, we're going to just be fair.
Michael: Yeah. It was probably thought of as a great thing to provide to his friends from college as they're getting started. Yeah.
Carl: So that's where I would start is from a position there of, "Look, we've built a little bit of a foundation and what are you going to do now? Let's start from where we are." And I think it's okay to sometimes have this conversation. And I remember saying to clients, "Hey, I recognize that there's going to be feelings around this stuff." And this always came up with life insurance, speaking of life insurance, right? "There's feelings about this, but for a minute, we're gonna have to set this aside and have a conversation about the numbers. And I want you to understand..." Think about this in life insurance, Michael, we're actually talking about somebody dying. And we're talking about putting a value on each of your lives.
Michael: Which I guess is the strength with starting with, "Dan, just help me understand how did you end up here?" Because there's a big difference between, "Well, my buddy told me this was the best way to start saving for my financial future, and this is my retirement account," and we'll have one conversation versus, "Well, it was really important to me to have life insurance protection because I knew I wanted to start a family someday. And I'm really glad I've got this life insurance policy because now we're getting married." My response as an advisor is probably going to be very different depending on which of those two Dan is coming in with, may or may not still recommend some life insurance changes, but I'm certainly going to frame that conversation differently if Dan says, this is my best retirement account versus Dan coming in saying, "Oh, no, I was deliberately buying life insurance early so I'd have coverage when I got married and now I'm getting married." Like, oh, well, this conversation needs to flow a little differently.
Carl: Yeah. And even the language I use, which you just repeated, of, “How did you end up here?” That language feels a little judgy to me hearing you parrot it back to me. I'd be just more and more interested, "Tell me about the life insurance. How'd you decide to do that? What was the goal here?" This is the kind of question financial planners ask all day long. I would be really trying to remove any judgment or any idea that... Maybe this was a great decision. We could probably come up right now with, you just painted one, ways in which this is a great decision. So I'd start there. "Tell me a little bit about that." Okay, great. Then depending on what I learn, I would have to... Yeah, go ahead.
Michael: Well, I'd say I'm going to assume from the context of the conversation and the requests that came in from the advisor that what we're going to hear from Dan is one of the less good reasons.
Carl: Yeah, sure. Let's go there.
Michael: So we're still in the...
Carl: So I'm just a guy who is a life insurance fan, or is it "The guy sold it to me"? What version is it?
Michael: I think it's, "The guy sold it to me because this was my retirement vehicle."
Carl: He told me this is the best way to save for retirement. And, by the way, I could use it to buy a house, and I could also take care of my kids' education. This thing does everything.
Michael: Yes. Yes.
Carl: Yeah. Yeah. So what do we do then?
Michael: What do we do then? So we asked the... I like your reframe. "So tell me about the life insurance. What was the goal here?" So we've opened the door, and in a non-judgy way, we're just trying to get to the backstory. So we've got a backstory, not necessarily ideal.
How Realigning Priorities Can Help Clients Move Through Past Decisions [14:53]
Carl: Yeah. Then, to me, there's an important step next, which is, okay, we've got the information. I don't think we need to fix that problem yet. I think now we plan. So in other words, think about this...let's just interject. Let's pretend this was a portfolio of five tech stocks that I worked for each of these companies. Well, before I tell you that's a really bad idea to own five tech stocks, just because you work there and have all your net worth there, I want to first create a plan. In other words, what's ideal and what's actual. So I wouldn't say anything about like, "I'm trying to create ideal versus actual." I just like, "Okay, okay. Tell me, what are your goals and what are we trying to do? Okay, great. When we come back next week..." However you engage, which we don't have time to go through here, but however you engage in the financial planning process, do that.
Then you get to come back to, "Okay, here's ideally where we would be." And now you get to have this delicate conversation. You can decide how direct you want to have it. I remember having it with clients where I just say, "Hey, look, do I have permission to be professionally candid now? Do I have permission?" And I would always ask, and that's how I'd say it. "Do I have permission to be professionally candid? This is where I want you. This is where I want you. Owning this, this, this, and this." And in this case, life insurance. "In an ideal world, the appropriate use of life insurance is," and then you state your life insurance philosophy, which, for me, is to protect against an economic loss. And I realize there are other philosophies around life insurance. That's fine, just as long as you have an articulated one that you can defend. "And I understand this version of life insurance, Dan, gave you some flexibility and accomplished a bunch of things at once. Do I have permission to be professionally candid?" "Yes." "This is not the optimal way to do it. And I'm glad it got you here, but I want you here." I'm comparing actual to the idea. "I want you here. So let's talk about our options to getting you there." And you can insert tech stocks here. "I'm glad..." Hopefully, they've all done well, whatever, whether they've done well or bad.
I remember a client I referred to a financial planner, and her name was Christie. The planner wasn't Christie. Sorry. The client was Christie, because I know a financial planner named Christie. The client was Christie. And I remember Christie calling me and she said, "They want to kill all my babies." They wanted to sell all eight of the tech stocks that she had $2 or $3 million in. She was like, "And there was no empathy. They just want to take them out in the street and dispose of them." And I was like, "Yeah, but that's..." And she's like, "No, no, I get it. I totally get like, I'm glad for the advice, but man, could we have eased into it a little bit?"
So you sort of have to decide how professionally candid do you want to be where you're just like, "Hey, can I walk you through why this may have served you well till here? And what you were told about it, there are some parts of that, but can I be professionally candid? You know, when you're a hammer, everything always looks like a nail. And that happens a lot with life insurance. You're not the first. And the good news is this gives us the base to do this, this, and this." Tech stocks. "Hey, now the good news is let's go through this really carefully and make a plan that incorporates taxes and how we're going to do it. And if it takes us a long time to get you from actual to where we want, actual to proposed, that's fine. We'll take our time." That to me is the model. Does that make sense?
Michael: Yeah. Yeah. As you're saying it, it reminds me of a client scenario from a long time ago. It indirectly was a version of this. And the weird thing for how it played out was that we never actually had to get to the problematic past conversation. I don't remember the client's name, we'll call them Larry. Larry had a version of this, whole life insurance that he got from a hairdresser who sold Primerica. I remember that part quite clearly. And he was actually in a similar situation, was coming in because was getting married, wanted a financial plan, wanted to figure things out. "Am I doing the right things as I'm starting down the path of getting married, having kids?"
And so we did the plan, the good old capital needs analysis, which was basically like Larry needed several million dollars of life insurance for the family, for the baby on the way, which quickly got to, Larry's saying like, "Well, I can't do $2 million in one of these, that would be expensive." He had $250,000. It was a lot because it was a permanent insurance policy. He was like, "I can't do $2 million in this." "Well, good news, Larry, there's this thing called term insurance and we can buy 30 years of term insurance on $2 million of coverage that you need, and it only costs..." It was a couple thousand dollars a year. He's like, "Oh, okay, we could do that. But then what do I do with this whole life insurance policy that I've got?" "Well, let's talk about it. We could leave it here and buy a little bit less of term insurance and keep the whole life as a base. We could open up a Roth IRA and make that our retirement savings vehicle going forward and wind this down, if there's anything else you would want to do with the money." "Oh, well, we actually want to buy a house." I was like, "Well, you could use this to liquidate and fund the down payment of the house. So let's talk a little bit. There would be some taxes." He was out of surrender at that point. "There'll be a little bit of taxes. We can talk about that."
And what we ended up with was this combination of bought term life insurance – not even for a whole life versus term life conversation debate, simply because he needed a bunch of insurance because family was starting. It wasn't going to be affordable with whole life. He needed to do it with term. Then all of a sudden it's like, "Well, maybe I don't need this whole life policy." "Well, let's talk about what we can do. Here's a house down payment." "Oh, I need to save for retirement." "Let me teach you about Roth IRAs." And the whole policy fell by the wayside by the end of it. There was never really a conversation of, "I don't know that that's necessarily what I would have been recommending to you ten years ago when you were getting started, but that doesn't really matter. You're here. You want to get to there. Here's the things we need." And we just navigated through it.
But I think the lucky thing for us is Larry also didn't fight the recommendation. There wasn't like, "But I was told that it can do all these things." We went through the conversation, and he was fine with that. And that's where we were. I get the impression from the request that came in, I can think of other scenarios like this as well, where there's no way to avoid, "I need to explain to you that the thing that you've got is not good, has problems." Maybe it's not this, it could be an investment that is patently not doing well that you need to get out of. You got sold a terrible fund from a terrible manager, and it's just not doing well, and you need to cut some losses...
Determining When (And How) To Escalate Financial Mistakes [23:15]
Carl: Let's talk about that because that happens. Let's not live in a fake world where everybody has a good intentions. There's plenty of people in, speaking very, very broadly, the financial services industry selling garbage. So you have client... In Dan's case, I'm more along the lines of, "Hey, I realized, given what you've told me about why you did this, that makes sense to me. But from here forward, let me show you what I think we should be doing and let's figure out a way to get there." But let's pretend like it was actually just some garbage thing.
Michael: Or the next actual extreme, there's garbage, and there's garbage so bad of, "Mr. Klein, Mrs. Klein, I think you need to talk to a lawyer."
Carl: Any version of that, let's start with the non-lawyer part. That's just terrible advice, uninformed, self-interested advice of somebody who just wanted to get paid. And I think we can be like, I would still do the same thing. Help me understand...not even help me understand, but just like, tell me about the thing. What was the decision that went into that? How did you think? Okay. Okay, good. Okay. We're going to make a plan. We have a plan. Now we're down to the brass tax of we want to implement the plan. And then we get to the spot where we're like, look, how professionally candid do we want to be? And I have never found it particularly valuable to hammer on anybody else. Like, "That's a bad person. They did bad things." I just find it better to stick to the facts, and the facts might be, "This product, I would never have used. Can I be professionally candid with you? I would imagine, based on what you told me, you bought this from somebody who... And there are plenty of these people in our industry who are selling products. They're not doing planning. They're often driven by their incentives. And I can tell you for this one, because I looked, they got paid 6% to sell this to you. That's a really strong incentive. They've got paid 10%. They got paid..." whatever the number is. "That's a really strong incentive."
Michael: And you would bring that kind of number and perspective in to make that point.
Carl: I don't know if... I wouldn't be scared to, but I certainly would definitely not be scared to be saying, "Look, people get paid really well to sell this stuff. And that can warp..." This is me still trying to be generous. "If I'm professionally candid with you, this thing is not serving a purpose. It didn't serve a purpose. I understand why you bought it. Please don't feel bad. This happens to lots of people. Let's make a plan to get you out of this."
And maybe even a recognition, "I know this could be hard to hear because I know, from even talking to you in this short amount of time, that you care deeply about making smart decisions with your money. And based on what you knew, I believe you did make the best decision you could. And the good news is we can do this, this, this, and this."
And then the legal piece, "Hey, this is so nefarious. I would have this reviewed."
Michael: Is that how you frame it? "I would have this reviewed."
Carl: I have never run into that. I've never had a situation where I was like, "You should go after this person." I never had that situation. Have you?
Michael: I've never had one that literally came down to you, "You just need to hire a lawyer and sue this person." But I can think of at least two over the years, both of which were basically...these were a little older, but like they were churning scenarios. One was someone just trading a ridiculous number of stocks when they could still earn a commission, a trading ticket every stock, and were just racking up ticket charges. And the other one was basically flipping shares every two years.
Carl: Wow. And what did you do?
Michael: Both of those were... So the starting point is first is explain, "This is really not appropriate and normal. Just so you know, you may have seen this and wondering. This is the only investment account you've ever had. So for all you know, this is normal. It's like, I need to communicate to you this is not, this is not a normal thing to see. This is creating more costs and charges for you than would be typical for someone in your situation." And the counsel we had for both of them was, because these were both brokers sold, "You need to contact the branch manager at the firm and express a complaint to them, ideally written, that says, 'I did not want this level of trading,' or 'I don't understand why there's been this level of activity. It seems like we have incurred unnecessary charges and we would like these unwound.'" And ironically, both of them were egregious enough that the firm, upon getting to branch manager level, branch manager basically said, “Yeah, we're going to unwind these because we, we know we're probably going to get sued if we don't.” And it was easier for them to refund some trading commissions, refund at least the last round of mutual fund commissions because I think they were actually afraid that something worse was going to happen. And I didn't get all the way into the details with the client. I'm going to assume both of them had some version of, "You agree, in receiving this money back, to sign this letter that says you're not going to sue us further." So this was probably a low-cost hold harmless release kind of thing for them. And both those situations, at least because they were fairly blatant, even by good old industry, FINRA standards, a letter to branch manager who did not want this further escalated in ugly ways was actually enough to get it done. They didn't have to file a lawsuit and go to arbitration. The fact that it probably wasn't going to go well for the firms was enough to get them to refund.
Carl: Yeah. Well, yeah, it seems like we're probably more talking about this was just not optimal, in some cases, suboptimal, or maybe even bad planning.
Michael: It was a long time ago, so I don't know that I remember exact language that I use, but I remember the framing that we were giving was just trying to explain, "This isn't normal."
Carl: Yeah, no, I'm talking about those two scenarios sound not normal. I'm saying most of our conversation and most of the things we've run into, Dan's situation, Larry's situation, Christy, in my case...
Michael: Unfortunately, those are actually somewhat normal and common, not necessarily.
Carl: Yeah. And I was quite surprised by this. I found myself often saying like, "Hey, this isn't bad." I was always quite surprised when I'd see a portfolio that wasn't bad. But I think, to me, to back up to the principles, is to just remember, let's be empathetic about it in the sense of like, somebody thought this was a good decision. Let's give them the benefit of the doubt that even the client themselves was making the best decision they could at the time. It doesn't really help anybody to slam them for that. And let's figure out how to make a good plan going forward. And I do think that language is helpful sometimes of like, "Look, I find it useful to talk a bit about the past and your current portfolio, your current financial holdings, your current balance sheet for the sake of making a decision about the future. It may mean that we're going to talk about some things that might feel like they were a mistake. We can talk more or less about that if you want to, but the most important thing here is let's get you on the right path starting now."
Michael: Yeah.
Carl: And then if it's any of those other things, we've opened at least the door on how to handle that.
Michael: Awesome. Thank you, Carl.
Carl: Yeah. Thanks, Michael. That was fun.
Michael: Cheers.
