As a financial advisor, credibility is crucial to the advisor-client relationship; after all, if clients don’t believe the advisor’s advice is credible, then they’re not likely to follow through on it (and/or may not be willing to hire the advisor in the first place). Which, similar to professionals in other knowledge-based fields, often results in feeling the pressure to always have all the answers, and always have your own financial house in order… out of fear that a client may not trust and find credible the advice of an advisor who has made poor financial decisions themselves and hasn’t followed their own advice. Except the reality is that financial advisors are human beings too, we can all make mistakes, and in practice, it’s often our prior negative financial experiences as advisors that actually lead us to want to help others with their money in the first place. Which can actually make the financial advisor more authentic and relatable to clients who are experiencing similar challenges themselves!
In our seventh episode of “Kitces & Carl”, Michael Kitces and financial advisor communication guru Carl Richards sit down to debunk some long-standing myths around what it really means to be a “credible” financial advisor, why authentically owning up to your personal financial mistakes actually helps build trust and credibility (and might even end up helping you gain new clients), and why being relatable as a human being (who makes mistakes from time to time) may be one of the more important traits you can bring to the table as a financial advisor.
As a professional (whose fruits of that profession literally keep the lights powered on), one of the hardest things to do show your own vulnerability by admitting that you’ve made poor financial decisions yourself in the past, and/or don’t have all the answers to every question or problem. But the reality is that, if we can own up to our own poor financial decisions and mistakes that we’ve made along the way, both to ourselves and to our clients, it puts us in a much better position to meet our clients with empathy. Which in turn allows us to be less judgmental (and for clients themselves to feel less judged), and in a much better position to not only help them with the technical aspects of implementing the sound financial advice we give them, but to support their financial wellness as well (which is our ultimate goal in the end).
Because to achieve that goal and get clients to be honest with us, and themselves, about what they really value so that we can help them apply their capital towards what’s most important to them, it’s crucial to make sure that clients can relate to us as advisors. Which often means trying to bring yourself off the “advisor pedestal”, and meeting your clients where they are. Getting clients to talk openly about the financial mistakes they’ve made isn’t easy, but if you are open to sharing your own story, then you can help make them feel more comfortable by making it clear that you aren’t sitting there judging them (because you’ve “been there”, too).
And while there is such a thing as “over-sharing”, the key point is that authentically and openly admitting that you don’t know everything, and don’t always make optimal financial decisions, can ultimately help the people that you want to serve, and by extension, strengthen you own credibility as a professional in the process. Because all that fear that you have about feeling judged if you own up to your mistakes is the exact fear that every client who comes into your office has about being judged themselves by someone who they (wrongly) think has all the answers.
***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 Stitcher.
Kitces & Carl Video Transcript
Michael: Welcome back, Carl.
Carl: It’s good to be here, Michael. It’s good to be here.
Michael: It’s good to be back. We are at episode 7. We are just…we are rolling now, and…
Carl: We are getting close to ten.
Michael: Yeah, we are climbing quickly towards ten. We’ll be there in a month or two, just chug, chug, chug right along. For this episode though, we’ve had some of these themes that we’ve touched on. You know, we did it back in episode 4 I think it was, and around social media and being authentic. And this is something that I know a challenge for me over the years. I know you’ve got your own history with it. This balancing act I think of between being authentic. I want to be my true self. I don’t want to put on a face sheen; I want to be myself and who I am and talk what I believe, and this pressure that I feel like we all have as advisers. You must be credible and act like a professional, whatever exactly acts like a professional means. You always, always, always have to act like a professional, which means, usually, this pressure that you have to always have all the answers, and you have to be perfect, right? You can never do anything wrong. You can never admit to your financial issues because that would undermine your credibility, right? Who wants to work with a financial adviser who had financial issues, or, you know, doesn’t do things the way everybody’s supposed to do them?
And it’s just a huge challenge to me because, well, A, we’re human beings ourselves. Almost no one does it all perfectly. That’s why I’m a fan of financial planners, having financial planners because you need help for this behavioral stuff yourself because we all lose perspective on ourselves.
How Michael Kitces Invests His Money [01:58]
But it hit home for me. So, a couple of weeks ago, I did a pod…I did a…I run a podcast, but I did a guest appearance on another podcast with a guy named Patrick O’Shaughnessy, who runs a fantastic podcast called, I think, “Invest Like the Best,” and it’s actually less investing-specific and more just talking about a wide range of stuff of investing personal finance, lots of different money angles. And he had me on this to talk about trends in the industry in the world of financial advisers.
But he put this question out to his listeners and said, “Michael Kitces is coming on. What you want to ask him?” And the number question that came in was, “Well, your podcast says ‘Invest Like the best.’ How does Kitces invest his money?” So, you know, Patrick being the dutiful one, asked me on the podcast, “How is your money invested?” And, you know, ha, funny thing, I don’t do standard financial planning in our household finances. In terms of what our investing looks like, the retirement dollars I have are primarily in a profit sharing plan with our advisory firm that gets managed by the firm. So that’s pretty standard, each your own cooking. I do believe that. But that’s a relatively small portion of assets for me. I keep a giant pile of cash, about two years of living expenses, way beyond, I guess, the standard six months because at the end of the day, I’m an entrepreneur and I’m not just an entrepreneur of one business, I’m an entrepreneur for multiple businesses, who then also works as a self-employed speaker and consultant. You cannot pick a riskier composition of businesses. So, we keep a really big emergency reserve.
Carl: I think Suze Orman would be very proud of you.
Michael: Yes. Suze would appreciate that. And then, I don’t contribute anything else to retirement accounts and savings accounts now. In fact, I stopped entirely about five years ago. And…
Michael: And the reason is that…
Carl: Are you allowed to do that?
Michael: I know, right? So, and the reason is, at the end of the day, because I invest in myself and I invest in my businesses, and, you know, by sheer dollars, the businesses are kind of the driver at this point. It’s a little bit expensive running some startups, and particularly, tech startups like we did when we built AdvicePay. But, you know, when I look at the dollars that drive from it at the end of the day, you know, building businesses that are actually successful, creates wealth that just orders of magnitude above I’m going to get my dollars and my Roth IRA and try to grow them at 8% or 10% or whatever it is that the markets are going to deliver, you know.
XY Planning Network, we started a couple of years ago, we’re just shy of 900 members. We charged $5,000 a year for a member. Roughly, you can do the math, we’re an almost $5 million revenue organization. Actually, more than that with, you know, some other things that we do. You take any kind of recurring revenue multiple on this, and, you know, it’s probably a 10 plus million dollar business. And I put some dollars into that to get the business going, there ain’t nothing I could have my bought my Roth IRA that would have given me ownership stake in something that’s become worth $10 million.
And I don’t make that point to talk about my growing dollars and wealth, but just for me personally. But just, you know, we always talk about investing in diversified portfolios. And look, if starting businesses isn’t your thing, go invest in your portfolio because most people fail in entrepreneurial endeavors. They’re insanely risky. So, I don’t advocate other people doing it as a general routine, but then it makes it all the more awkward to, so I’m basically saying I very deliberately do a thing that I don’t recommend clients do.
Carl: Yeah. Look, we maybe are going to go in a slightly different direction in a minute, but we can’t not explore this because it’s so cool to…I think it’s such a great little case study, just simply on the, sort of, thumb rule kind of advice, and then how it actually applies to individual people, right? And I just think…I’ve run into a lot of people like you. A lot of my friends are like you. And I think of it as, cash and my own projects.
Michael: Yeah. I guess if you go to the class investing thing…
Carl: I actually…
Michael: It’s a Barbell strategy, right? A giant wad that’s really conservative, and a huge portion that’s really aggressive. And, you know, I’m 41, so I got some time here. There will be a point where the aggressive stuff clearly needs to be less aggressive, and we need to diversify this down. I’m not going into the grave doing this with concentrated wealth risk, but I’m not retiring any time soon. I actually am in my building phase, and find that, you know, wealth building looks different for me to the point that there are businesses I could not have started if I was plowing my money in my retirement accounts because it would be stuck there, and I couldn’t get it out to start a business.
Carl: Yeah. But, Michael, what I think is really, really important to understand is…so, if, in fact, I was working on a book called “Over The Wall Portfolio,” and this is exactly what it was about. I kept having this…I was interviewing for…I wanted to write a white paper for the wealth management firm that I was building, and my niche was going to be entrepreneurs that have had a successful exit. And I started interviewing them. And I kept hearing this exact story; I got this pool of money. Some of them would describe it as “this is the money I promised my spouse I would never lose.” Right? Some of them would describe it as living. One of them called it his financial fortress. It was this pool of money I never want to see…remember, they’ve had a successful exit. I never want to see the eviction notice on the door, the foreclosure notice on the door again. I’ve already seen that once. I don’t want to see again. So, there’s that pool.
And then they have this pool over here, and it was only their own projects, you know, projects they were going to invest in, businesses they were going to build. And it’s really important to understand, this pool is asymmetrical risk-return opportunities, right? As Buffett says, “You don’t have to swing at every pitch.” So, you’re only, they would only risk…and I’m not going to risk $200 to make 250. I will risk $200 to make 20,000. And if I don’t believe that opportunity’s there, I’m not even going to swing, because I’ll just leave it in cash. And so, I think there’s overconfidence aside, which is just a huge… you just layer in the new risk as am I being overconfident about these opportunities? But that’s…look, we’re all taking risks, so the other risk is basically overconfidence risk.
Michael: If you were…if you didn’t have moments of overconfidence, you would never be an entrepreneur, because this stuff never makes sense on paper.
Carl: Yeah, yeah, yeah. So, I think what’s interesting is, for most of the population, those opportunities don’t come up, right? For my average client who’s a salaried guy, or I work with a bunch of doctors or whatever, these opportunities don’t come up. And when they do come up, I can think through a lot of my old doctor clients that invested in a toothbrush business or whatever. Or a pie shop, I remember. If they do come up, it’s typically because they have a unique…three things, unique ability, unique skill…sorry, unique skill, unique expertise, or unique relationships.
And to me, you just have shifted, basically, your risk to an overconfidence question. And that’s a risk that you’re managing, right? So, it’s really interesting to me, and maybe we need to…I can talk about this subject all day long. This is one of my favorite subjects, of asymmetrical opportunities and how do you find them. But maybe we need to stay focused, and the focus is, okay, Michael, that’s…
Michael: Have I just taken a shotgun and blown my foot off on credibility talking about how I don’t save in retirement accounts?
Carl’s Own Financial Misstep [10:22]
Carl: Well, yeah. And all of this was really just your little, sort of, kind, tricky way of asking me about my house.
Michael: So, Carl, if you ever had a similar situation where you felt a challenge between the authenticity of your financial experiences and your credibility as a financial adviser, has this ever occurred in your life?
Carl: Actually, anything over 10 years old has not happened. Yeah, and of course, that’s relatively well-documented, unfortunately.
Michael: So, for folks who joined the industry since the financial crisis and are not up to speed on the prior decade, can you give kind of the fill-in context here for people who want to get caught up?
Carl: Yeah. So, just, go Google “Financial Pro Loses His House,” and you’ll see the…my editor at “The New York Times” talked to me into writing this, and they turned it into the full front page of the business section, a picture of me staring at my house, the entire above-the-fold piece. It was 2500 words I think, and you need to go read it because the context really actually matters in this situation. But it was just the full…not the full, but a 2500 word-piece of how we lost our house in the housing bubble in Vegas because we lived in Vegas at the time.
And rather than getting into all the details there, let’s just dive into the aftermath, which I think is really…there’s two things that I think are important. One, you said in the beginning, we have to know everything. And two, we have to…you used the word “perfect,” right? We have to, sort of, behave financially pristine. And I think the first one, we have to know everything, that one to me, is just a complete, sort of, cultural relic of what we thought it meant to be a financial adviser. We think, defending outdated maps. Right? And that instead of being a guide in a changing landscape, and I think the most powerful…I believe the most powerful, sort of…one of the most powerful statements we can make as an adviser is “I don’t know. But you know what? Let me find out.” Right? And I don’t know why we’re so scared of that. Because I’ve watched advisers make stuff up… flat out make stuff up because they were so scared of saying I don’t know. So, that’s the first one.
And the second one in terms of behavior. Yeah, it was such an interesting experience to go through that because it was, you know, we weren’t quite as “woke” as we all are now; we weren’t quite as, sort of, sensitive as we are now. And there were some very, very insensitive experiences that I went through as a result of that. People really mad inside the profession at me. So…
Michael: Inside the profession?
Carl: Oh, yeah. I got a call from a…I’ll just leave it generic, I got a call from a regulatory body, who came out and audited me because of complaints. And they told me, they said, “Hey, we get this all the time. Whenever any of you guys get any press, all of your friends call and tell us you’re doing something wrong.” He’s like, “Your compliance record is pristine. It’s not a problem, stamped, done. ” But that was a result of calls from other planners, advisers, whatever…
Michael: Who were seeing what? This guy lost his house in a financial crisis. You got to drum them out of the profession?
Carl: I don’t know what they’re saying. And I don’t want to get too off. I mean, I’m happy and thrilled to spend as much time as we want to. I just don’t want to get off the subject.
Michael: Well, I don’t know. I feel that you’re just going to scare people not to be authentic about it because the regulators are going to come knocking.
Carl: Well, I think it’s…I do think it’s changed a bit. I think we’re a more sensitive and understanding society. This was back when no…you know, the idea of short selling your house, and the way we did it…please go read the article because…please, don’t sell me any emails. And if you haven’t read the article, you are not allowed to email me about this, right? If you read it, then you want to talk, I’m totally happy to.
Michael: We’ll make sure there’s a link in the transcript for people who want to click.
Carl: Yeah. We worked really hard with the bank, right? Every step of the way. But I think we’re living in different times now. I think that more people have been through that. I think that we understand that we make mistakes. And what I learned from it, because I got thousands, thousands of emails. I got hundreds of physical letters.
Carl: There were 1700 comments on the Yahoo! Finance version of the story. And what I learned from it was, well, a couple of things. One, to be a lot less judgmental of what I think I know about some of these financial situations, and just realize, if we treat everyone as if they’re going through something, more often than not, we’ll be right. Right? So, just…and number two, what was shocking to me was my client’s response and prospective client’s response. So, I’m not advocating this. Don’t do this as a marketing tactic. It’s a bad idea. It’s not worth it.
Michael: What, buy a house and then have it not go well and get…go through a short sale just so you can have a good war story?
Carl: Or make a financial mistake. Buy $10,000 worth of infospace.com in 1999, and then tell everybody about it when it goes to zero. That’s a bad idea. But my point is, I had…I lost zero clients because…I thought my whole business was going to go away. I was sure of it. But it just…
Michael: So, talk more about this. Because…well, look, other advisers will take whatever shots they’re going to take, but at the end of the day, it’s about how the clients react when you share a story like that. You know, I’m a financial pro who lost my house in the financial crisis. So, what were the client conversations?
Carl: Well, so, I didn’t lose a single client. I can trace…I mean, I sold that business, but I could trace directly, a 20%, 30% of new clients coming from that experience. My client said things like…I remember, these clients that we…in the last episode, we called Dan and Barbara. Dan and Barbara called me and like, “Hey, I’m so sorry.” And I was like, “What do you mean you’re so sorry?” “You were so committed at that time to helping us make decisions. We had no idea you were going…if we had known, we would have brought you cookies.” You know things like that. I mean, I live in Utah. People bring cookies. So, all right, I lived in Utah. But I also had lots more common was I feel like, with new prospective clients, was “I feel like you’re relatable. You understand what I’m going through.” And I think…
Michael: Because you’ve literally been through it. You’re not…
Carl: Yeah. And I think…
Michael: You’re not on a pedestal anymore. You’re talking to them as a peer.
Carl: Yeah. And I think people understand the concept that I’m really good with other people’s money. I’m super good at being objective with other people’s financial decisions. Really good. I’m not just good with my own, which is why I need an advisor. And I think it’s the same with what you’re talking about, right? Like, look, if I’m an entrepreneur trying to make investment decisions, and I understand that you don’t do the traditional thing, I’m not going to look at you and go, “Oh, man, I don’t want to hire that.” I’m going to say, “Oh, wow, he understands the way I’m thinking too.” And so, I think…and then there’s a third element of this, which is what Marty Kurtz, who was the president of FPA at the time. I called him before I wrote this, and just said, “Hey, am I making a major mistake?” And he…anyway, maybe I shouldn’t have…Yeah, he did. He said, I can quote this comfortably, he did, he said, “No, we need more of us being honest about our lives.” And I think it started a discussion. I won’t make any…claim any credit for this, but I think it just started discussions at our industry about how do we handle this stuff personally. Who do we have to talk to?
So, oh, and there was another great story. Who’s at Abacus? They have an advisor who just started writing about her story involving some family members and not…you know, an investment she made with her brother, and it went south. It was so good, and I read it and thought, “I would hire that person in a heartbeat.” Not, “Oh, look how dumb.” So, that’s been my experience.
Should You Own Up To Your Own Financial Missteps? [19:30]
Michael: So, as we wrap up, your advice to maybe advisors out there who are listening, who do have some version of this in their past, a financial blemish, maybe something more significant. Maybe there was a short sale of a house, a business loss or failure, a debt write-off, a bankruptcy, where I feel like for most advisors, the default gut response is just push it down, hide it, pray to God it never comes up with a client because it might undermine my credibility as a professional. What would you say to that person, or how should they be thinking about how to deal with this or work through it?
Carl: Oh, yeah, from a human level. Right? Just on a…forget the fact that you’re an advisor for just a second. We’ll come back to that, but on a human level, find someone to talk to. That idea of…and you said it exactly right. It’s what we do, right? Push it down. Put it in a titanium capsule and swallow it and shove it as far…that is not healthy. So, find someone. Now, in terms of your work and sharing it publicly, I just went through this with an advisor, who asked for my advice on this, and I think you share it if it’s helpful, right? I don’t think you need to feel a need to run around revealing past sins, but if it’s helpful; if it helps somebody. And the counter side to this is I was at lunch with a friend of mine that started the Whole30 craze, Dallas Hartwig, and, you know, wrote that book, “The Whole 30,” with his now ex-wife. And he was eating just garbage at lunch, he ordered the cheesecake or something, and I was like…and I remember going home telling my wife, “If Dallas can eat it, I can eat it.”
So, that’s the flip side to this is, if we give people permission, you know, that reflects more on me though about me looking at Dallas and thinking, he’s giving me permission to make mistakes. So, I think the way to think through this is if it would be helpful, if you can think of a way that it would be helpful to people’s lives, I don’t care at all. I mean, I do, actually. That’s not true. I do care what my colleagues think. I do care what the other people in the industry think of me. I do care. But I care more…I mean, I care more about the letters I got from people who said…I mean, I got some pretty crazy letters from the people who it really helped, right?
Michael: To me, the point you hit home is just it makes you more relatable because the truth is…well, the truth is, A, virtually no one has been perfect with their finances forever. Everybody has some mistakes and speed bumps they’ve gone through. We usually feel bad about them. We usually feel ashamed of them. We often get really nervous about feeling judged about them. And going into an advisor’s office when the advisor’s up on the pedestal of perfection just makes it feel worse as a client, I think, to confess your financial sins. And going into someone who’s got their own financial sins, their own financial mistakes, it just makes the conversation, I think, easier for the client when you start out with, “Look, you’re going to have to be vulnerable about a bunch of money mistakes you’ve made that no one likes talking about, so let me start this off with my financial vulnerability and some of the dumb stuff that I’ve done so we can take the judging off the table and begin to have this conversation.”
Carl: I think, Dan Heath wrote about, Dan Heath, that sort of “Made to Stick” which Dan and Chip Heath, I think they wrote about that reciprocal sharing, the study about…there was a five-minute exercise where you asked a specific set of questions and you each had to answer. And at the end of the five-minute exercise, people related their connection to the person in similar ways as they would a friend that they’d had over a decade.
Michael: Very good.
Carl: And so I’m not…but, this is the tricky thing here. I don’t think, I certainly would…I got accused of this. I got accused of using this as a marketing ploy to sell my first book. The only reason it came out 60 days before my first book was my editor wisely said to me, “Do you want to write this story or do you want someone else to write it? Because this story is going to be written.” So I went to the publishing and said, “Hey, I got this thing.” But I wouldn’t do it as a tool for marketing.
Carl: But that said, I don’t think it hurts. I think it helps. I think being more authentic, more relatable, more honest, in a way…now, there are some things that we do in our lives that we don’t need to run around telling everybody about. My wife says I haven’t found any of those yet. But there’s something called oversharing, right?
Carl: So, but if it’s going to be helpful. So the way I think of it, if it’s going to serve the people that you want to serve, be thoughtful about the way you do it, and do it.
Michael: Well, I think that’s a good place to end. Hopefully, food for thought maybe for anyone who’s listening and has been through some version of this or has that thing in their past that they push deep down to the dark place that, you know, that it’s okay, that, you know, all that fear you have about feeling judged if you share this in front of your clients, to me, welcome to the first glimpse of how every single client feels when they’re about to come into your office and afraid that they’re going to feel judged.
Carl: Yeah. Amen. And I think it’d be important to say here, Michael and I come up with topics, and we talk beforehand about topics. And today, I was writing, before I called, I was writing out some topics, and we came up with a couple. And one of the ones I really wanted to explore was, how can we be a little more lighthearted? How can we have a little more fun? Why do we take our industry so seriously? And we’ve done, just because you probably listened to episode 6, and episode 7 have been pretty heavy. I promise you…
Michael: Episode 8, we’re going to lighten up.
Carl: But these are important topics we needed to talk about it. And we’ll need to talk about more of them. It’s a pretty serious business, right? But I do think you’re right. If you’re thinking about doing this…And by the way, this is one of those things that my email address is always open, right? If you need help with this, or last episode, again, if you’re struggling with these things, especially to the level that some of us struggle with, to the level that I was struggling with it, and you need someone to just talk about it a bit, email me. It’s email@example.com for sure. Mention…@behaviorgap.com. Mention the…well, you probably won’t mention the comments, but that’s my email address.
Michael: You can if you want.
Carl: Yeah. Amen.
Michael: Amen. Well, thank you, Carl.
Carl: Thank you, Michael. That was awesome.