Articles About General Financial Planning

A fundamental aspect of financial planning is to help clients achieve their goals... yet the unfortunate reality is that some clients have difficulty even identifying productive goals in the first place. And for some, even upon achieving their goals, they find the outcome unsatisfying, resulting in a new, greater goal of "more" in a never-ending cycle. To say the least, many clients find that setting and achieving their goals does not result in the happiness they anticipated.

In this guest post, Dutch financial planner Ronald Sier shares some insights about the latest research on money and happiness from Elizabeth Dunn and Michael Norton, Sonya Lyubomirsky, and more, who have found that in fact there really are some ways to buy happiness... or at least, ways that money can be spent that is more likely to result in happier outcomes, from spending on experiences (rather than stuff), spending on others (not yourself), spending money to "buy" time, or directly spending to many small pleasures rather than a few big ones.

While many financial planners question whether it's appropriate for an advisor to "tell their clients how to spend their own money" the research suggests that some financial planner wisdom could go a long way in helping clients to really derive a bit more happiness from their money. And of course, the guidance is equally relevant to advisors who may be looking for a little more happiness around their own money, too!

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If clients could simply accomplish everything they wanted, at once, with the resources they had, financial planning would be unnecessary. It would simply be a world of instant gratification, as needs were satisfied on demand. Of course, in the real world, we can't simply have anything/everything we want whenever we want. Resources are limited, and as a result financial planning is essentially about trade-offs. We must prioritize which goals are most important to achieve, and allocate resources to them, recognizing that this means money may not be left to satisfy other goals (or wants or desires). Thus, in practice we might say that the essence of financial planning is to help clients prioritize trade-offs, and decide what goals will be satisfied first (and which will be second, and which won't be done until third, etc.).

However, in financial planning we have a problematic tendency to just "dump" a long list of recommendations on clients, with either an implicit expectation that they will implement everything, or with a series of priorities that the advisor (not the client) establishes as "the expert" as being most important. Yet behavioral research suggests that this can be daunting, overwhelming, or sheerly unmotivating for clients. In an effort to be comprehensive, protect ourselves from liability, and demonstrate the thoroughness of our expertise, we may be getting clients stuck into an analysis-paralysis paradox of choices, or worse simply overwhelming them into inaction.

Ultimately, the key may not merely be to give clients a comprehensive list of recommendations, or to tell them what steps they should take next, but instead to help them make the choice of what's most important to them and then hold them accountable to follow through on it. Accordingly, the ideal "Action Items" list for clients shouldn't just delineate everything the planner recommends in order, but be offered to clients with a series of blanks where they can fill in what's most important to them, what they will commit to do, and when. The goal is not to get everything done immediately, but instead to begin a process of incrementally getting a little done between (or at) each meeting, until the entire financial plan is finally implemented (and of course, by then it will be time update, change, and adapt accordingly in a continuous planning process!)!
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Working with grieving clients is a difficult challenge for many planners; most people simply do not have very much experience working with others who are grieving, and the uncertainty about what to say or do - or not say or do for fear of offending - leads many to avoid such potentially awkward situations altogether. Yet the reality is that experiencing loss, and grieving for it, is a fact of life, especially when we recognize that the kinds of "loss" triggering grief can encompass a wide range of circumstances, from the death of loved ones to a loss of role or routine to an outright material loss of money or even home.

Fortunately, though, a recent new book entitled "No Longer Awkward: Communicating with Clients Through the Toughest Times of Life" helps to provide guidance in navigating these difficult issues. Written by Amy Florian, who is herself an expert on grief, both academically (with 30 years of experience, she holds a Master's degree and is a Fellow in Thanatology) and sadly personally (as several decades ago a sudden car accident left her a 25-year-old widow with a 7-month-old son), the book provides guidance on exactly what to say (and not to say) in grief situations, and a wide range of templates and resources as well.

Simply put, "No Longer Awkward" may quickly become the definitive handbook for advisors on how to comfortably handle those uncommon-but-frequent-enough grief situations with clients.

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Earlier this year, former LA Times journalist Helaine Olen - who was responsible for their popular Money Makeover series for many years - published a controversial new book entitled "Pound Foolish: Exposing The Dark Side Of The Personal Finance Industry." In the book, Olen tears apart most of the personal finance industry - tracing it from the roots of Sylvia Porter to Jane Bryant Quinn to today's world from Suze Orman and David Bach to Jim Cramer, the MoneyShow, and Robert Kiyosaki's "Rich Dad" series, and showing along the way how the conflicts of interest rife in the industry serve to undermine much of the value personal finance is purported to give.

Although Olen also shines a harsh light on many segments of the financial advisor space as well, the most notable part of the book is not merely that so much of the financial services world is conflicted and acts in its own interests at the expense of consumers, but that the underlying implication that the problems of most Americans are a result of their poor spending habits and failure to get financially educated may be placing too much blame on consumers and too much of an expectation on even the best that personal finance has to offer. Instead, Olen suggests that many of these issues must be viewed in a broader social light, where the struggle of bringing financial planning to the masses may be less about the problems of our industry business models and more about the fact that what financial planning has to offer simply isn't enough to rectify the real world challenges the average American faces.

The kinds of government safety net and paternalistic solutions implied by such concerns are likely unappealing to many planners, but Olen's book is nonetheless a worthwhile read for some fresh perspective on the intersection between what personal finance and financial planning have to offer, and the limits on what they can achieve without perhaps some social and economic reform and government oversight and assistance.

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Getting a handle on client expenses is often difficult - and only exacerbated by the fact that most people don't exactly enjoy the budgeting process. Nonetheless, failing to accurately estimate ongoing expenses makes it almost impossible to plan. While in many situations, it's possible to get a reasonable estimate of spending by looking at ongoing household expenses, the reality is that many people have large expenses that occur irregularly throughout the year - or even interspersed across several years - and as a result, "just" focusing on recurring monthly expenses can lead to a significant underestimate of true spending.

The end result is that a lot of clients and planners may systematically underestimate spending by failing to fully take into account large irregular expenses, such that there is never as much money left at the end of the year to save as originally anticipated. Some planners adjust for this by trying to estimate every expense and convert it into a monthly amount, just to get a more accurate estimate of ongoing spending; others simply try to estimate the amounts of irregular expenses and when they might occur, and project accordingly. So how do you handle irregular expenses?Read More...

The ongoing low interest rate environment in the US has created many challenges in recent years, as the struggle to find yield and return drives planners and investors away from bonds and towards other options for higher returns, from equities to so-called "alternative" asset classes - in turn driving up those prices and reducing dividend yields and prospective future appreciation. Nonetheless, many returns on alternatives are still appealing given an alternative of near-zero interest rates on fixed income! Yet the reality is that low interest rates, as they continue to persist, are beginning to have other effects beyond just the impact to investors. Insurance companies have been forced to raise prices on some types of insurance, or leave the marketplace entirely, as the returns are simply too low to manage risk and generate a reasonable profit. Pension plans continue a slow grind of underperforming their long-term actuarial assumptions, creating a larger and larger deficit that must ultimately be resolved as well. And while many planners have been trying to focus their clients on the risks of what happens to bonds if rates rise, recent research suggests that in fact the greatest surprise of the coming decade could be that rates continue to remain low as the US economy deals with its massive public and private debt levels - which in turn means many of these low interest rate challenges could still be in the early phase!Read More...

While most aspects of the financial planning update are getting easier, especially as account aggregation software becomes more prevalent - allowing the planner to automatically get regular updates from all client financial accounts, including those not under the planner's direct investment purview - the value of real estate continues to be a sticking point for many planning firms. How do you update the client's net worth statement without slowing the process down by waiting for the client to provide an estimate? Will the client's estimate really even be accurate, anyway? And the process can be even more problematic for firms that set fees based not on assets under management but net worth. How do you get a fair estimate of the value of property that relies on the client when the client's fee is impacted by that estimate? In an increasingly technology-driven world, there's now an answer: with real estate valuation services on the web, like Zillow.

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Determining a client's risk tolerance is a standard requirement in financial services, both as a matter of best practices, and regulatory minimums. In recent years, though, advisors have increasingly leaned towards doing the minimum required to assess client risk tolerance, due to the frustration that client risk tolerance itself has varied wildly through the bull and bear market cycles of recent years. However, a new study out using FinaMetrica risk tolerance data from before and after the global financial crisis joins a growing body of research suggesting that in reality, client risk tolerance is actually remarkably stable, and that what's changing through market cycles is not the client's risk tolerance, but instead risk perceptions. The significant implications of the research are that planners struggling with unstable client investment behaviors around risk  - e.g., buying more in bull markets and selling out in market declines - may actually need to focus more on managing risk perceptions, rather than blaming the instability of client risk tolerance.Read More...

What is the value of financial planning? What do you get from it? What does it really do for you? Historically, the profession has tended to answer these questions with explanations like "financial planning brings you peace of mind" and "financial planning gets you on track for retirement [or other] goals."

The problem is that these results are intangible and long-term, which makes them hard to define clearly and difficult to be held accountable to over a relevant time period. In fact, arguably one of the greatest challenges for the advancement of financial planning is our inability to clearly explain the value proposition and what clients will get out of it.

So what's the solution? Financial planning needs to redefine itself from long-term intangibles to short-term tangible results; after all, clients who can really see that the outcome of the planning experience has benefited them become true advocates of our services, and build the habits that ultimately lead to long-term success! Which in turn raises the question: what are some short-term tangible results we can establish to better demonstrate the value of financial planning?

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Making decisions about trade-offs that only have distant, future ramifications, and deal in abstract projections can be difficult for clients. Yet while we can always revisit decisions as time passes, the reality remains that in order to establish a plan in the first plan, we need to assess such uncertainties and make some initial decision. Would you rather have a plan that has a little risk of spending cuts and a high probability of excess wealth, or a plan with lots of risk of spending cuts that is less likely to leave over wealth you failed to use during your lifetime, none of which will be relevant for years to come? How do you weigh the risk of spending cuts against terminal wealth, or the volatility of a portfolio against the future impact it may have on spending?

Recent research suggests a new way to evaluate these problems, adopting utility functions that have been applied elsewhere in economics to the financial planning world, and opening up a new body of research in the process. While we may still have a ways to go before utility functions become commonplace in planning, this may be an early glimpse at the future of how we craft recommendations for clients... at least, if we can overcome some hefty hurdles, first.Read More...