Decades ago, when the financial advice industry was focused primarily on the sale of investment products and insurance, the standard planning approach was to conduct a gap analysis to highlight the client’s needs… so that the advisor could implement whatever available products they had to address those needs (and earn a commission in the process). More recently, financial planning has shifted away from a needs-based approach, and towards a more aspirational “goals-based” approach where clients commit to pursuing advisor-recommended strategies to achieve those goals. Yet the challenge of goals-based investing is that it presumes clients know what their goals are, and can effectively articulate them… which in practice isn’t always the case. In part because the compounding math of wealth accumulation itself isn’t natural for most, and it’s difficult to set goals if you don’t even know what the compounding of saving and investing might make possible in the first place!
In our 48th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss why goals-based financial planning puts the proverbial cart before the horse, the importance of exploring the possibilities first, strategies to dig deeper with clients to create frameworks from which realistic and meaningful goals can be developed, and why iterative planning allows advisors to develop long-term relationships with clients, where the focus isn’t on The Plan, per se, but rather on the process of planning and adapting to what else may become possible over time.
As a starting point, it’s important to understand that humans in general aren’t really wired to envision a future that is substantially different from what we experience today. It’s little wonder, then, that clients, when asked about their “goals”, often don’t have very good answers... and may even sometimes wildly unrealistic expectations (which, in turn, forces the advisor to become the “bearer of bad news”). Which means that the first (and perhaps most underrated) thing that an advisor should do is to help clients understand the myriad of possibilities ahead of them, explore a range of scenarios, and understand the inevitable trade-offs and choices that they will have to make along the way.
From that “possibilities-based planning” foundation, advisors can focus on asking good questions that lead to meaningful conversations around helping clients discover those things that are most important to them, identify their desired future state, and then build a framework upon which they can define (and start moving towards) their goals. In turn, defining those goals with a possibilities-based discovery approach creates room to reassess those goals and to shift over time… while allowing the underlying framework to remain in place.
Ultimately, while it’s not necessary to completely discard the notion of goals-based planning, the key is to examine what the various possibilities are to begin with, before even thinking about asking clients what their goals might be. By thinking more along the lines of possibilities-based planning, advisors can help clients determine what are realistic goals to set in the first place and determine the most efficient recommendations that will allow clients to focus on what’s most important to them and get them to their desired future state.
***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 35: Favorite Questions To Ask A Prospective Client To Build Trust In The First Meeting
- Kitces & Carl Ep 47: Getting Data Gathering Back On Track When Clients Drag Their Feet
- Marketplace Money
- René Girard and Mimetic Theory
- Values-Based Financial Planning by Bill Bachrach
- Start With Why by Simon Sinek
- The Dan Sullivan Question by Dan Sullivan
- Heuristics and Biases in Retirement Savings Behavior by Shlomo Benartzi and Richard H. Thaler
- Pricing Creativity – A Guide To Profit Beyond The Billable Hour by Blair Enns
Kitces & Carl Podcast Transcript
Michael: Hello there, Carl.
Carl: Greetings, Michael. How are you?
Michael: I'm doing well. I'm doing well. You ready for another exciting episode?
Carl: For sure. I keep wondering when you're going to turn around and draw something on that whiteboard for us.
Michael: I feel like we're going to have to at some point. Of course, the problem is we both put this out as a video on YouTube and as a podcast.
Carl: Yeah, that's true.
Michael: I feel a little bit bad about the drawing on the whiteboard thing because the podcasters won't hear it. Then, I have to explain what I'm drawing, and just...I feel like it goes downhill quickly at that point.
Carl: I used to do that with Tess Vigeland on NPR. We used to do – on "Marketplace Money," we used to do a segment called "Financial Sketches on the Radio" or something, and I'd have to describe, "Okay, I want you to pretend like..."
Michael: You're drawing your Sharpie sketches on the radio.
Carl: With Tess. It was really fun. It was fun because you had to train that ability of, "Okay, now imagine this." Yeah, we should try that sometime, and we should just all watch you try to do it.
Michael: I don't quite have the artistic gift that you do, but I appreciate that.
Carl: I won't go that far. Very cool. We need to talk about something today.
Carl: I think it's going to be a surprise to people to hear your...you have a little...it's almost like a little nerve, a little thing. All we have to do is say, "Watch this! Watch everybody. Watch what happens. Those of you who are watching on YouTube, you can watch, but you might be able to hear it. If I just say the word, 'goals,' let's see what happens to Michael."
The Problem With Goals-Based Financial Planning [02:19]
Michael: All right. You ticked this off in the last episode because we were talking about data-gathering and the challenges of getting the data and the information, and you lobbed this piece out there of the challenges of getting people's goals. I said, "Oh goodness, yes. Drives me nuts." Here we are. I feel like we have to come back to this and talk about this more because I'm now getting to this point with financial planning, in our collective industry, that I'm almost on the cusp of just outright saying, "I hate goals-based planning, and I think it's ridiculous." I feel like that's heresy because the whole industry is now in a giant shift towards goals-based planning as the center and the future. I feel like every executive is talking about the virtues of goals-based planning for the future of their organization has never sat across from someone in a first client meeting and said, "Tell me about your goals." Because if they have, you never get a good answer.
This whole goals-based planning framework presumes you can just ask someone about their goals and, "Oh, I'm going to retire at this age with this much money, and I need this at this time horizon. I'm also going to do this other thing," and we'll just pop all those goals out, set some dollar amounts to it, and off we'll go with our perfectly allocated portfolio that matches the goal in the time horizon and the dollar amount.
When I have these conversations with people, nobody knows what their goals are. The whole thing is predicated on this idea that clients can answer this question, that most can't answer, and the ones that do, if I ask them two follow-up questions, it becomes very clear that the goal wasn't actually rooted in anything. "When do you want to retire?" "I think I want to retire at 65 at about a million dollars." "Cool. Can totally make a plan to do that, but just wondering, where did a million dollars come from?" "It seemed like a nice round number." "Cool, cool. Okay. If I showed you that you could retire at 63 with $800,000, if that was actually possible, would that be okay?" "Oh yeah, that would be even better." Okay, complete change of goals by 20%. "Tell me more about the work that you're doing. Oh, that's really cool. You have spent 30 years in your industry. Have you ever thought about consulting after you retire, maybe going back and consulting a little more?" "Oh yeah, I think I can do that." "Cool. What do you think you would earn from that? You have a really deep expertise. Could you do $20,000, $30,000, even $50,000 a year?" "Oh yeah, yeah, I could probably do that." "Cool. If I showed you that doing $30,000 a year of consulting, you could actually retire at 59, which would be 12 months from now. How does that sound?" "Oh my gosh, that would be amazing." "You could be done in 12 months and you'd only need $600,000 to do it because of the consulting income." "Oh, that sounds fantastic." "Great."
In the span of about a five-minute conversation, I cut your retirement goal by 40% and cut your retirement time horizon by six of the seven years. And that's just a few minutes of conversation.
Carl: That was a short circuit.
Michael: Why have we started with this goals conversation?
Carl: That was a short circuit of planners. No, no, no, your goal was 65 with a million dollars. Look, I don't know if it is possible to not turn this into a complete rant session, because I have been saying for 10 years, "Goals are guesses." What I've noticed with humans is that nobody likes to be asked what their goals are because they don't know...
Michael: I think you even overstate it in saying that goals are...I don't even find that it's 'goals are guesses'. For so many clients, goals aren't even guesses, they're just plucked out of thin air – ideas of things that sound like they might be neat or that a commercial told me would be awesome. It's not even often grounded in their own reality.
How To Clients Value Through Goal Clarification [06:27]
Carl: Listen, of course it's not. We don't know. Rene Girard's work on mimetic desire has...I was going to say proven to us, but definitely, in the age of Instagram, it's made it even harder. We look for our hint about what we want through what everybody else wants. Getting clear about your own goals is crazy. I think the problem isn't in goal-based planning; the problem is in the fundamental concept of understanding or getting somebody to state their goals. I think the trick to this is teaching people what a goal is without ever using the word 'goal'. Teaching people – and I think goal clarification is a massive value that we don't even realize we do when we do it right, because nobody knows, and if they do know, and if they pretend they know, it's just a guess based on what they saw everybody else do, what they saw on Instagram. I think the way to handle that – and then to also – even when we help them clarify their goals, to help them realize they're going to change. This is still a guess.
I love the framework of 'strong opinion loosely held', right? We're going to have a strong opinion about where we want to go, and we're going to call that a 'goal', and then we're going to actually look for disconfirming evidence to show up because we don't have the information we need, at the current location we're at. We don't have the information we need to know where we want to end up there 12 years from now. We'll set that as a target, a strong opinion, and then we'll take one step. And when we take the one step, we'll look around and if there's any disconfirming evidence, we'll change the goal. But the conversation I think people – at least we found that people really enjoy these practical tips about how to have these conversations. What I would look for is before ever saying – remove 'goals' – you're not allowed to ask, "What are your goals?" unless you teach somebody what you mean. It can't be on an intake form. You're going to have this conversation where you ask some questions in the first part of a first meeting. We talked about that. We had an episode on great conversations to ask in first meetings.
Let's say you say something like Bill Bachrach's classic, "Why is money important to you?" And somebody says to you, "The kids – I really want to make sure we give lots of opportunities to the kids." "Amazing. Tell me more about that. What does that mean? Why would" – following Bill's model– "Why give great opportunities to the kids?" "Because I really want to make sure that they all have...that would be...it's my most important thing," whatever. Then, we've had this conversation over here and we've taken notes and we've thought, "Kids, opportunities." We could even say at that moment, "That's amazing. In fact, in a minute, I'd like to put some framework around that. And when we do, we might even call it a goal. But tell me first, why is that important to you?"
I remember a client, Julie, she said, "Freedom, flexibility." Then she said, "I want to have more time. I just work so much, I want to have more time." And at that time, I was like, "Time, that sounds like something we could put a framework around." I said, "Julie, in a minute we'll talk more about what it means. We'll put some framework about what having more time means and what exactly it will look like. And when we do, maybe we'll even call it a 'goal'." You're pulling out these things they identify – I like to think of that as 'purpose', Bill Bachrach calls that 'values'. I just personally like the idea of 'purpose'. Or Simon Sinek's work on "Why." When we're having this conversation around 'why?' – Dan Sullivan's, "Three years from now, what would have to happen?" We take that work and then say, "Okay, would you call that a goal?" And we just give people permission: "Relax, we know these will change." Because I forever...I was playing around with it. I remember, I had this conversation with Moira, actually, around no-plan planning. We're going to just optimize for where we are today, we're going to take the next step, see what we learn, we're going to take the next step, and it was like, no-goal planning. Then I realized, like a flight, you've got to have a sense of where you want to go, some intention. People like that word too. We're going to set an intention. Feels a little less critical. That's my take on goals. In fact, what is it, Shlomo at UCLA?
Carl: He's done some amazing work about this, too, that people don't know. He suggests having a list of suggestions. I don't know about that idea. I'm just saying his work points to the same problem. People don't know. Teach them. That's how I would say it. I wouldn't throw out universally goal-based planning. I would say we just need to get better at understanding how to help people clarify goals.
Incorporating Client Collaboration In The Data-Gathering Process To Begin Exploring Possibilities [11:45]
Michael: The other thing that strikes me about this – and we talked about this briefly in the last episode as well – I'm a big fan of getting the planning software up on the screen with the client as early as we can in the process. From the data-gathering end, if you start just putting numbers up there, the client starts wanting to make them more accurate and wants to get more information and get more detailed numbers because they're seeing the plan starting to take shape and they want to make the numbers more accurate. But the other reason why I'm such a fan of getting the planning software up there as early as possible is that it helps clients start understanding what goals are even possible in the first place.
I remember a client we had a bunch of years ago, her name was Nancy. Nancy's issue was she was 50 years old; she had saved up about $300,000. She was saving about $10,000 a year in her 401k plan. She wanted to retire by 65 with a million dollars. That was the magical number for her, and she just felt completely desolate. "I've got 300 grand, I'm putting in $10,000 a year. I'm trying to get to a million. This is going to take me 70 more years to accumulate the other $70,000 at $10,000 a year." She was despondent about ever having a chance to retire. And I'm sitting there just – already in my head, I'm starting to rule of 72 this. I'm like, "8% moderate, 8% return moderate growth portfolio," because it was a little ways back, so that felt like a more comfortable growth assumption. Eight percent moderate growth portfolio, your money quadruples in 18 years with contributions and quadruples in less than that. She is actually already completely on track to nail her goal with no changes to her current course. She's completely despondent because, in essence, human beings just don't do compounding math very well in their heads, and she doesn't realize that the path she's on – not only is her retirement goal completely on track – it was actually possible for her to retire quite a bit sooner because it turned out she didn't even actually need the whole million dollars, that number had come out of thin air, and with the compounding growth that she had, she's actually doing quite well to have $300,000 at age 50.
It wasn't until we showed her the first projection, just said, "Hey, I just want to show you, your $300,000 with $10,000 contributions at a moderate growth rate, this is what it's compounding up to." I forget, she was going to be at, like, $1.2 million by 65? "You're already blowing past your goal. Now tell me about how you're feeling and what you think of this goal?" Nancy's whole body language – everything – just started changing. All of a sudden, it was like, "Oh wait, I can actually do this?" And as soon as she thought she could do it, all these other ideas started coming up. Like, "What if I did this? What if I retire a little early? I'm not even actually sure I want to be here. Maybe I'm going to move across the country and go back to where I grew up, and it'll be less expensive there and then I don't even need as much, and now I can bring the date back another year or two." All this stuff started changing because she put forth a goal that was both – a goal plucked out of thin air and had no idea how to actually get to that goal or whether it was possible in the first place, and when we started instead from, "Let's just look at the possibilities, which it turns out for you are even better than you realize because we don't do compounding math in our heads very well," suddenly when we start with possibilities, all the goals started changing because she realized what was actually possible and what was not possible. I certainly have my share of clients that what they wanted to do was grossly unrealistic, and maybe we'll talk about unrealistic expectations at some point down the road. But I find it comes from the other direction as well sometimes, that...
Carl: For sure.
Michael: ...we don't fundamentally understand what's possible or not, and starting with the goals puts the cart before the horse because we're trying to guess at the goals that are going to be feasible. We have no actual idea if the goals are going to be feasible. Then, we try to come up with a plan to try to get you to your goal when we have to twist and turn to do extreme things to get you to your goal because I have the whole thing backward to me.
Carl: It's a broken...
Michael: What does it look like when we do possibilities-based planning instead of goals-based planning, and you start with, "I don't know what your goals are. You don't know what your goals are. No one knows what their goals are. Let's just start actually looking what's possible and then we'll figure out which of those we want to pursue"?
Carl: Look, I think the system's broken. We've got to figure out a better system. The false sense of certainty and precision, the idea that humans know what they want. I mean, come on. We do not know what we want. It's insanely difficult for humans to know what they want. All the behavioral finance problems – all of this is laid on top of the idea that we think we know what tax rates are going to be for 54 years. All of those assumptions...
Michael: Don't go after my tax assumptions. That is a different conversation.
Maintaining Adaptability As Clients’ Goals Change [17:33]
Carl: All those. This reminds me of two conversations. One was with a friend of mine named Brad, and I was like, "Brad, how much..." This was, like, 22 years ago. "Brad, how much are you saving..." We both just had our first or our second child, and I was like, "How much are you saving for your daughter for university?" He said, "Hey Carl, how about this? I'm going to save as much as I reasonably can. I can't do any more than that." Then you add that to the number of meetings I sat in, in big places – big firms – with the wealth management or financial planning people that got brought into help, the number of times I watched people say, "That plan looks a little too good. Change that assumption." Or "that plan looks a little too scary. Change that assumption." You realize you're saying to the client, "You can meet all these goals," and then suddenly the goals changed. Should I have said, "You shouldn't have met the goals," so you had stayed disciplined? The reality is, the whole system, it's all this giant lever. We're talking about flopping compound interest around based on a couple of little bits of assumptions and the reality is: let's do the best we can today and let's look for new evidence tomorrow. Let's have these...I love the idea of 'possibilities' or 'intentions' because we want to know if I'm going that way. I think for right now, I'm going that way. That's helpful.
Then, we just don't...I believe Buddha's been saying this for a long time, and I think all the wisdom tradition leaders have been saying this for a long time. I think Jesus said, "Look at the lilies. They don't worry too much about this stuff." I think what they're all pointing out is the same thing. Don't get too attached to it. Think about the future for sure because that's...you need to do it, and we're not very good at it. But then, let's move in that direction and not get too attached to it.
The reason I think this is so beautiful is that it shifts. If we can communicate this, we become 'guides in a changing landscape' instead of 'defenders of maps'. That puts massive value on the process. So don't do financial plans – do financial planning, and then suddenly we've got a relationship, and this relationship is me guiding you over the next 30 years, narrowing in the potential range of outcomes towards an outcome that felt intentional at least. That's why I think goals are crazy, and I'm with you. Let's just throw them out.
Michael: I'm not quite sure I'm that far.
Carl: That's how you started. I had to back you in off the ledge.
Using Possibilities As The Framework For Developing Realistic Goals [20:31]
Michael: No, I'm not a fan of these planning/investing approaches that start with goals, that start with, "Tell me your goals," because I don't think anybody knows what they are, and then as soon they see what's actually possible, they may change completely. To me, it's about shifting from, "Let's start with your goals," to "Let's start just trying to help you explore what's possible because you actually have no idea what your goals are and what your goals even might be because you usually only pick goals that you think are at least decently possible or that you heard about somewhere, and not any goals that relate to what you're actually able to do given what's under your control and in the trajectory of what you're doing." We've got to start with the possibilities. But I do think there's value in eventually getting to some level of goals, not goals held strongly, like, "This is the thing we're doing and the only thing we're doing and it's never going to change." I certainly agree with you, goals come and go, change and morph. But I don't know, I think both for a lot of clients – and at some point, because I do have to make some investment decisions or implement some stuff or do some things – I do need to set a mark on the ground and say, "We are here. We are trying to get there. I've got to have some sense as to what your time horizon is to make some investment decisions. I've got to have some sense as to what your income and goals are. I don't know how much insurance you need." There still are things that at some point I have to tie back to numbers because you have to save a dollar amount, you have to invest a certain way, you have to buy a certain amount of coverage.
Carl: For sure.
Michael: I wouldn't necessarily come away entirely from goals, but we seem to always start with this idea of, "Tell me your goals, and I'll make you an awesome plan to get to them," as opposed to saying, "Let's start looking what the possibilities are, and we'll figure out what you're trying to march towards." And I love the way that you had put it, that just helping people with goal clarification is actually way more of a value than we often give it credit for, if only because when I help you clarify your goals, often your goals end up being so different from what you thought they were. It may turn out they were way more achievable and that you're actually just going to get there faster and better with a more positive outcome because I helped clarify for you what you can actually do, instead of just having you rely on a number you plucked out of thin air or what your neighbors are doing, or all the other cues we take when we don't actually have any idea what's possible with compounding math in 10, 20, 30 years, instead of starting with, "Let's look at what's possible and then you tell me whether you like this path and how it's shaping up, how you want to direct it, or if you want to start doing something different to take yourself in a different direction."
Carl: I completely agree with that. I think that the idea...we see this in other areas, the lean startup and agile software development. If you read much of the complexity theory – work that's been done on complexity and complexity theory – which is fascinating but super dense normally, the idea is that we are dealing with a complex adaptive system when we're dealing with financial planning. It's complex because we don't even know the inputs, but we certainly don't know the outputs, and the thing that happens in the middle is crazy. And it's adaptive because your interaction with the system changes the system. The only way to navigate a complex adaptive system out of the literature is that you solve for the next local optimum, and then you reset. Yeah, we have a desired future state. That's where we think we want to go. But we know that's a guess, so relax, Mr. and Mrs. Client. We're putting a stake in the ground out here. We're going to head in that direction. I have taught you that we call that thing a 'goal' because you told me what was important to you, and I put some framework around it, then we called it a 'goal'. Now let's head in that direction, and when we reset, we'll look for disconfirming evidence. Maybe we don't want that goal anymore. Guess what? That's okay. In fact, not only is it okay if goals change, we should expect goals to change. But, we still need them because they orient the plan. I just think we need to flip the whole thing on its head and realize we're guides in a changing landscape, not defenders of a map. You don't have to get the map perfect before you leave, including the goals. You just have to have a guess and then take the first step.
Michael: Love it. I love it. We're not defenders of the map. Say it again? I like this saying.
Carl: You're a guide in a changing landscape. This is the single opinion I'm trying to forcibly insert into the industry right now. Real financial planners are not defenders of outdated maps. They're guides in a changing landscape. And if you understand the distinction, which we pointed out in the last two episodes and probably plenty more, it changes everything about...you may use the same tools, the same calculator, the same software, the same everything. But the way you approach it, the way you talk about it, and the way the client values it, it changes everything it you view it through that lens.
Michael: Love it.
Carl: Thanks, Michael.
Michael: Thank you so much, Carl.