Enjoy the current installment of "weekend reading for financial planners" – this week’s edition starts off with a quick recap of who said what at this week’s Financial Services Committee hearing on the Bachus SRO legislation. From there, we take a deep dive into a long series of articles looking at how financial planning is changing. An interview with Rick Kahler explores how financial therapy is being integrated into his practice, and a Morningstar Advisor article looks at how personality types can help predict which kinds of behavioral biases your clients might exhibit. An article by Paula Hogan in the Journal of Financial Planning examines how to integrate financial planning from the economists’ perspective – the so-called Life Cycle finance model – with the current world of financial and life planning, with a rising focus on planning for human capital… followed by another article looking at how several planners are being to incorporate human capital planning in their practices. Bob Veres looks at what we can do to ensure that planners really stay focused on planning, and don’t allow themselves to be lured by "easier" business models. A panel discussion in Financial Advisor magazine explores how some executives at companies that serve and support advisors see the trends playing out. At the same time, a recent article on The Economist questions whether clients might sometimes seek advice more than they should, and how much advice we seek is really for practical reasons as opposed to psychological ones. And Dick Wagner raises the question of whether it’s finally time to push the profession to financial planning 3.0. On a final note, we include a transcript of a recent speech given last weekend by financier investor George Soros in Italy; although a bit of a non-sequitur from the weekend reading theme of changes in the planning profession, the article provides such an amazing look at what’s going on in Europe, that it just had to be included. Enjoy the reading!
Weekend reading for June 9th/10th:
Highlights from the Financial Services Committee’s Hearing on the SRO Bill for Investment Advisers – This article from RIA Compliance Consultants blog provides a nice summary of the statements made by various constituencies at this week’s Financial Services Committee hearing on the Investment Adviser Oversight Act of 2012 – the so-called "Bachus SRO bill" that would designate an SRO to take oversight of investment advisers, with FINRA as the heir apparent for the role. Testimony included 6 witnesses – four supporting the legislation (including FINRA CEO Rick Ketchum), and two opposing. Notably, executive leadership representatives from TD Ameritrade and Schwab were also in town for the week meeting with legislators and speaking out against the legislation.
Rick Kahler on True Portfolio Diversification and Adventures in Client Psychology – This article from the Journal of Financial Planning is an interview with financial planner Rick Kahler, and provides an interesting look at this experienced planner’s perspective on everything from dealing with turbulent markets and rising correlations (be constantly looking for new asset classes that will be non-correlated, but watch out for too much money always flowing to ‘the next best thing’), to the evolution of financial planning from its early days to emerging as a whole new profession, to the inclusion of "financial therapy" in Rick’s practice. The article also looks at Rick’s adoption of blogging, video, and social media to obtain new clients.
Client Personalities and Behavioral Bias – This article by Justin Reckers and Robert Simon for Morningstar Advisor explores how to incorporate insights about client personality types into advice for clients, with a focus in particular on the Myers-Briggs Type Indicator on its four dimensions: extraversion versus introversion; sensing versus intution; thinking versus feeling; and judging versus perceiving. For instance, your extraverted clients may be more prone to overconfidence bias and illusions of control, while your introverted clients are more prone to a status quo bias and will be more appreciative for your outside perspective and touching base periodically. Your feeling clients will tend to make decisions more emotionally and subjectively and be prone to excessive optimism or short-term thinking than your thinking clients who may be more prone to overconfidence and confirmatory bias based on their thinking skills – which in turn means that you must appeal to them differently. Overall, the point is that by being aware of a client’s personality type, you can have a clue as to which behavioral biases they will be most likely to exhibit, and plan to deal with them accordingly.
Financial Planning: A Look From The Outside In – This contribution by Paula Hogan to the Journal of Financial Planning takes an interesting look at the intersection between financial planning, life planning, and life cycle finance (the economist’s financial planning framework). For instance, while financial planning often focuses on wealth and financial assets, the life cycle finance body of knowledge points out that people have human capital as well (the present value of lifetime earned income), and argues that human capital is central for most. Similarly, Hogan notes that life planning is also a human centric model, focusing on values clarification and goal specification rather than purely financial wealth. Hogan also explores the relative focus of planning on the stability and level of lifetime standards of living, versus just wealth, the economist criticism that stocks invested towards goals become more risky over time (not less), and more. Ultimately, Hogan suggests a new definition for financial planning: "the lifelong process of integrating personal values with the management of both human and financial capital for the betterment of self and community."
A Bigger Pie – This article from Financial Planning magazine, continuing the theme of human capital, suggests that when dealing with clients in difficult financial circumstances, step too much time focusing on cutting back expenses and not enough on boosting incomes to make the pie bigger in the first place. This might include helping clients invest in themselves to study and train to improve their job skills (as previously discussed on this blog) for a raise or a new job, or to start a second/side job or business to generate some additional income. Some planners are even begin to integrate career coaching in their practice.
Stop Imaginary Planning – This article by Bob Veres in Financial Planning magazine takes on the challenging question of how to keep planners focused on the real work of planning, and not stray to "easier" business models (that may also contain unfortunate business risks)? Veres suggests the three primary problems are that: #1, planning work is genuinely difficult; #2, it’s difficult to get clients to pay for it in a world where many give it away for free, and/or planners undercharge and fail to run their businesses effectively; and #3, financial planning done right often challenges other parts of the financial services industry and thus has created an ongoing stream of enemies. Veres suggests several solutions – most notably, that ‘wanderers’ who move away from planning should be ‘punished’ by turning them away from the planning community (and its membership organizations), and that planners must be proactive in defending real financial planning.
Forward Progress – This article in Financial Advisor magazine is a panel interview that shortly followed the Tiburon CEO Summit in April, with five executives from companies that serve and support financial advisors. The panelists note that the real change coming is not just the dynamics of the markets and the industry, but in how clients want to communicate and interact, as the advisor’s role shifts from "Do it for me" to "Do it with me" instead, especially with the next generation of clients. The advisor’s role in helping the client to change behavior is also key. Technology is a part of this shift in services to clients, but the center is not technology; rather, it’s the advisor’s role and how technology can support it. The panelists also suggest that alternatives are likely here to stay as they go more mainstream, although many appear speculative and advisors still appear unsure about how exactly to fit them into the portfolio, and look at how advisors are building portfolios for retirement income. Overall, this is an interesting look both at the advisory world, and how major company executives see what advisors are doing.
Not So Expert: The Need For Financial Advice May Be More Psychological Than Practical – This interesting article from the print edition of The Economist explores how in many situations, the failure of experts to give advice is well documented, yet it doesn’t seem to stop our insatiable need as human beings to seek out advice – even when the advice has no use. For instance, one study showed that people were even willing to pay someone for forecasting advice on a randomized coin flip, if the initial advice had turned out successful – even though it was still a random coin flip! The disturbing implication is that some clients may express similar behavior with respect to investment advice in particular – mistaking advice on randomness that has coincidentally favorable outcomes for actual expertise. The article points out that this isn’t necessarily meant to imply that all advice is bad; but it does suggest we have an incentive to offer more advice than necessary, to justify our value – and clients may be willing to accept that, because it gives them a means to blame you if things go wrong instead of themselves. The conclusion is that while there clearly is some need for advice in some situations, we may offer more than is necessary – and feed our clients’ psychological desire to have scapegoats or feel more in control of their lives.
A Challenge Beckons – This article by Dick Wagner in Financial Advisor magazine calls for financial planners to move on to financial planning 3.0 – where talented client-centric fiduciaries really bring financial planning to the true threshold of being a profession. Financial Planning 1.0 started 42 years ago with Loren Dunton, leading to the creation of the CFP marks and the College for Financial Planning, where financial planning was all about the financial product it generated. Heading into the 1990s, Financial Planning 2.0 emerged, a more personal and intimate exploration of our relationships with money and a widening range of practice models beyond just using financial planning as a product delivery vehicle, along with significant improvements in self-regulation with the development of the CFP Board’s Code of Ethics and Professional Responsibility. Where will Financial Planning 3.0 go? Wagner suggests a focus on really addressing issues of theory – what is the purpose of the profession, why does it exist, and whose needs are being served? Where is our academic base? What public roles should we play? Wagner believes that, navigated successfully, Financial Planning 3.0 may become the most important profession of the 21st century; just as with medicine, law, and theology, nobody escapes the need to deal with money intelligently and thoughtfully.
George Soros’ Remarks At The Festival Of Economics – This article is a transcript of the full speech delivered last weekend by George Soros on the current economic situation in Europe. As Soros notes, there is widespread agreement that economic theory "failed" in light of what has happened since 2008, although there is little agreement about cause, and Soros suggests that we have also underestimated the extent of the failure. The underlying cause is that in the end, we simply cannot view economic problems like natural science problems (e.g., Newtonian physics), because they involve thinking participants who make decisions, even (and especially) with imperfect knowledge – which means theories like rational expectations and the efficient markets hypothesis may be far removed from reality. Soros suggests instead that even while we seek to understand a situation and react to it, our reactions in turn change the situation to be understood, in a never-ending loop Soros calls Reflexivity. From this perspective, Soros goes on to give a striking explanation of why and how bubbles form, that Europe is in not a financial bubble but that the European Union is a political bubble that has gotten it into its current mess, and provides a novel and compelling perspective on why Europe is suffering and what needs to be done to get back on track.
I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd’s Eye View – including Weekend Reading – directly to your email!