Trust. It lies at the heart of what we do as financial planners. Without a trusting relationship with clients, we cannot work constructively to advise them and help them to achieve their goals. At a broader level, if the public does not trust financial planners, they will be unwilling to work with us in the first place.
Yet at the same time, there is not necessarily a clear agreement amongst financial planners about what exactly it is that best inculcates that trust relationship. It is about establishing the credibility as an expert to become a trusted advisor for the client? Or the intimacy and authenticity necessary to ensure that the client feels safe and comfortable to share with you in the first place, and be willing to act on your recommendations?
If you had to pick one factor as the primary one leading to trustworthiness, which is more important to you: credibility, or authenticity?
The inspiration for today's blog post is an article featured in this past Friday's "Weekend Reading" column, published by financial planner Carl Richards (also known for his BehaviorGap work) in the November 8th issue of the New York Times. In the article, "How a Financial Pro Lost His House", Carl shared his own intimate story of how he got caught up in the real estate boom in Las Vegas, bought "too much house" and eventually had to give it up in a short sale. The article seems to have stirred a bit of controversy, in part simply because of the moral controversy surrounding short sales, but also in regards to how Carl's story as a financial planner who made financial mistakes of his own reflects on financial planners at large.
From what I have seen, there appears to be two camps regarding the article. The first complains that the article is a blow to the credibility of financial planners with the general public. As the view goes, how can financial planners claim expertise in guiding people about financial decisions when we make such catastrophic financial decisions of our own? Accordingly, detractors suggest the article has a "do as I say, not as I do/did" tone to it that can undermine credibility in the eyes of the public. And notably, this view is also highlighted in many of the public comments to the article, which are filled with negative feedback, either suggesting that the article was just an attempt to promote Carl's upcoming book "The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money" or that the article demonstrates the incompetence of advisors ("see, financial advisors aren't experts and don't deliver value; they can't even make their own good financial decisions").
On the other hand, there is clearly a camp that loves the article. Although not seen as loudly in the public comments, I have witnessed several discussion threads about the article that are much more upbeat, and Carl himself reports dozens and dozens of financial planners who have contacted him privately to express support and appreciation for the article. The people in this camp note that in the end, financial planners are human beings, and as human beings we too will make mistakes. We can't avoid them; we can merely either acknowledge to and admit them, or try to hide them and pretend to be unrealistically perfect. In the end, this group applauds the intimacy and authenticity of the article most of all, and the implicit trust that it inspires.
To me, the fundamental disagreement gets to the heart of what it is that does, or does not, build trust. The detractors of the article are implicitly suggesting that credibility is at the core of our trust relationship with the public. Accordingly, things that undermine credibility - such as publicly acknowledging our faults and failures, even while professing to be the expert that can help others navigate such challenges - will undermine our public trust. On the other hand, the supporters of the article are implicitly suggesting that authenticity and intimacy are at the core of our trust relationship with the public. Accordingly, the genuineness and vulnerability that Carl reveals in the article while sharing his difficult past create an intimacy and authenticity that advance our public trust.
So which one is "right" - is it about credibility, or about authenticity? Some recent research by Charles Green at Trusted Advisor Associates suggests that in reality, both play a material factor. As he explains it, the trust equation is made up of four factors:
( Credibility + Reliability + Intimacy ) / Self-Orientation = Trustworthiness
As a formula shows, anything that increases the numerators of Credibility (can we believe what you say?), Reliability (can we depend on your actions?), or Intimacy (do we feel safe sharing information with you?) can increase trust levels, while anything that increases the denominator Self-Orientation (are you focused more on yourself than others?) will reduce trust. Thus, we maximize trust by increasing some combination of credibility, reliability, and intimacy, while reducing our self-oriented focus (i.e., by focusing more on the people we're helping, rather than ourselves).
Accordingly, it appears that both camps are right to some extent. As the trust formula shows, losing credibility does undermine our trustworthiness; at the same time, improving intimacy through authenticity clearly increases trust, too. The question is whether the "loss" of credibility exceeds the "gain" in intimacy, or vice versa, as to whether there is a net increase or decrease in trust.
Anecdotally, it appears to me that those who themselves rely on credibility as a primary factor for trust ("The Expert" trust archetype) view the article as a negative and suggest that the credibility loss exceeds the intimacy gain, while those who rely first on intimacy as a driver of trust view the article positively (intimacy gains are worth more than any credibility losses). Green's work shows that there are actually six different trust archetypes, depending on which two (out of four) factors are the focal point of your own trust framework. (If you're interested, you can see which archetype fits you best by taking the Trust Quotient Quiz yourself.)
So what do you think of the Carl Richards article? Does it advance the financial planning profession with the public, or not? Does the intimacy and authenticity of the article carry the day? Or is it a blow to the credibility of the profession when "ever the experts make mistakes?" How do you evaluate trust? Does Credibility outweight Intimacy for you, or is it the other way around? Is there a difference between which factor is most important in a one-on-one client relationship, versus the profession's relationship with the public at large?
Great post. Excellent digestion of the discussion. I too noticed the overwhelming public feedback (mostly negative)from the article. On saturday morning I watched the comments pile in over peak reading time.
It wasn’t just the reduction in credibility that was bothersome to me. It was an overall lack of genuine accountability. Yes he wrote an article for the public to see and probably explicity stated that he made bad decisions. But he didn’t consisently deliver that message.
The message, to me anyway, was: listen to the whole story before you judge. So we did…only to be disapointed that there were absoutely no mitigating circumstances to make his decisions seem more reasonable. It was almost commical how he started the article that way only to weave a story that was a caricature of bubble real estate decisions.
It wasn’t so much his bad decisions or his short sale that impacted the abovementioned numerator, in my opinion. To me the article was an apparent attempt to connect with the public, without regard for the impact on our profession, in order to sell books. Smells of self-orientation.
Marty Kurtz says
I’ve followed with great interest this discussion on the ethics of financial planners and all those in the financial advice arena, it has long been of interest to me. Also, these issues have been a debate at the CFP Boad DEC and FPA and NAPFA Ethics Committees. This issue of Carl’s circumstance, intent and actions are indicative of the issues all of us dealing with life and money. The question that JAson is trying to answer is “who was Carl when he did that short sale and who was he being when he posted the story in the NYTimes? This is at the heart of principle based regulation and shows the complexity of deciding “right from wrong”.
I believe Carl did the profession a great service by bringing out this issue and discussion. Deeply enbedded in our profession are our own money scripts. When I started in the business almost 30 years ago the mantra was “fake it ’til you make it”. Common advice from managers of larger organizations in a sales environment was “buy the biggest house you can afford, I want you motivated!” Great emphasis was placed our success and show, not clients needs and success. We have our own issues which I think Carl’s article clearing points out.
First, he called a sales person who was evidently “successful” and took his recommendation, after all, driving a Gold Jaguar and with his name on bus stops he must be good, right? Second, Carl did this on his own. He did not have an objective third party offering him advice on how to think about life and money. We, as a profession,,,, have always been weak in this area. I believe now Carl has a financial planner.
It is interesting the way trust and trustworthless are used. I believe you, Michael k were right when you said our mission is to be trustworthy. We can not do anything that will generate trust, our total mission revolves around being trustworthy. the fiducairy standard is based on the four duties that lead us to be trustworthy by BEING honest and loyal and puting clients interests first. Also using care to treat the client as you would like to be treated. Our FPA Code of Ethics (and CFP Board’s and NAPFA’s) call us to be competent, diligent, have integrity, along with being professional and objective and fair and and hold confidentiality. No where does it say do not disclose your life and living. This was not a mistake Carl made with clients but one in which no suffered more than Carl and is wife.
Trust is a most wonderful thing, it is a gift that clients give us. As a matter of fact trust is only given never earned. It is something to be honored and protected, hence our need to be trustworthy. Since it is a streaming gift that clients gift to us, it can be damaged in an instant. these virtues previously listed and the duties of fiduciary are vehicles of cooperation in a society where we really need to rely on each other. Disclosure and transparency are what we are fighting for in Washington and the state capitols around the country. Carl, I believe was living up to a standard that we should respect and admire. He got in a bad situation, tried to deal with it alone and learned a great lesson. no client was injured but they have gained a planner with on of the most valuable assets we can have in a financial planner, life experience.
This is a great discussion as we learn day by day how to more effectively honor the gifts we are given and responsibility we carry. We all are human….our virtuous acts will lead us to our values, our humanity puts us all in the same boat. Who we are in front of our clients and who we are in our industry is the question of the day. I think Carl is an example of how we should act and hope disclosure and transparence are the necessary ingredients to honor the gifts we are given.
Nathan Gehring says
I suggest we explore this topic from a slightly different angle. Instead of trying to determine which is more important, ask which is more learnable.
In my mind, credibility and expertise are factors which are learned. We are not born nor raised as experts. Years of practice and study make us experts. Through work and time, we can increase our expertise and build our credibility.
Authenticity, on the other hand, is not something we can intentionally try to learn. Life experiences and time may make us more authentic, but it is not so simply learned as is expertise.
Carl may have undermined his credibility and expertise in the short-term. He can rebuild that. His authenticity has been clearly displayed, however. I’m certain he knew he’d be attacked as he has been. He knew there was risk. He told his story anyway and has increased his authenticity factor significantly.
I will always err on the side of authenticity in this equation. It may cause some harm, as clearly has happened in this case. But ultimately it is a good thing.
Yes, Carl’s story in such a public forum seems to have created a bit more ill-will toward planners. In the long run, I think it’s a good thing that people understand planners are not infallible, make financial mistakes themselves and need financial assistance like any other person.
Robert Schmansky says
I’m in the camp with Jason and hope to have a few thoughts on the NAPFA blog at Forbes; there are two things I would add:
1) I’m OK that Carl may make mistakes; I don’t even know what area he works in. I can relate to someone who may only work on one piece of the puzzle, and learns by experience about all how personal financial risk fits with investing like he mentions at the end of the piece that he now knows more about.
But, the idea of a ‘behvaior gap’ and the message of the drawings lend to this idea of Carl who acts differently than most consumers, so it’s fairly disappointing as someone who bought into his drawings to learn otherwise. That’s were both the credibility and authenticity come into question.
2) If you are an investment professional; I have a hard time understanding the behavior anyhow.
Imagine for a second if everyone felt the way Carl did about his obligations… would you, as an investment pro, recommend stocks? If I knew all of my neighbors acted like this, there would be severe economic and investing consequences. Our economy is based on lenders giving to people to buy, invest, build; with the understanding they will be paid back. That’s where growth starts.
Hindsight 20-20 maybe? But, the point is as an investment advisor it’s hard to think the idea that we don’t have an obligation to keep our side of the lending just rubs me a little wrong. It’s not a bank that’s being hurt, it’s real investors, savers, depositors, lenders, employees, ex-employees, etc.
I think it’s ashame, but I have a hard time seeing a benefit to publishing the story to the business of financial planning; you can feel glad he may have learned something (I don’t know I agree), but it’s not just ‘a bank’ that was hurt here. I met with two people last week who are skeptical of being burned… one likely is. I get why they feel that way. As someone who thinks Carl’s got an incredible opportunity to spread the message of planning, and sells it in his messages, I have a similar feeling.
“But, the idea of a ‘behavior gap’ and the message of the drawings lend to this idea of Carl who acts differently than most consumers, so it’s fairly disappointing as someone who bought into his drawings to learn otherwise. That’s were both the credibility and authenticity come into question.”
Assumptions built upon assumptions. One only has credibility and authenticity if they’ve never made a mistake? Your logic is questionable at best. Can someone who learns from their mistakes have more credibility than one who is in the enviable position of never having let emotions affect their decision-making? Don’t take it personally, just please clarify.
“Imagine for a second if everyone felt the way Carl did about his obligations”
Since you have shown you understand Carl so well thus far, please expound on how Carl feels about his obligations. If you are assuming once again that a short sale is an indication of how he feels about his obligations, then clearly you have no idea what you’re talking about. It is appalling to me that we are in a profession where objectivity is crucial but there is no hesitation to put people in a box without getting the whole story.
I get it that there are those in the public that might look at that story and generalize that all financial planners don’t have any credibility, but those same people felt that way before the article. Do we need to spend the time pontificating about the reasons people won’t seek out help?
Let’s stop pretending that infallibility is a prerequisite for being a good planner. Take mistakes for the experience they give us and use them to guide those we serve in a more productive manner.
Your call with Carl will hopefully be illuminating.
This isn’t a close call, in my view. Carl does the right thing by freely coming clean with a large financial mistake. I suspect no planner on the planet hasn’t made some financial blunders of their own and concealing them does nothing to elevate financial planning from a sales vocation to a profession.
I write the Irrational Investor for CBS MoneyWatch. What qualifies me to write about emotional investing mistakes is that I am human and possess all of those destructive emotions, which sometimes get the better of me. I bought gold during the last gold bubble and have written about the hard lesson I learned. Learning from those mistakes is key and Carl does a service to us all by talking about one of his mistakes.
Consumers should trust planners enough to listen but never so much that they will follow blindly.
Tim Maurer says
Thanks for your deft articulation of the “aftermath” of the article, Michael. A primary thought and a handful of relatively disjointed observations:
1) Authenticity is not separate from, but instead informs credibility. The highest level of credibility simply cannot be established without confirmation of authenticity. Few things better reveal authenticity than recognition of fault or error (the only absolutes in personal finance).
2) Any of us who put our hope in an advisor based on the preconception of his or her apparent perfection will eventually be disappointed.
3) The advisor who promotes an air of seeming infallibility will eventually be humbled.
4) Public comments are a breeding ground for adverse selection. People are much more likely to share their negative impressions than their positive for several reasons, most notably: the act of judgement of or condescension towards another temporarily silences our loudest shortcomings (I know this as a guilty party) AND people are more likely to condemn from a distance than “face-to-face.” While there has been a disproportionately negative response in public comments, I’ve heard the DIRECT response to Carl (via email and phone) has been overwhelmingly positive–like 100 to 1!
5) Anyone claiming Carl is bearing his soul and confessing his errors to the world to sell his upcoming book has virtually certified their own lack of credibility on the subject. Obviously they haven’t followed Carl or read much of his other work or, heaven forbid, sought to know him personally. If they had, they’d realize how silly their presupposition appears. (Plus, do you really think the New York Times would promote a publicity stunt?)
6) I wonder how many would step forward if, in order to condemn Carl for his action and inaction, a pre-requisite was established that one open his or her financial life for all the world to see…
7) (Finally…) The financial industry has long perpetuated an aura of intellectual superiority and condescension, if not omniscience and faultlessness. Of course, the joke is on us (I’m part of the industry too), because the rest of the public knows it’s all an act. But honesty is never bad for business, and any planners who think Carl’s willingness to acknowledge fault will hurt the industry are too far separated from those they serve to recognize people are more likely to follow the leader in the trenches than the one in the tower.
Robert Schmansky says
We can be civil and discuss if it was helpful or harmful on the public perception of planners without the insults. I’m not certain why we can’t have a dialogue without these barbs of perfectionism, not understanding clients, and so on.
Maybe your client base is completely different than mine, and I agree honesty is the best policy (though maybe not always for business), but to say that those who disagree with you are “separated from those [we] serve” by recognizing that there is a trust issue in the general public… unless you’re only meeting with other advisors, you should realize that there is in fact a trust issue with advisors in general and the public. Trust is hard to earn, easy to lose.
PS – I have a call with Carl to address another point here that no one is reaching out about it.
Marty Kurtz says
I believe trust can never be earned….only given freely as a gift! m
Tim Maurer says
No lack of civility was intended in my final point (but I’m flattered you read that far!). I was addressing an earlier comment in this thread: “To me the article was an apparent attempt to connect with the public, without regard for the impact on our profession…”
This is the out-of-touch-ness to which I’m referring… The whole notion that the profession is somehow more important than the public it serves (or that honesty is somehow subservient to public perception of the profession) bothers me.
And of course I agree with you that there is a trust issue between advisors in general and the public, but I believe that has become a reality because of a LACK of honesty, not too much of it.
Robert Schmansky says
That’s a great point about honesty Tim. Something for us bloggers to think about in our messages perhaps. Thanks, Rob
Tim Maurer says
Great point, Rob. I appreciate the dialog!
Regarding bullet #5:
Why do I need to know an author personally to share my opinion of his/her article?
How could knowing him imrpove my objectiveness?
Why is it so outrageous to believe the author considered the personal economic impact of the article?
Joe Pitzl says
In hindsight, we can all look back and say, “what an idiot!” In fact, Carl has done that himself, and he certainly doesn’t need our help to point that out.
We, as financial professionals, must acknowledge that we have an overwhelming tendency to obsess over our image. We obsess about the level of professionalism we exude in our dress, our behavior, and our outward image of success. As a byproduct of that, many of us are not authentic in the way we represent ourselves to our clients. In many cases, our industry convinces people to believe we are someone we are not…then we tell them to trust us because we are an objective professional sitting on the same side of the table as they are. I think our clients are smarter than that.
Our clients are human beings and they come to us because they recognize the complexity of money in their lives. Michael has pointed out to us here several examples of research that clearly outline that the top reason people do not work with financial advisors / planners is the fear of being judged. When they stop by our office for the first time, sit down in our stuffy conference rooms around a big table and we spend an hour ripping apart their existing situation in an attempt to get them to sign on with us, we completely ignore the fact that these people are doing their best. If it was easy, we wouldn’t have jobs!
Furthermore, if we portray an image of perfection and that financial decisions are so easy for us to execute, and that our personal situations are so clean, cut and dry, how can we possibly sit on the same side of the table, connect with them, and empathize as they struggle with the challenges they have with money? They may listen to the advice of a perfectionist, but you are kidding yourself if you believe you are connected with them in a meaningful way.
I suspect that most financial planners have not been through what Carl has, and a big part of that was the result of good planning and decision-making. But we have all made decisions that didn’t turn out as we had planned and ultimately cost us a lot more than we anticipated. What is wrong with admitting that? Life is messy. Money is messy. And just as two wrongs don’t make a right, two messy situations do not create a clean one!
The external forces surrounding money and the decisions we and our clients make is incredibly powerful. So powerful, in fact, that some of the most intelligent people that ever walked the Earth fell victim to it. Google Sir Isaac Newton, South Sea Bubble. Clearly not an idiot, just a human being that fell subject to the powers of a mania…
If research tells us that the biggest reason people do not come to us is the fear of being judged, yet we rush to judge one of our own for the mistakes he has made, are we helping our hurting our credibility?
Ron Rhoades says
Several thoughts …
I have myself made several financial blunders in my life … I hope these have inspired me to not be so judgmental about others who make financial mistakes (as Carl alludes to in his article). I applaud his courage. Yes, some clients may be turned off and depart Carl, as a result (and who would really want such persons as clients). But I suspect many others would be attracted to Carl, as a result, as his article speaks to our hearts as he reveals his love for his family, his dedication to “doing the right thing,” and the manner in which the experience has made him a better person.
Ernest Hemingway said, “Who would be interested in an old man who was a failure?” Some, when reading Carl’s tale, may possess such sentiments.
Yet I would hope that the better quote, and reflective of the sentiments of the vast majority of financial planners, arises from the late Steve Jobs: “I didn’t see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life … Sometimes life hits you in the head with a brick. Don’t lose faith. I’m convinced that the only thing that kept me going was that I loved what I did.”
So many of the greatest accomplishments of mankind were achieved by those who experienced an instance of failure, or poor judgment, and who then utilized such experience to propel them on.
In summary, one poor decision does not make a man or woman. Nor does it define a financial planner. Rather, used as a humbling and learning experience, it can make one a much better financial planner. Honesty about the experience of past failure, as Carl has demonstrated, is essential to the use of that event of failure to propel future success. From all I have seen, Carl is on that path to success, however success may be defined.
I appreciate Michael Kitces’ citation to the article and its equation on trust. I have a similar, but somewhat different, take on the subject. I have viewed the formation of trust as consisting of four essential elements. First, expert knowledge (credibility?). Second, complete candor and honesty authenticity?). Third, placing the clients’ best interests above your own, save the need for reasonable compensation (self-orientation?). Fourth, compassion/empathy (intimacy?).
I don’t view any one as more important than the other. The circumstances and/or type of client personality may dictate emphasis of one of these four traits over the others; but the absence of any one element would undermine trust, or not lead to the development of a relationship based upon trust.
Just my perspective … Thank you, Carl, and Michael, for stimulating such an interesting discussion. Ron
Chuck Rylant says
Michael, I appreciate your effort to be neutral in this article. The title suggests you can be either credible OR authentic. These are not mutually exclusive. Many have suggested that in order to be credible, an advisor has to be perfect. This is not true. To be credible, the client needs only believe the advisor can help the client, not that the advisor is perfect himself.
In the world of professional fighting, most top fighters have coaches who have never been top professional fighters. Does that mean that because the coaches were not fighters they cannot be great coaches? In fact, usually the best coaches are not very good fighters themselves. Very rarely do great fighters make great coaches. I suspect this is true among most athletes. Was Tiger Wood’s coach as good as Tiger?
To further the analogy, can an advisor with a $1 million net worth give good advice to a client with $5 million? How can someone who has only accumulated $1 million give good advice to someone who has accumulated $5 million? I hope I don’t have to explain my point.
Many in this industry believe financial advisors have secrets the public doesn’t know and those secrets are the value the advisor offers. These advisors focus excessively on the minutia of financial planning, tax, and estate planning. These same advisors believe clients care about credentials and designations. This is NOT correct and creates a disconnect between the advisor and client.
Clients care about two things.
1) Do they like and trust you
2) Can you help them accomplish their goals
It’s fine if advisors enjoy learning the minutia, but clients only care about themselves—as they should. They don’t care about the advisor, how much money he has, or how many letters are after his name. That is the reality of human behavior and wishing it weren’t true is ignorant.
Financial planning is very similar to the fitness business. Eat less, exercise more. Spend less, save more. It’s very simple. There are some technical aspects in both, but the majority of clients do not hire advisors for advice, but instead to guide behavior. Clients and advisors often need an objective third party to protect them from themselves.
Those who cite Carl’s article as a “blow to the credibility of financial planners” are making a weak stretch with those such as Madoff who have committed fraud and theft. Madoff stole peoples’ money, Carl allowed his emotions to drive his own money decisions and he shared about it. What better evidence to illustrate the need for financial planners? Unlike Madoff, Carl did nothing immoral, illegal or that hurt his clients.
Was the timing of Carl’s article a publicity stunt? Of course it was and congratulations to Carl for being smart. Without talking with Carl about it, he may have felt internal conflict about his mortgage and the publication of his book. At the same time, his publishing circle knew the publicity value of the story and encouraged him to release it. I suspect these two factors influenced Carl’s decision to go public with his private finances.
The timing of the story was wise and those who criticize this as a publicity stunt likely also do not believe in marketing or promotion. Many advisors wrongly believe that business goes to those who have the best product, are the smartest, have the most credentials or letters after their name. This is not how the market works.
Like it or not, people are driven by emotion and their decisions are not rational. That is why emotion driven marketing attracts clients more than credentials and designations. I noticed one advisor was disappointed that Carl received publicity for his “mistakes” while the other advisor who claimed to be “perfect” was not receiving any publicity. People do not connect with people who are perfect. Even superman had to have kryptonite before he became a hit. People want you to be human so they can relate to you.
I wonder if the majority of Carl’s criticism comes from people from my Grandparents generation. I’m 36 and there is a huge difference between how the generations prior to mine handle our skeletons in the closet. It seems that my Grandparents’ generation forbids discussing things that look bad. Today it seems more common to air dirty laundry rather than sweeping it under the rug and pretending it never happened.
That is a matter of preference, but I believe the openness is better for our society. Forty years ago, people did not discuss adultery, domestic violence, child abuse, drug addiction or financial problems. Today, these types of things are more in the open and thus there is more chance of solving them.
I will wrap up with the moral debate of paying the mortgage. Paying or not paying a mortgage should be a business and finance decision, which I think Carl addressed in his article. It is not a moral one. Choosing to walk away from a mortgage is best made with a logical perspective, not an emotional one.
The best discussion of this I’ve found is here: http://goo.gl/lxoEd. I assure you the people who sold the house and the mortgage and the companies that deice to foreclose on homes, make their decisions 100% based on business factors with absolutely no moral guidance. It would be a disservice to your clients for advisors to look mortgagees differently.
In summary, I applaud Carl for having the courage to open up publicly. His critics are likely jealous of his success or are living in a glass house. No one is perfect. It’s possible that some of his critics have their finances in “perfect” order now, but likely made many of mistakes in the past.
To those very, very few who have never made a single financial mistake, than I ask is the rest of your life in order. How is your health? Are you overweight? How is your relationship with your spouse, children, and grandchildren? Are you happy?
No one is perfect, and therefore, one should reevaluate his decision to publicly criticize another imperfect human—even if you disagree with his choice to share his private business publicly.
Michael Kitces says
As a quick note, the title is not meant to suggest that you can be credible OR authentic as though they’re mutually exclusive.
It simply asks the question “which is MORE important” – in other words, if you were put in a situation where increasing one could/would decrease the other (the dilemma of Carl’s story), which do you choose to elevate as most important, even at the cost of the other?
Chuck Rylant says
Fair reply Michael
Robert Schmansky says
Chuck, I respectfully disagree that one can not have a public opinion one clearly a topic that people have personal stakes in, namely public trust in planners.
There seems to be this ‘perfectionist’ strawman that people keep creating. I guarantee it’s led on this board and others to not wanting to voice an opinion; you can see that hesitancy in AJ’s post. It’s not a true statement, and as I said to Carl, part of his story I can relate to; so I’m clearly not your perfectionist.
There are parts I can’t though, and parts I consider if the contrast in the message of a behavior gap and the story isn’t more harmful than helpful. That’s the argument; not if it’s a right move to advise clients to walkaway (I have), or a comparison to a Ponzi artist. No need to continue to create arguments with people who aren’t posting that they are perfect, no one said those things.
Here’s an example I gave… I have a drawing of Carls – it is a box that say “how I view $”, and a circle that says “how you view $.”
What’s your take on that message? What if you bought into that message from a planner, only to find that maybe they were more of a circle than a square?
Like I said to Carl, I think he’s got a fantastic talent, message and platform. I would like to see it successful, but to say we all aren’t stakeholders in the public perception of planning and shouldn’t have an opinion is baseless. I think he’d agree that public perception is to be determined, though I understand there are many positive comments, and many negative ones. We can discuss it without the perfectionist dismissals.
Ron Rhoades says
A passing thought … How can we criticize someone for buying a home at inflated prices, if we did not ourselves sell our own homes due to the same inflated prices? Each decision has its risks and consequences. Given the regulatory/banking environment of the time, I find it difficult to criticize even the short sale … if I were in Carl’s shoes, would I have done differently? Or as well as he did?
Actual life experience can create credibility, even if the life experience involves what may be seen, in hindsight, as a “mistake” of judgment. As the Roman writer Virgil wrote: “Trust one who has gone through it.”
Nathan Gehring says
I’ve written it everywhere else, so might as well add it here.
Carl has offered us financial planners a remarkable opportunity. Every moment that I’ve been a part of this profession, I’ve been bothered by the “what is financial planning” question. Or as others like to characterize it, what is the value of financial planning?
Carl’s story, so publicly shared, allows us to explain that value in a way we may never have had the opportunity to do before! Financial planning is about making good financial decision. That’s it. All the other stuff is just mechanics and process and value add. We help people make good financial decisions…because that’s a DAMN hard thing to do on one’s own.
Carl, someone trained in financial matters, made some poor financial decisions. No question. Carl made those decisions on his own, without the help of a financial planner. He did not have someone who understood the behavioral nuances of financial decision-making to help him and guide him. All his training was useless once being human got in the way. He was not an impartial observer.
What Carl was missing as he made his decisions is Financial Planning. His training had given him the right answers, he knew them and even knew he wasn’t following them. He didn’t know how to act on them. Financial Planning is the art and science of making good financial decisions. Had he had a financial planner (under my definition) there to help him with those decisions, might they not have turned out differently?
What better story can we ask for than this when explaining the value of financial planning? This is why we do what we do…to help people make good financial decisions.
And that’s a damn noble and important and powerful thing to offer.
Carl Richards says
That is perfect! My naive hope was that by sharing my story it would help others. What I didn’t think about was what that it was a perfect case study on WHY everyone needs a planner!
I have hired one. I pay for his advice, and as a result I hope to avoid the types of mistakes I have made in the past that should seem so obvious to outside objective professional.
P.S. My email address for those that care to address this issue directly is carl[you know]thinkingcarl[dot]com
Nathan Gehring says
Interestingly, Carl, my question (what is financial planning) seems to be either an absolute taboo subject or entirely boring to everyone but me. I have gotten no response whatsoever to this question.
I’m a bit puzzled by it, after having so often heard planners struggle with the planning value proposition. Your story is such a clear example of why people need good financial planning. Yet nobody seems interested in that.
Brandon Moss says
Oh I’m INTERESTED…just took a bit to get back to you. You’re posts have been spot on. We have been working on our company the last 5 years to put our clients in the best position to make better financial decisions. The idea and concept of financial planning is really just a decision framework around trade-offs. The tools, deliverables, etc. are all interesting to us as planners, but at the end of the day our clients just want an honest conversation around “am I making the best decision”.
Robert Schmansky says
It’s taboo, we all practice financial planning (except when we don’t)… Third only to discussing compensation models and admitting we aren’t perfect financial machines 🙂
Tim Maurer says
Brandon Moss says
Great conversation. Full disclosure: I am a Carl supporter, my company is a Carl supporter and I applaud his courage at writing a polarizing piece.
What stands out to me is the level of conversation this has created. We need better conversations around money in America. That article created money conversations in a variety of ways. Advisors are talking, clients are talking, message boards are lighting up. The money conversation stood out this week and looks to be continuing.
If Carl had not had this conversation with his clients previously, I’m sure he’s having it now. And that’s a good thing. We seek to have Honest Conversations with our clients on more than just investments, but the entire money conversation. It is why we started our company and why we have been so wildly successful.
I can find investment “credibility” quite easily. And actually I can even find it free in some instances; it’s quite the commodity. Rarely can I find the authenticity I saw displayed in the New York Times, for all the world to judge.
Tom Davison says
One aspect Carl’s decision is the power of the belief in home value appreciation that was in the country at the time. From today’s perspective, it is quite different. Perhaps the most fascinating speaker at a recent conference was an economist who studies housing. Remember the mortgage debacle? What was the cause? Well, he and we can list perhaps two dozen key factors – including greedy brokers, faulty appraisals, mortgage bankers, AAA credit ratings, Alt-A loans, government action to extend home ownership to every citizen, and the list goes on. The economist’s conclusion: well above any of these was the common belief, held across the country, that houses appreciated rapidly and for a long time. And a widely held estimate of appreciation was in the 15 – 20% a year range. And there were decades of history to support that notion. In that context, what is the rational economic decision? Invest in housing, and as much as you can swing.
How many people actually called the collapse of the mortgage market (other than all the cab drivers I’ve ridden with)? Our world looks so different now, and it is hard to fully put ourselves in the context of the day Carl bought his house.
I feel as though I’m entering the lions den but as Brandon points out the discussions this article has generated have been good. Like politics, however, it is difficult to convince others your view has any redeeming qualities.
I don’t think the article has done harm to the financial planning field. Those that did not trust planners in general still don’t, so be it.
Reading the comments by Mr. Richards’ supporters I’m dismayed that they minimize the scope of his errors in judgment as “mistakes” and “stumbling” as if anyone who successfully navigated the real estate boom was just lucky.
A mistake was believing he could afford one price but paying much more. A mistake was financing 100% of the purchase price. A mistake was making a negative amortized payment. A mistake was spending recklessly.
Each one was a mistake but taken together they are inexcusable even if he had nothing to do with the financial industry at all.
No one I know of who has criticized the article or Mr. Richards expects anyone to be perfect. Saying otherwise is being dismissive of legitimate points.
As for Michael’s original question of credibility or authenticity, both are important as Michael makes clear in the post. The equation is interesting but I’m not sure I believe the point about the two balancing each other out. “As the trust formula shows, losing credibility does undermine our trustworthiness; at the same time, improving intimacy through authenticity clearly increases trust, too.”
The motive for the article plays a part in authenticity. I don’t see it raising his authenticity when it was written to sell books. I know some will point out that exposing these “mistakes” was not intended to sell books, would actually be bad for sales, but I have been in the news business too long to believe that. Any publicity is good publicity. How many requests for interviews has he gotten? How many people have mentioned his book, his article?
As I’ve pointed out elsewhere these poor decisions do not negate or diminish the power and effectiveness of Mr. Richards sketches. They are wonderful tools and have already done much good and will continue to do so.
As someone points out above (sorry I can’t find the reference) credibility can be rebuilt. I just don’t see it yet. By making a distinction between a moral obligation and a contractual obligation in the article, while technically and financially speaking, true, Mr. Richards is using a semantic loophole. To most people, contractual obligations are indeed moral obligations. Take the big corporations out of it and imagine I make a contract with you for landscape work. You pay me upfront and I don’t do the work. Is it alright because I don’t have a moral obligation just a contractual one?
Steve Smith says
Another great post, Michael.
One of the premises of this article is that credibility equates with expertise; in the sense that we advisors have some special gift obtained through education or experience that enables us to have forecasting abilities that our clients should rely on.
Examples:Is this or that sector of the market over or under valued? (Including of course, real estate, which caused all these problems only because millions of people believed it was undervalued. Otherwise we woudn’t have backed up the truck.)
True authenticity involves admitting to both ourselves and to our clients that we don’t have such expertise and if that’s among the key deliverables clients are expecting from us, they are looking for the wrong thing. The more an advisor claims to have such expertise the less authentic we are.
The most authentic thing I can say to clients is “I don’t know any more than you do” about lots of things and the only promise I am making is I will do the best I can to create an environment to help you make the best decisions possible under all this uncertainty.
Joseph Alotta says
I have been taking fitness classes at the gym for some time now. Last year they introduced a new lady instructor to us who was decidedly heavy. My first reaction was how can she teach fitness if she can’t do it herself. Well and behold, she was by far the best instructor and now a close friend of us all.
Michael Kitces says
I won’t deny that the overweight instructor can’t still be an effective fitness instructor. And of course, there is always the classic “those who can, do, and those who can’t, teach” – many of the world’s best coaches were never personally world class performers in the sport they coach.
But the point remains, as you noted here, that your first reaction was still negative. In some situations, we don’t get the benefit of the doubt and/or the opportunity to prove ourselves as your fitness instructor did. There’s plenty of research to show that first impressions and perceptions do matter for something.
Michael Kitces says
The CFP Board recent reported a spike in planners reporting bankruptcies, and pointed out that a planner facing bankruptcy without mitigating circumstances can actually result in revocation of the CFP marks. Article at: http://www.financial-planning.com/news/financial-advisors-bankruptcy-cfp-board-2675991-1.html
Do you disagree with the CFP Board’s policy? How material is the distinction between Carl’s short sale of his house, and declaring a full bankruptcy? Thoughts?
Steve Smith says
One obvious distinction between a bankruptcy and a short sale is that with a short sale the creditor is voluntarily relinquishing a claim against the debtor. In a bankruptcy, debts are discharged by federal law, presumably against the wishes of creditors.
Which raises the question as to whether Nevada is a deficiency state or not. Carl didn’t mention this in his piece. In a deficiency state, following foreclosure, the debtor remains liable for the difference between the amount due on the note and the amount obtained by the bank in the foreclosure sale. In a non-deficiency state, such as California, once the bank resorts to foreclosure, it is limmited in recovery to the amount the property sells for at auction. If the bank is the high bidder, it gets the property and that’s the end of it.
So, if Nevada is a non-deficiency state, if the bank received more in the short sale than it would have in a foreclosure, carl actually did them a favor.
Unless, of course, there is a moral obligation in a non-deficiency state to pay a deficiency, even if not required by law. 🙂
Joe Pitzl says
Not exactly the best timing in the world considering this thread, but if we are concerned about credibility, I submit this one is far more of a concern than Carl’s article: http://bit.ly/td6PBl
Michael Kitces says
So does that mean the only reason Carl’s CFP marks weren’t at risk for revocation was because he chose to finance his spending using non-recourse mortgage debt that limited his exposure to his own debts, instead of other forms of borrowing?
Robert Schmansky says
This is just another reason why it is a shame we’ve allowed our institutions to use bankruptcy as a means to harm an individuals earning potential.
There are plenty of other things we’d all like to know about people who we interact with and their private lives, and that we don’t… you don’t know if your doctor is abusing meds, you don’t know if your therapist has had a history of mental disorder.
It’s hypocritical to think financial mistakes are of so much more importance than others that we’ll crush that persons ability to fix their financial issues through public censure and restriction on the type of jobs they can have. We in the financial planning field should know better than other fields.
Sorry for the distraction. Carry on!
Michael Kitces says
On the other hand, a physician abusing prescription drugs (a more serious offense) really can lose their medical license, and I believe many states actually require psychiatrists to themselves had a therapy relationship for their own mental health (and aside from requirements, it’s widely considered best practices).
By comparison, the CFP Board requirement actually doesn’t seem THAT egregious to me. They’re not saying you lose your marks for making a bad investment, and even acknowledge there can be mitigating circumstances to bankruotcy. They’re talking about situations of gross financial mismanagement.
Meg Bartelt says
This reminds me of the discussion on this blog just a few days (weeks?) ago about the relative risk of “investing on margin” vs. “investing on mortgage.” Although not a direct answer to the question you raised in that blog post, the fact that declaring bankruptcy can result in losing one’s CFP(R) designation, when a guy who had to short-sell his house because he took too much equity out of it instead of taking a traditional loan does NOT lose his CFP designation … it certainly seems an argument in favor of “investing” (however broadly construed) on mortgage instead of margin. (Sorry for that run-on sentence.)
I imagine that’s what you have in mind, Michael, when you mention that Carl lived in a state with non-recourse mortgages.
Robert Schmansky says
Ok, I’ve got to defend my opinion now I suppose… perhaps not the best examples 🙂 I had an assistant who had a miscarriage that was eventually found to be due to over prescription of a drug the doc was found to be abusing himself. Did the client have access to his personal information to know that? No. Should they have? Perhaps; I don’t know. But, if that’s not serious enough to warrant further public disclosure, I don’t see how bankruptcy is. Let’s try another… How about the doctor who is an alcoholic? (Trying to avoid the overweight trainer for obvious reasons!)
You make the point financial irresponsibility isn’t cut and dry, and so the penalties here clearly becomes political based on facts and how someone else will interpret them. It’s not as clear as the doctor abusing; there is no way the CFP Board has enough time for each planner to cover their full financial life story to determine that one is in the public interest to penalize, one is not. I think we assume bankruptcy is an extreme case of mismanagement of finances, or one bad investment, though I doubt many are. Extremes could be penalized; but how does it protect the public from an irresponsible planner when someone in Carl’s same situation, different state, no friends / family to bail out, may lose credibility / even a job, when someone else can get by? If the goal supposedly is public protection, why is one and not the other a public threat? One just had more options than the other to avoid going bankrupt. But, the assumption is the bankrupt one acted foolishly, while the other is fine. It doesn’t measure anything.
Assuming in those cases the ‘lesser’ public censure is used, well, many advisors would use that in a competitive situation, again we’re attacking the income potential of someone who may be in need of income by making that info more public. Bankruptcy is hard enough on the individual to have to deal with the personal penalties; IMHO a public professional flogging isn’t useful. If we say it protects the public, let’s ask the public who work with advisors who have gone through it what they think. I doubt those working with good planners agree.
Michael Kitces says
I think you’re still implying the point here – you wish that doctor DID have to disclose the prescription drug abuse that was occurring. It was unfortunate it wasn’t discovered earlier, and it lead to problematic client outcomes.
“Fortunately” for the CFP Board, there ARE some public ways that they can be aware there are potential problems: they require you to disclose if there has been a bankruptcy. Is that a perfect measure of whether someone is mismanaging financially? NO. Which is why the CFP Board does NOT automatically revoke marks for any bankruptcy. Instead, they gather further information about the situation, and make a decision based on the facts and circumstances of the situation.
I’m not sure what more you can ask? Is it a perfect model? No, probably not. Should we choose not to oversee professionals in any manner because we can’t do it in a manner that can’t produce the exact outcome you believe is correct in 100% of all possible instances? No, I don’t think that makes sense, either. In point of fact, examining potential misdeeds and making a judgment call about consequences based on the facts and circumstances of the case is what our entire legal is based upon. Of course, the CFP Board only has jurisdiction as far as their marks, but they ARE entitled to oversee their marks in a manner they see fit!
And frankly, while most of the comments here have defended Carl’s actions, I’ve seen almost no one respond to or acknowledge the fact that the PUBLIC’S comments and feedback to the article on message forums and boards have been OVERWHELMINGLY negative. “We” seem very willing to forgive “one of our own” – for some good reasons – but the public comments are remarkably clear in implying that the CFP Board is right, and that when personal financial problems of a planner are too severe, the planner loses credibility in the eyes of the public.
Fern Alix LaRocca CFP EA says
Yes, we are all more forgiving to each other than the public is mainly due to our strong position that we want the public’s trust. Let’s face it. Trust has gone out the window (Madoff,etc) People want perfection but they aren’t going to find it (I applaud Carl for his honesty even though it is obviously trying to sell his book).
We need a new mantra. One that says-hey, we aren’t perfect but we have the skills and resources to help you. We need to partner with our clients on this financial planning journey and empower them to make the right decisions. It’s a very complex financial world now and many advisors can’t keep up (I am sure there are many Carls out there) and that is why so many are specializing and the comprehensive financial plan is going by the wayside.
We need to bring back the message that this is a long term journey and there are no get rich quick investments out there and financial professionals can be fiduciaries and work together with clients.
-Fern Alix LaRocca CFP EA
Nathan Gehring says
Despite my belief that planners are equally adept at making terrible financial decisions as any other person, I actually agree with the board’s position on this, at least in theory. They should discourage planners putting themselves in dire financial circumstances.
Financial stressors (e.g. contemplating bankruptcy) are accompanied with powerful emotions. Powerful emotions lead to further poor decisions. Put yourself in Carl’s shoes while he and his wife are trying to decide how to proceed…how easy might it be to consider fudging billing or churn a client account or sell an inappropriate product for a higher commission. Critical decision-making skills are impaired at this point. The potential for errors, conflicted recommendations or downright fraud are exponentially increased.
As CFPs, we should be trying to eliminate these types of factors in our lives. Not because we _will_ hurt our clients, but because it increases the chance we might harm them.
The question then becomes, should the board punish those who have filed bankruptcy after the fact? It does nothing to protect that planner’s clients any longer. But is that punishment great enough disincentive for others to get themselves in those circumstances to make the harm that comes to the punished planner worthwhile?
If the CFP Board really wants to push this matter, it would make sense for them to require practicing CFPs to engage a planner for themselves. Require that every CFP have an objective set of eyes on their personal finances to help eliminate the likelihood of some financial stressors being created.
Mike Anderson says
I am not going to dig into the greater philosophical issues here as it has been done already by folks far more eloquent. I do want to highlight as someone who lived in a “hot zone” (Miami) during that time, that I could have had close to the same outcome (as a planner) as Carl. I purchased a home for $300k in early 2004 (approximately $100k more than the build price in 2001). I watched the home escalate in value to $515k by 2006. I decided to leave S. Florida and ended up selling my home for $400k in summer of 2007 (dropping fast). Now the same home sells for about $210k. So am I any smarter than Carl? NO! I just got lucky. Probably the only thing I did differently and maybe a bit “smarter” then Carl was I took out a fixed rate loan in 2004 with the intention to stay. i could have made the payments but I would have been “stuck”. And I can’t tell you how “easy” it was to move onward and upwards with increased opportunities for financing. I avoided it because I didn’t need it, but it sure would have been nice to have a “better” house.
Bottom line, I applaud Carl for a bold and wonderful article that has created the most controversy and engagement among the planning community in years. Also, I am not sure if I consider the arm chair internet trolls that comment directly on the articles at the NYTimes a prospect base. I find consistently the comments are negative for most articles. Its easy to “know everything” when you speak from the world of anonymity.
Allan Roth says
I picked up on your Carl Richards piece and linked to your discussion board. I confessed my sins as well:
Avoid these three money mistakes: Financial planner Allan Roth reveals his worst money mistakes and explains how you can profit from his losses:
Alan Moore says
I believe the money scripts that cause financial planners to be offended by Carl’s admittance of failure are the same scripts that cause financial planners to not hire their own planners. They seem to think that we must be perfect in order to do our job. The fact is, we are all human. We all succumb to our emotions at times.
I contend that I would never go to a financial planner that won’t admit their own financial mistakes and can articulate what they learned from those experiences. If they can’t (or won’t) admit failures, then they either have no life experience, are liars, or totally disconnected from reality. Either way, that’s not the type of planner I want for myself.
Pedro Piloto says
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