Many clients seek financial advisors for their expertise and their abilities to guide them through financial decisions. However, for some clients, the ambiguity that inevitably arises from uncertain outcomes can be very distressing, especially when it comes to investments during volatile times. While these clients may have general concerns about their financial future, their concerns may also be in reaction to messaging from other sources that guarantee (unrealistically) low or even ‘no-risk’ solutions. In these cases, advisors must find ways to ease their clients' worries while also reassuring them that their plans are on track.
In our 92nd episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss why some clients need more certainty than others in their financial plans, how to educate clients who may not understand the inevitability of at least some level of risk in a financial plan, and how to maintain confidence and trust from clients who are fearful of their financial plan failing.
As a starting point, it’s important to understand that there is a difference between risk and uncertainty. As while risk can be quantified with a level of calculation that helps to give context to possible outcomes, it also helps clarify some of the considerations that can influence those outcomes. And for clients who don’t understand the mechanics of these factors and potential outcomes, the uncertainty of where their financial plans stand can be very uncomfortable. Especially when there are volatile conditions, some clients may be very distressed by the seemingly chaotic uncertainty of their situation, and not necessarily understand that the potential risks have all been planned for. Furthermore, by communicating proactively, advisors can maintain the confidence their clients have in them and deflect any misleading messaging from other institutions that may guarantee products that promise any level of unrealistic certainty.
Ultimately, the key point is that for many clients who have concerns about uncertainty (as with their investments, especially during volatile times), they may simply be uncomfortable about following a financial plan framed as a dynamic pathway subject to change as needed in the future. For these clients, in particular, financial advisors can help them make sense of the unpredictability that their plans account for, giving advisors an opportunity not only to educate their clients, but also to communicate their confidence and knowledge that they will be there to help the client keep their financial plan on track!
***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 Ep 91: Is It Better To Have Clear Goals Or ‘Just’ A Strong Sense Of Direction?
- “When Genius Failed: The Rise and Fall of Long-Term Capital Management” by Roger Lowenstein
Kitces & Carl Podcast Transcript
Michael: Greetings, Carl.
Carl: Well, hello, Michael, how are you?
Michael: I'm doing well. How are you?
Carl: Things are fantastic is the word I'm using today. Really good.
Michael: Fantastic's pretty good for what I have to admit is a very not blue background for you.
Carl: I know.
Michael: This time. There's no couch, there's no drawings.
Carl: I know. I'm reorganizing. My wife, we were sharing a studio space, and my wife moved into our home office, and I'm reorganizing the place. The couch is not even in the office anymore. But she did decide today, she told me, "The couch doesn't fit in the home office anymore. It'll have to go back to yours." So the couch will be back.
Michael: Oh, fantastic. All right. Is that because it really doesn't fit or because it was so just spoiled by traveling with you to the Jolt Conference and having a bunch of financial planners sit on it that now she just doesn't really want it in the house?
Carl: I know. That concern seemed to have faded. I think it's literally like...it might just be an excuse to get a different couch. Who knows. Whatever. I need a couch here. It's the perfect size. It's all good.
Michael: Fantastic. Fantastic.
Carl: Yeah. Yeah.
Why It’s Impossible To Deliver Certainty To Clients [01:19]
Michael: Well, look, last week we...or I guess two weeks ago, we had what I thought was a really fun episode talking about kind of this dynamic of, is it better to have clear goals and set clear goals? Like good news, we can work towards them, bad news, sometimes we set them too high or too low? Because who knows what the future's actually going to be. It's hard to put a compounding. Or is it better to just kind of have a general sense of direction that we're pursuing and just march in that direction and let the future unfold as it may? We had this great follow-up question that came recently that I thought dovetails well to this theme from the other end, which is some clients just don't seem to be cool with the wandering sort of general sense of direction aspect of this.
So, we had a question come in that was sort of this effect of how do you handle the fact that some clients just want more certainty, they're seeking more certainty? It's not necessarily going to go over well, just tell them, "Well, life's uncertain, so you just got to deal with it." Because at some point, if they're that seeking certainty and you can't give the certainty, you're going to get fired and they're going to go find someone else who's selling certainty, who may not even be selling a good source certainty because we've all seen there are some not so great things that happen when people put a little bit too much stock in certainty. That's just a reality for us. And so, I thought it was a really interesting discussion of what do you do and how do you handle this subset of clients that are just really looking for certainty and not so keen on the, well, we are just going to be dynamic and update as we go because the map is worthless and all the wonderful things that you say that I think can get tough for someone that just really doesn't like living in that space of uncertainty?
Carl: Yeah. So, do you want to relate this specifically to the idea that sort of we talked about in goals or just certainty in general?
Michael: I think certainty in general. Practically speaking, particularly in today's environment where certainty around markets and market volatility is the theme, we don't maybe have to go all the way into talking a client off the ledge of bear markets and such, because we've done that in the past. But there is a more fundamental piece of...particularly for as we built these businesses around helping clients manage their assets as at least a big component of what we do along with financial planning. To me, there is something very fundamental. We are in the uncertainty business if you do the AUM thing because if you don't, I guess your clients are all in cash and CDs and they don't tend to come to us as advisors that do an AUM model. So, how do you deal with these folks that really want the certainty? Whether that's life certainty, goal certainty, portfolio certainty? Because I think those overlap pretty heavily and the kinds of clients that are looking for that.
Carl: Yeah. I think there's two things that would be fun to talk about, one, let's just get clear about this certainty thing. And number two, I want to just talk what do you do...because this reminds me a lot of clients who really, really all they want to talk about is performance. It's really important to them. And if I don't promise them performance, if I don't talk about performance, if I don't engage in performance, they're going to go somewhere else. So, let's save that for the, what do you do part, but first it's really important I think to get clear. Look, I don't know what I'm talking about, but as far as I understand certainty is a myth, right? It's really easy to sell but impossible to deliver. And all I mean by that is, we don't know… Most of the things we put in our models, and these words are really important, right? They're models. They're not going to be an accurate representation of reality. Right?
So many funny stories about that. But my favorite stories from Long-Term Capital Management. I read there was a line there and it wasn't from the Nobel Prize winners, but there was a line after Long-Term Capital Management blew up, many of the listeners will remember that, but some of you won't even have any clue what we're talking about. It's fine. You can go read the book. But one of the super-smart people that worked there said, "Our models weren't wrong. Reality just refused to conform to it." Right?
Michael: Just the ultimate denial of reality.
Carl: Yeah, yeah, exactly. So, they're models full of assumptions, right? The language we used when you fill out the thing is intentional. These are assumptions. We don't know. We don't know. What did you have in there for inflation in January of this year? We don't know.
Michael: Well, okay, but the other guy who just called me said, "I can get 75% of the upside of the S&P 500 with no downside guaranteed."
Michael: And that feels pretty certain while you're telling me, "Well, I don't know, markets will go up and down and up and down and we kind of hope they go up more than they go down because they have historically. But just to be clear, I can't guarantee you even that because the past is no guarantee of future results."
Carl: Right. No, it's really important. So, let's just first establish the problem. You're 9 out of the 10, the other 9 competitors if we just took 10, are going to be selling certainty. The whole industry is a...we sell certainty. That's what we do. We're at risk of becoming...and that's partially why I think we have this never-ending kind of treadmill of people who are less than enamored with the industry, speaking broadly. I'm not speaking to this professional group of people who are listening to this, but the industry, speaking broadly, people don't trust us very much. We rank somewhere near used car salespeople. That whole thing, we all know that problem. Part of that problem, part of it is that we've been promising something that we can't deliver on. So, we know that's a problem because we also know that you're right, the other three advisors they're going to talk to, will be selling certainty for sure in some form, right? And they're not. And I also want to be clear, I don't think they're using that language. They're not like, "Come in, I can sell you certainty." But they're using the language...
Michael: Well, no, but they probably use the word guarantee, which is a pretty good proxy for it.
Carl: Yeah. And they're using the language you use, right? You can capture this and they're going to sound very sure. And even when they talk about markets, they're going to sound very like, "Oh, next quarter, we're going to see this." And they use fancy language to explain what happened. We've all seen this. It's a mess. You and I have been watching this for 20-plus years, right?
The Importance Of Not Selling Based On The Promise Of Performance [08:24]
Carl: Okay. So, as long as we establish that we can't deliver that, I think we get to move to this analogy or comparison to performance. And then we can talk about what do you do. Because what you do is the art, right? Some level of chess, you're willing to lose a battle here and there so that you can win the war on behalf of the client. All that, we'll get to that. But performance, what do you do when a client walks in demanding performance? Because that's where this really shows up often. I remember all my days at the big brokerage firm with the bull that's owned by a bank. I remember the people walking and saying, "What have you got for me, kid?" Right?
Michael: Although I feel this comes more from the other end, “I'm in CDs, they're really certain. You're talking me into the market. It's not certain. I've been doing it for a while. It went down a lot.”
Carl: Yeah, yeah, yeah.
Michael: Why should I keep doing your thing and not going back to the certain space that I was?
Carl: Yeah. So, we know that if you win a client, every client you win based on performance you will lose based on performance. If there's not some skillful work done in the middle. And I think of that as art, right? And every client you win based on a beautiful 30-year perfectly spelled-out plan, if you're using language around like, "Here's what your life is going to look like. I'm 97.2374% confident." If you're using that kind of language, you will lose that client because of that kind of language. We know that will happen. But what do you do in the meantime? I think, to me, the way I think of this is we're not going to use any of that language, right? I like thinking of this as, does the client need a punch in the nose or does the client need an empathetic hug?
Are we going to play checkers or are we going to play chess? And some clients can handle checkers. It's what they want. They've had the experience. Oh, you're right, you know what I mean? I can't believe. I've always felt like those people promising, and I can think of a couple, and it was always women. A couple of women that were that way. And there was just this sort of intuitive BS meter for lack of a better term. And they were like, "Gosh, I'm so glad you..." Well, actually it was the opposite. I was promising certainty early on. And I remember two women, in particular, saying to me, "Wait a second, you think you know with that level of confidence what the next 20 years of my life are going to look like? I didn't know I was going to have a kid three years ago."
So, some clients are ready for the punch in the face, which is essentially like, "You know what, we're going to do the best we can. We're the best consumers in the world, we build the best models in the world, and we know it's going to be wrong, and the real critical value here is this constant readjustment in life." Some people are. Other people like you're pointing to, we can greet them with empathy where they are. “I know that's really important.” Right? “Performance is really important to us too. The fact that we get these models really right is really important to us too.” Right? And believe me, we work really hard to do it. And we slowly, and it may take years, help them just slowly understand that... And it's through the...whatever, I want to call it a quarterly meeting. It's not a quarterly meeting.
It's through the constant interaction where we're teaching them because you know the phone call's going to come. You know the call's going to come where you have to say, "This didn't go the way we expected." Now, this could be you were really sure you were going to get an inheritance and you didn't. You were really sure you were going to sell that business and it didn't. You were really sure you were going to get that bonus. It also could be markets, inflation, something with our assumptions. It could be a family member getting sick. It could be all of those things are going to provide us the opportunity. That's a terrible word to use, after a family member getting sick. But all of those are going to give us the chance to be having those sorts of conversations of like, "Oh, you know what, that's okay, we got it. Let's sit back down. We'll update your plan." Right? So, we're not using any language, "See, I told you that certainty is in imposs… We'll update your plan, and we'll make..." And you can sneak in language. "We'll make some course corrections. That's what I'm here for. Don't worry. This happens all the time." Right? To me, that's the game of chess. Does that make sense?
Easing Client Fears Of Uncertainty Through Communication And Education [13:14]
Michael: Yeah, it makes sense. I'm still feeling, I guess, the angst from this advisor that, look, these have been volatile markets and someone's going to pitch my clients on something that's more certain than what I'm selling and saying like, "I can tell them all I want, we'll make course corrections, but they don't have to make course corrections with what the other guy's selling."
Carl: Yeah. I mean, look, if we just...
Michael: Course corrections are predicated on uncertainty, right? We're still back in that space.
Carl: If we're talking specifically about the difference between being an investor in CDs and the difference between being an equity investor and the impact that has through the whole plan, then, of course, that's just an age-old problem that we all have to deal with, which is, "Am I skillful at teaching people the trade-offs that they're making between those two choices?" And sometimes you lose that. I remember very specifically a client who I'll just call Joel who, entrepreneur...and I find entrepreneurs to be particularly challenging in this area, simply because when something uncertain to the negative, particularly market exposure, shows up, there's nothing they can do. And they're used to being able to do something. Right? Real estate investors are maybe even harder because they can rezone, they can repaint, they can tear down and build a duplex.
And suddenly you're saying, "There's nothing to do here." That's the education process. And Joel, I remember, real estate investors/entrepreneur both, has this big pool of money, markets go down, we're broadly diversified. When we made the decision, it was like everybody can imagine, "Yeah, of course, of course, of course." Risk is an arbitrary concept till you get punched in the face. Joel hadn't been punched in the face before. Of course, what risk? I'm smart. I understand this. Right? And it was one of the ones I lost. I lost that entire war. I don't really care about losing Joel as a client, I care deeply about the fact that I'm sure that was a bad decision for him because kept him in, kept him in, kept him in, kept him in. If you're going to capitulate, you should capitulate early. You know what I mean?
I kept him in, and then he was finally like, "I can't do this anymore. I'm out." And that was a huge...in my mind, it was one of the biggest pieces of my career that I feel bad about that I wasn't able to pull that off. I know it wasn't my fault. There's only so much we can do. I don't need any emails or letters or flowers. I'm fine. But I do feel bad that I wasn't able to be skillful enough to talk Joel in off that ledge. But that's what we're pointing at. That's an age-old problem that is much closer to scary markets conversations that you and I have had before.
Michael: Yeah. The other thing that runs...this parallels for me back to 2008/2009. And remembering a client situation then... We're anonymizing clients, so we'll call her Nancy. And so, Nancy was freaking out in the midst of what to me was sort of the ultimate uncertainty in that environment. Right? If you remember 2008. This wasn't just the "Are markets going to go up or down? This was like, "Is the financial system going to survive because I saw something on television about how some bajillionaire is literally taking their money out of the banks and putting it into gold bars in their personal vault because the whole system might meltdown?" And getting those kinds of calls from clients, right? I'm not even certain the whole system is going to survive. The way I ended up handling it because I am the nerd and these were even my nerdier times, was I'm going to learn everything I can about how this whole meltdown thing is really happening, and I'm going to try to explain it to everyone, "Here's what's really going on."
Carl: Yeah, love this.
Michael: Here's how mortgage-backed securities actually worked, because no one knew, certainly no client knew. And like, here's what a CDO was. And here's what a CDO squared was, and how it worked. And had made little charts and graphics of the tranches of the mortgage-backed securities and then the sub-tranches, the CDOs, and the sub-sub-tranches of the CDOs squared, and how all that rippled across the system. And ironically, it ended up being one of the first issues of the Kitces report white paper. So, we put out because I had just launched the newsletter service in the midst of this as well. Great time to launch a business. But had a version of this conversation with Nancy with just a bunch of yellow pad illustrations of like, "I know you don't really care about this, but you're freaked out about what's going on." It's like, "Let me just sketch out what a mortgage-backed security is and how these tranches work."
I don't know how much Nancy got it. I don't think she was actually that interested. But her stress came way down nonetheless because what I realized in that conversation was that it... I don't know if I'm going to find the right words. It wasn't that she couldn't handle uncertainty, it's that there was a level of additional uncertainty to the environment because she just literally didn't understand what was happening. And when it's something where you don't even know how it works, it's especially freaky. I suppose it is sort of the distinction between uncertainty and risk. We tend to use the words interchangeably, but classically risk is, I know what the parameters are, the potential outcomes, I just don't know which one you're going to get. Uncertainty is, I really have no freaking clue what's going to happen from here.
Carl: Just really quickly put a pin in that, please, financial planner friends who are listening to this, please understand the difference between those two terms, because it's embarrassing that we don't, most of us...not you, because you all understand because you're listening to Kitces talk, right? But most of us in the industry don't understand the difference between those terms and it's causing major damage. So anyway, keep going though. Don't get distracted.
Michael: And so, in that spirit, what I suppose in my context, I had interpreted as, oh, Nancy's just not good with the uncertainty of this environment. The answer was like, Nancy was not happy with the uncertainty environment, but she was actually able to handle the risk of the environment. And she was okay with the risk. The uncertainty was because strange things are happening that I just don't understand. And things I don't understand are freaking scary, right? Something in our brains are just hardwired to be afraid of the unknown because bad things were there that usually were predators that did bad things to you, right? Natural selection was very powerful for not venturing out too far into the unknown. And so, just some combination of making it understandable or at least showing Nancy that I was clear and comfortable in what was going on. And so, she could find confidence in that. Turned it from uncertainty back to risk.
And risk she was actually okay with. Wasn't happy for lots of reasons, but we had done our process around risk tolerance. She was not a conservative, "I don't like risk investor." But she really didn't like the uncertainty of, "I just don't even understand what's happening. All I know is crazy things are happening. And someone said the financial system might melt down. And in the absence of any other information, I'm kind of feeling I should be walking out the door here." And so, it left with me this feeling that... Indirectly, it's one of the reasons why my gut response always when crazy things are happening is how can we communicate this out to everyone? But as human beings, we're always searching for the narrative. Brains are wired to the narrative. We like to make fun of certain financial pornography networks that like to spin the narrative into everything.
But I do think there is a powerful...there's a power for that and there's a place for that, that look, when scary things are happening and you don't understand how the system works, it really does take you from risk to uncertainty. And we can cut back on the uncertainty by getting proactive in a message out to clients, video out to clients if that's your thing, you do it on Loom or BombBomb or whatever it is. You're just saying, "Hey, there's a bunch of stuff going on right now. Let me just help make a little sense of what's going on in this environment. Inflation's lifting up, it's causing bond rates to rise, everybody's anticipating the Fed is going to raise rates. When interest rates rise, companies it's more expensive for them to borrow, that can actually reduce their values. So the stock market is reacting."
Just provide a narrative and make some sense out of it. Not because we're trying to do the network version of this, which is, "And therefore you should buy, buy, buy this next stock because here's my prognostication of where this is going." Because I'm not trying to predict the future, that's taking me out to trying to create certainty. I can't necessarily create the certainty, but I can get us from uncertainty because I don't know how it works to "just" the risk. I know how it works. Here's what's going on. I don't know which particular path we're going to follow, but I can reduce the range of the uncertainty by creating some understanding of what's going on and providing you that narrative, so you don't fill in the gaps in your head. And I have found that was the biggest legacy to me from the financial crisis was our brains are going to start filling in the gaps with some kind of narrative, so either I get more proactive and communicate out to everyone and give them a narrative that's at least a little more reassuring, or they're going to make their own narrative. And it's usually worse when their brain's doing that on their own.
Why Conveying Confidence Is Important When Clients Are Uncertain [23:55]
Carl: It's really, really interesting. I wanted to talk about this. I really, really like that. And I wanted to talk about that in the context of the financial plan and not specifically the markets. But before I do, I wanted to just note real quickly how interesting it is. And it's really important to understand, this is sometimes seen as or. You either or understand it, explain it, technical, or you're empathetic, it's totally an and. Because my lesson from '08/09 is 100% sit with me, right? It's 100%.
Michael: Interesting. Then you have to...
Carl: I know, I know, I know.
Michael: I talk to them and they cry, Carl. I just want to send them an email.
Carl: I know. I was literally going to say, cry. I was literally going to say, "Look, I will create space for what you're feeling." And it's so interesting that that is not an or. That is both of those responses are A, valid, and B, important, and C, necessary. So, let's talk real quickly about...let's just a side note planning. I love the idea too of, yeah, it's pretty easy. Somebody else is selling certainty, well, you walk a client. You get sort of Brooklyn on them. Like, "You know what, you want to go down that path, let me walk you through what's going on. Let me help you understand. That thing that you just said you're going to capture 90% of the upside with only 5%, that investment that he just said is just like a CD except you earn more."
Those were the classic ones. Like, "Let me walk you through what they are because I understand. In fact, I'm going to give you some questions to ask that joker when you go back to this meeting. Because I understand the thing they're about to try and sell you better than they understand it. I promise." Right? And the same thing with the plan. Totally get it. Equity's scary. Somebody else is selling you a permanent life insurance policy for everything that will cure everything. Let's walk through what happens if we do that. And if that trade-off is something you want to do, I must have misunderstood something. And of course, I will help you find the appropriate tool given that trade-off you want to make. But you go right at it like, "Look, I owe you an explanation, so you understand." So, the whole thing you just walked through with the markets, completely applies with the plan, and the people listening to this call, this podcast, it's true, right? You'll know better. And if you don't already know better, you know how to spend an hour, one hour, and you'll know better than any joker at any of these other places doing that stuff, you'll already be like...yeah, so...
Michael: I think that's the thing to me. And granted, I had to do this Kitces style when I first started down this route. I think the thing I ultimately wrote about the financial crisis was a 19-page newsletter because I do my thing. But it doesn't have to be that. Truly, it doesn't have to be that. I think you make a good point, Carl, that I think even for some of us advisors, the imposter syndrome thing starts kicking in of like, "Hey, look, the truth deep down is I'm not quite sure why this stuff is happening. It's a little freaky to me as well. I'm watching my clients, my AUM, my revenue go through these gyrations as well."
But I think you make a really powerful point that we don't give ourselves enough credit. A, for how much we do know, B, how much scary this service is for clients because they know that much less than we do. The importance, even as you think about sending that message out to clients, you don't have to explain the whole world order and how everything functions, right? At the end of the day, just, "Here's what's going on. It's going to be okay. You're okay. This does not change your ability to achieve your goals. Here's what's going on. It's going to be okay. We're on top of this." And I guess to your point, "Let me know if you want to talk more." That can be a couple of...literally, that can be a few paragraphs. That can be a two to three-minute video on Loom or BombBomb or whatever it is that you want to use. Just something that makes order out of what feels like chaos for clients because they don't know what's going on. It doesn't remove the risk, but it does narrow down the uncertainty.
Carl: Yeah. And I think one thing that would be interesting to just point out real quickly here is there's a principle in military strategy doctrine and it's the only place I've ever heard this, which I really like, but now I can see it in other places where there are times when overconfidence is a tool in the toolbox. One of the places, after I started looking into this, understood, you don't want the paramedic to tell you if it's actually probably likely you're going to die. You don't want to know that. What you want to know is, "Hang on, I got you. We're going to make it through this." And they may be saying that even if they know the odds are very, very low.
Michael: Oh, yeah.
Carl: Sorry to use the grim example, but there are occasions where overconfidence...and I remember that in '08/09, I don't want to turn it into a conversation around that. But I do remember looking people in the eyes and saying, "Stay the course, it's the best option we have. There's nothing else to do. I'm telling you, stay the course." And then I remember shutting that door in the conference room, thinking to myself, "I hope I'm right." But that was not the time to be saying, "I hope I'm right." I think there is an element of that that goes on with the certainty piece with clients saying...and again, this isn't all about markets, it's that you can apply all the same stuff to the plan, to products for long-term. And you can say, "I know this product that's being proposed or this strategy that's being proposed better than the person pitching it to you. If you want me to break it down, I got three hours. Come in." Be like, "If you don't, I'm telling you the trade-off here is not what you think it is." Right?
And that level of your ability to be confident in what you’re proposing is, in some situations, the only tool you have to win that particular battle for the sake of the overall war of the client. Right? Sometimes you lose a pawn to help win the chess match. Is that the right term? Anyway, that's how I think of all this. And again, remember, this is not so that you can keep revenue. It's fine. Whatever. This is not so you can keep a client. Great. It's so you can have an impact on their lives. Right? You can help them. Sometimes we have to play righteous tricks to help them meet the goals they've told us about. And of course, revenue comes from that and whatever else. But as long as we keep in mind, these righteous tricks are in sake of the client not in sake of...it's not a bait and switch. It's a righteous trick.
Michael: Well, awesome. Appreciate the discussion, Carl. Thank you very much.
Carl: Super fun. Thanks, Michael.