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Any financial planner who has worked with a client through some "market turbulence" or an outright bear market is well aware of the stress that market uncertainty can bring to the client. But how often do we look at the stress that market uncertainty brings to the financial planner vis-a-vis the client relationship?

Today's blog post was inspired by a wonderful article by financial planner Carl Richards on the Morningstar Advisor website. In the article, Carl makes a very good point about the quality of advice or service, and how it is directly related to the personal commitment to professionalism of the person who delivers that service or advice, as summarized in one of Carl's famous sketches below:

Sketch by Carl Richards of

The essence is very straightforward, and a principle that I think most of us as professional planners are familiar with - in order to deliver the best advice, we need to have a personal commitment to the quality of the service we are delivering. But Carl also juxtaposes an interesting challenge: there is a great deal about the client's plan, and its successful outcome, that we cannot control. Some things - like how much the client saves and spends - are at least in the client's control (but still not ours), while others - like the returns that the market delivers - are not in our control nor the client's. Carl notes that as a result, "...there we sit, deeply committed to the success of something that we ultimately can't control."

When I first read that last line from Carl, I couldn't help but wince a little bit. Ouch. We as financial planners invest a tremendous amount of ourselves and our personal commitment to something that we largely cannot control. No wonder, in looking back to the typical planner's experience through the 2008-2009 market decline, that so many planners experienced so much distress. The ironic reality is that the more effectively we made a personal commitment to our clients and their success, the more distress we experienced when those client goals were challenged (or worse, shattered) by external market forces.

Unfortunately, though, I wonder if even that is not the whole story. After all, it seems almost inevitable that introducing such uncontrollable stress into our lives (as professionals) will similarly induce coping mechanisms for us to handle the stress. Some of those coping strategies to deal with stress will likely be good, healthy, appropriate responses to stress. But in reflecting on some other conversations and comments I heard while attending the FPA annual convention last week, I have begun to ponder how else we might be coping, in potentially less effective ways.

For instance, in a session on retirement distributions and dealing with clients, financial planner Jon Guyton (of "decision rules and safe withdrawal rates" research fame) made the point that for most financial planners, if you ask them what the one absolute worst outcome could possibly be for a client, the answer is "if the client ever runs out of money." On the scale of things we as financial planners don't want to have happen when we are making a hefty personal commitment to a client relationship - especially when it is focused on creating a path to financial success - running out of money would be the worst. But as we reflected earlier, when there is a deep personal commitment from ourselves as planners, the worst failure of our clients becomes inextricably linked to our own emotional distress and experience. So if we as humans try to avoid unpleasant outcomes... is our advice impacted by our fears on behalf of our clients and their results?

At this point, I'm sure most planners are probably thinking "No, of course not. I act in the interests of my clients. My advice is delivered to help them achieve their successes, not to mitigate my own fears and concerns as a professional." Nonetheless, I am reminded of a story told by behavioral researcher and Professor Dan Ariely in the opening general session to the FPA conference. A number of years ago, Ariely suffered severe burns across much of his body due to an accident in the lab, and as a result spent a long difficult time in the hospital as a burn victim. Part of being a burn victim is to have extensive bandaging while the skin grows back, and unfortunately a part of that process is the regular changing of the bandages, which involves no small amount of pain. As anyone who has ever removed a band-aid is aware, there are two ways to remove a bandage: slowly but with a little less pain, or very quickly at all once with more pain but a speedy finish. In Ariely's experience, nurses virtually always opted for the quick and speedy route. But as Ariely's subsequent research into behavior has shown, the slow and steady approach is actually less stressful; even though it lasts longer, when the peak intensity of the pain is lower, we do not experience as much distress. The point, though, is not that the slow and steady approach is less distressing than the fast tear; the point is that all of the nurses, consummate professionals trying to help their burn patients get through terrible pain and difficulty, were themselves wrong about how to deliver their services in the most soothing manner. They thought they were doing what was best, but it turned out they were incorrect. And when Ariely questioned them about it after the fact, one of them made a startling point: to paraphase, the nurse said to Ariely "...but you don't realize the toll that it takes on us as nurses to see you in pain; the fast rip to the bandages ends the process more quickly for us." In other words, the fast rip technique was as much about the nurses trying to end their painful experience in tending to their patients, as it was for the patients themselves. This is not meant to diminish the incredible work that nurses do; it is only meant to illustrate that sometimes we are so impacted by what affects us as professionals that we unintentionally lose sight of the fact that our clients may be having a different (and less pleasant) experience.

Bringing it all together... we as professionals do our best work for clients when we bring a personal commitment to the advice relationship. But as a result, we are very committed personally to an outcome that we have remarkably little control over, which consequently can lead great distress when things don't go well. This itself leads to the possibility (or even high likelihood?) that we will engage in behaviors to manage our own potential stress, even if it is subconsciously or unintentionally. And this in turn may impact our clients in ways that could actually increase their pain or decrease their success, even as we don't realize that we're causing such results (as the wonderful nurse professionals didn't realize that their quick-rip bandage technique was actually more painful for their own patients).

One immediate way I can envision that such disparities might impact us as financial planners is around the level of risk we recommend in a client portfolio, especially when there is a mismatch between the risk tolerance of the planner and the risk tolerance of the client. What happens when the planner is very conservative and the client is highly tolerant of risk; we either get a volatile client portfolio and a lot of planner stress (since the committed planner is now "along for the ride" in the client relationship), or a planner who tries to convince the client to be more conservative "in the client's own best interests." But in the end, was that really advice for the client who is risk tolerant, or was that partially abou
t an advice relationship oriented towards a client portfolio that exceeded the planner's own risk tolerance? Conversely, what if the planner is aggressive and the client is "too" conservative, introducing the possibility that the client will accumulate less wealth than the planner thinks is a "tolerable" risk path? I know that sometimes, planners encourage clients to be a little more exposed to risk assets for the genuine benefit of the client; but I have to wonder if sometimes, we direct clients to the riskier portfolio because we as planners don't want to be uncomfortable with results that differ from our goals and expectations in the client relationship to which we are so deeply personally committed.

So I encourage you to reflect on your own advice and relationships with clients. Does this dynamic affect you at all? Is there any advice that you are giving which, when looking back, may be partially impacted by how the outcome could affect you, the planner, in a client relationship to which you are personally committed, but isn't necessarily optimal for the client? Is there something you might change about your advice in the future, now that you have the opportunity to be aware of and navigate this "emotional conflict of interest?"

  • Kenneth Klabunde

    This is not entirely related to this post, but I am thoroughly enjoying and benefiting from the frequent blog articles you are posting. This is really good stuff…keep it up.
    Kind regards.

  • Mike Barad

    I read the Carl Richards article on Morningstar Advisor, saw your comment to his article, saw Carl’s Twitter post that mentions your derivative blog article, and here we are. Isn’t our “network” amazing!

    I find your thoughts on the potential mismatch of risk tolerance between an advisor and their client to be an interesting thread. It reminds me of a Morningstar Advisor magazine article on human capital. The article talks about determining the risk profile of your human capital before making an allocation decision on your investment capital. It questions, are you a Stock or a Bond?

    A financial advisor is most certainly a stock, as their future income stream is impacted heavily by the stock market (compared to a tenured teacher whose income is more bond-like). Given that an advisor has a high risk human capital profile, I wonder if that magnifies the difference between them and their conservative clients’ risk tolerance. What is risky to one is not necessarily risky to another.

    Here’s a link to the Morningstar Advisor article on human capital, for those intersted:

Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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