Executive Summary
Some financial planners consider budgeting and cash flow the cornerstone of a client's financial plan; for others, the focus is on long-term planning, and they let client cash flow sort itself out. In many situations, planners seem to be uncomfortable in giving spending guidance to clients; as the saying goes, "It's their money; who am I to tell them how to spend it?" Yet at the same time, most would probably agree that clients can't just save their way out of their fiscal woes; you only free up money to save by first determining what to NOT spend it on.
So does that mean in the end, planners can't have a broader impact until they are more active in helping clients actually set spending policies?
The inspiration for today's blog post comes from a recent conversation I had with someone about how financial planning can expand its reach and relevance, and why it is that folks like Suze Orman command such an incredible audience relative to the reach of the typical financial planner. As I've noted before in this blog, is there something we can/should be learning from so-called "personal finance celebrities" like Suze Orman, Dave Ramsey, and others?
For instance, I find it notable that Suze Orman's most popular segments is "Can I Afford It?" where callers share their financial situation and something they want to spend money on, and Suze flat out tells them if they may or may not buy it! What kind of person wants to go on public television to have Suze Orman yell at them about their spending habits? Well, apparently quite a few, given the popularity of the segment!
Even more significant is the fact that so many viewers tune in to watch this! Obviously, the advice isn't necessarily directed at them - since it wasn't their call-in question or spending item - but I think ultimately many viewers find deep personal relevance to the segment, because as Orman talks through why someone can or cannot afford their desired item, she shares with everyone a process to determine what is reasonable spending.
And that seems to be something we generally lack in both our general financial education, and in the services we often deliver as financial planners. What guidance do we provide about how much an individual should spend on a car relative to their income or wealth? Or on a home entertainment system? Or the latest computers and gadgets? I can already hear some of you now - "but it's their money, it's not my role to tell them what they can or cannot spend it on!" - but are we sure that's not our role? After all, THESE are the real money decisions people have to make in the real world from day to day; if we refuse to provide guidance to clients on this, do we make ourselves less relevant? Is that why financial celebrities like Suze Orman, Dave Ramsey, and others sell more books and have more viewers tuning in than the cumulative number of clients that all CFP certificants serve in the entire country?
In addition, it's worth noting that while Orman tells people what they can and cannot spend on, it's ultimately not about judging their spending itself; just whether they can afford it. As the segment itself proclaims, "[Suze's] not going to judge, just look at your numbers and give you her stamp of approval... or denial." It's all about spending relative to income, and spending on a particular item relative to the rest of the individual's spending needs. Why can't financial planners deliver a similar value? And again, given the astounding number of viewers/readers/followers Orman and others similar to her have... does that mean our clients might actually be craving this guidance, and we're ignoring their needs?
So what do you think? What role should planners have in providing spending advice to clients? Should planners develop a standardized set of guidelines that tell clients what portion of income can be reasonably allocated to various types of expenses, and what is too much? Is it possible do give spending guidance that is relevant and definitive, yet not judgmental?
Tom says
Like the thoughts, Michael. One of Dave & Suze’s luxuries is that they are usually (except in the case of on-air callers) yelling at a mass audience. Dave beats people up with ‘idiot’, ‘moron’, and ‘stupid’. That’s the secret to his motivation–inflicting verbal pain and emotional painful word pictures (normal is broke, etc.). People will avoid pain before pursuing pleasure or gain.
However, if you or I started calling our clients these names in an animated way as Dave does, we’d lose clients. Dave speaks to a mass audience who doesn’t take it personally. Our clients would take it very personally in one-on-one meetings.
That said, we go thru purpose-driven finances (building a budget according to what’s important to you) with our clients, and help them get set up on Quicken to track spending more easily. We talk about areas for improvement, but they still need to make the choice.
I recommend holding client and/or prospect seminars where you can be more ‘blunt’ like Dave to discuss budgeting (since you’re talking to a mass audience). I have a purpose-driven finances seminar I created for churches and colleges that allows me to be more forceful in discussing how to appropriately budget (give, save, spend).
Michael Kitces says
Tom,
Thanks for sharing. This is a really interesting perspective, and I hadn’t thought about it this way.
To what extent do we make it harder to give clients the advice/prescriptions they need BECAUSE we have deep, personal, one-on-one relationships with them (which makes it hard to be stern with them when necessary).
On the other hand, the role of a parent is to be stern and deliver authority when needed, while still providing love and support as well. Is there a way for planners to serve both roles in a similar manner?
– Michael
I believe our role is to ensure client’s understand the consequences of their spending choices, not to dictate those choices.
With that said. I also believe it is our job to help people understand when a choice change is due to an impulse desire versus a value change.
David, well said I couldn’t agree more.
Interesting points Michael and something I’ve been thinking about a great deal. One fact is that many “planners” are simply investment advisors and don’t spend any time on cash flow issues.
Putting the case of those non-planners aside, the other fact is that NOBODY likes being told what to do. While it makes for good TV (lots of people like watching one person tell another what to do) the reality of it all is that most of Suze’s or Dave’s targets only take a small part of the “advice” that is directed to them. That won’t work with a client that is spending hundreds or thousands of dollars with a financial planner.
While I won’t tell a client what choices to make, much of my job is to help them make better ones every day. That’s why most of our work is “education” rather than “advice.” It doesn’t make for very good television – but it does work to actually make a difference in peoples’ lives.
John,
Interesting thoughts.
Certainly, relative to the total number of people who see Orman, Ramsey, etc., clearly only a portion of the listeners/viewers take the advice.
On the other hand, we also see that even with full financial planners, it’s a constant struggle to get clients to implement properly and effectively.
I actually wonder if we will ever get a chance to measure what the implementation/utilization rate really is. We’ve assumed that a lot of people just watch the shows and don’t take the advice, but I don’t necessarily KNOW what the implementation rate is. I wonder if it could be better than we realize? Just food for thought…
– Michael
Michael,
These celebrities are first and foremost entertainers. I once watched Cramer dent a can of Spam on his head on camera.
Second, their clients do not have much money. So if you want $10,000
investment accounts, you can go after them.
Sincerely,
Joe.
Joe,
Just because many of their viewers don’t have huge investment accounts, doesn’t mean that we couldn’t learn something from them about how to deliver value.
That aside, I strongly suspect that you will find a number of more affluent viewers watching them as well, which means there’s something relevant there that spans wealth.
Respectfully,
– Michael
Not sure that we can play the parent role very successfully with clients…maybe with a small minority. What we’re talking about here is financial counseling, which is different than financial planning (though often important for the planner to have skills in this area). In a counseling relationship, counselors do some education, but they also try to bring the client around to see for themselves that their behaviors are harmful. They do this by asking provoking questions, sometimes blunt, sometimes very open-ended. example: Last year you made X and you saved Y. Are you comfortable with this level of savings? Do you believe you will reach your goals with this level? What would happen if you continued saving this amount for the remainder of your working years? How important is it to reach ___ goal? Is it more important than ___(expenditure)? if you had to cut back on expenses to save more money to reach your goal, where would you start? Are there any other areas? If you had to increase your income in order to save more, how would you do it? Are you willing to work more years in order to reach your goal? How many more? What if your body doesn’t hold up well with age? Etc etc
Just food for thought, but I think the client needs to feel like they came to the answer on their own (so they ‘own’ it). Education is great, but ownership is key to implementation.
Michael, Great post as always. One big differential here is the “watching a train wreck” aspect of a Orman, or Ramsey. Viewers usually know whether they really, or really can’t afford to buy something, but they love to watch the drama of someone else’s situation unfold on TV. Suze and Dave don’t care if they annoy the caller because they have half a million other folks watching with interest and that leads to revenue. That’s different then telling a client point blank that they can or cannot afford something. The only monetary value here is the fee they are paying me, offend them and you can say bye bye to the fee. Its better to approach this very tactfully with real live paying clients….
Mike
Michael,
Great topic and great comments from the topic. One way I have thought about implementing this concept is with debt. Many people looked to banks to tell them how much house they could afford. For a long time, bankers did a good job of this asking people to only spend 25% of their gross income on their mortgage and 36% on fixed expenses. Then bankers realized that they could make more money by giving mortgages to more people and changed the measures to over 50% of income. Financial planners could have helped to moderate those excesses by having a point of view.
If we are looking for guidance on the standards that could be set we could consider the Bureau of Labor Statistics consumer spending reports. The reports tell you what consumers do spend money on. Financial planners could opine on whether consumers spend the right percentages in the right areas and use one or both percentages to influence client spending. For instance, when I compared my spending to the averages, I found I was saving more and spending more on going out to eat. I decided to continue saving more and to reduce the amount I went out to eat. The spending is not a guide necessarily but a data point to consider.
John
I think the willingness to let the planner into the grond level budgeting is a big step for many clients. Money is such a taboo subject, and noone wants to get called on the carpet for their cable bill, or Starbucks habit.
I tell clients I will provide a forecast of their future based on savings of “X”, if they want to increase “X” they can work on their budget. Should they decide to reduce Starbucks, etc, we will have a bigger “X” I’m not sure now if this is my reluctance to get that deep into their lives, or their issues with me being there. Good question!
Josh
Michael – excellent insight to call our attention to this topic!
Another aspect of the “can I buy/do this” is the sometimes chasm that exists between the general information we share with clients about their financial situation/spending and the immediacy and saliency of the decision they are trying to make. Personally, I’m sitting at my computer looking at beach houses I might rent for a week this summer. There are many that meet my general criteria. I know full well what the financial consequences of my choice, but I’m having a hard time deciding on one that costs $X and one that costs $2X. Both are completely affordable, but the primary considerations are more the concerns of how it might make different family members react. The point of this example is that there are so often non-monetary considerations that are potent that clients need help with.
A different example is purchase of a major item – an expensive car, or the topper – a new house. Houses seem like one of the most emotionally driven decisions people make, and it is really easy to overspend. And part of it is truly that people can’t see the financial implications of a house. Very difficult cognitive activity. How can you intuit the consequences of a 30 year mortgage obligation, the added costs of lawn care, oh yes, the occasional and regular maintence, … Takes remarkable insight on the financial front, and by the way, people can’t do compound interest in their heads. Can I make a down payment – that’s a question I can understand. And where did the housing crisis come from?
So, for a variety of reasons, ranging from social, to personal emotional, and ability to apply what a client knows in general about financial situation to any specific instance, spending decisions can be/should be difficult.
And to add to this there’s another factor for financial planners to watch out for – we live in this world, and may have worked out so many decisions like this for ourselves and clients that we’re far more skilled in translating the big picture of a person’s finance into a specific decision than the clients are. We may do that translation easily as we have so much practice at this sometimes difficult decision, so we don’t sense cognitive strain, therefore naturally feeling that the clients can equally easily figure it out.
Human decision making in the real world is hard. Kahneman’s book Thinking, Fast and Slow is 500 pages, not 5.
Almost all of our clients’ financial decisions (spending decisions, in particular) are made outside of our offices when we are not around. Unfortunately, most people – regardless of wealth / income levels – simply do not have the proper context or patience to figure it out at the time the decision is being made.
Guiding spending decisions and behavior is not about telling them yes or no. It is about helping people design a frame of reference they can use to make these ongoing decisions on the fly. This may simply require a little conversation and context with some, but for others, it may require something more hands-on…an automated bucket system, an envelope system, use of cash instead of cards, physically cutting up cards…there is a lot of room for creativity here.
The draw to Ramsey / Orman is simplicity and clarity. Anyone can understand what they are saying and they have a clear path from A to B. While we can’t hold their hand, we can help them think more clearly and/or help them create a system that will simplify the decision points in their day to day life.
I think a household budget is fundamental to good planning, those who are clueless where the money went are most likely to need our help. One good tactic is to discuss statistical norms on spending for food, clothes, travel, etc. to let the client judge for themselves when they can and can’t afford something. Sometimes we need to be more direct. I’m reminded of what Chris Hogan said during training (for D.Ramsey counseling) “we are not called to be comfortable, we are called to be effective!”. I find it very rewarding to help people change courses, but as others noted this is financial counseling – not wealth management for HNW clients. Great topic Michael