Executive Summary
Financial planning is full of complex decisions. From handling the nuances of Social Security planning (e.g., whether part-time income may trigger the Earnings Test, or whether past non-FICA earnings could trigger the Windfall Elimination Provision), to navigating the complex set of rules tied to retirement accounts (e.g., how to delay RMDs from a traditional IRA, or the rules for when and how to make a backdoor Roth contribution), the reality is that it can be challenging to remember how all of the many different components of financial planning might interact with each other when making recommendations to clients. Yet managing this complexity is crucial for financial advisors, as the failure to do so can lead to both omissions (e.g., a key rule that gets missed) and errors (e.g., failing to recognize the full breadth of issues that had to be considered in the first place).
Fortunately, checklists are a proven method for helping professionals manage such complexity. As highlighted in his famous book “The Checklist Manifesto”, author (and doctor) Atul Gawande illustrates that one of the easiest ways to handle the daunting complexity that face professionals today is simply to create a checklist of the key steps that must be taken, or the key factors that must be considered. In fact, checklists have been widely adopted and demonstrated to be successful in avoiding errors in many professions, including both airline pilots and surgeons. One limitation of checklists is that many people prefer to learn visually, though, which in turn has led to the adoption of flowcharts in professions such as computer programming, where the purpose of the flowchart is largely similar to a checklist (e.g., to help ensure quality control for complex processes that require consistent outcomes), but to do so more visually than a bullet-point checklist.
Yet despite the effectiveness of both checklists and flowcharts, the reality is that one of the biggest barriers to adopting the use of such tools is creating the tools themselves, as it is both time consuming, and can take considerable knowledge to develop these tools in the first place. To address the challenge, we’re excited to announce the launch of fpPathfinder, a new business specifically created to provide checklists and flowcharts for financial advisors, to use either internally in their own practices when evaluating client scenarios and formulating recommendations with clients, or directly with clients as a way to illustrate and explain key financial planning concepts and decisions.
As a starting point, fpPathfinder is offering a “Retirement Planning Essentials” package of visual flowcharts that can be used to cover key retirement planning issues, from eligibility to make tax-deductible IRA contributions and take tax-free Roth distributions, to the specialized claiming rules for Social Security benefits for divorcees or surviving spouses, the rules for delaying RMDs from a traditional IRA, and the rules for when and how to make a backdoor Roth contribution. Over time, fpPathfinder plans to launch additional flowcharts covering both retirement planning and other topics, as well as a complementary set of checklists for common planning scenarios, a voting system for members to express interest in what flowcharts to create next, and the opportunity for advisors to white-label the flowcharts with their own name and brand. Ultimately, fpPathfinder hopes to be a valuable resource for helping financial advisors adopt the checklist and flowchart processes common among other professions – as a means to both help advisors avoid errors and omissions, and to elevate the value of services that advisors provide to their clients!
Professional Complexity And Minimizing Errors & Omissions
Financial planning, like most professions that provide some kind of advice to clients, is complex. Not only is there a sheerly immense amount of information to learn in order to craft technically accurate and appropriate advice recommendations to clients in the first place – the CFP Board lists 72 different Principal Knowledge Topics to be mastered in order to fulfill the education requirement for CFP certification – but it’s even more challenging to remember how all these different components might interact with each other as a part of someone’s financial world.
For instance, when it comes to Social Security alone, it’s straightforward to identify the client’s projected benefits (on their Social Security statement), and there are many calculator tools to help evaluate the prospective benefits of delaying Social Security. But how often does the advisor also remember to verify that the client doesn’t have too much in part-time earnings in retirement to trigger the Earnings Test for those under full retirement age? Or remember to ask the client if they were previously married to a spouse for at least 10 years, such that there could be an ex-spouse’s spousal or survival benefit? Or ask if the client had a prior (or current) job where he/she did not participate in the Social Security system (which can trigger the Windfall Elimination Provision)? Or consider the sequence of return risk impact on the portfolio by taking higher withdrawals in the early years while delaying Social Security?
These challenges – writ large across a wide range of financial planning scenarios for clients – lead to two types of core concerns. The first is that, in the process of trying to consider all the issues, there’s an omission: a key rule that gets missed, perhaps something that is uncommon and only comes up rarely, but happened to matter in this particular client scenario. The second is that the advisor simply makes an error, as the sheer amount of complexity causes some particular interaction effect to be missed, by failing to recognize the full breadth of issues that had to be considered in the first place. We have the knowledge, but fail to apply it correctly.
Thus why most professionals (including financial advisors) end up buying Errors and Omissions insurance, specifically to help insure against the consequences of those mistakes, whether driven by ignorance or ineptitude.
Ideally, the advisor is simply diligent enough to have studied and learned all the relevant issues, the potential interaction effects, and has the skillset to readily recall all of the key information at the exact time it’s needed.
Unfortunately, though, the reality is that few professionals are perfect all the time. In one study conducted in Australia, 400 mystery shoppers met and became clients of financial advisors, and in the process evaluated seven different client-experience categories (communication, compliance, quality of advice, understanding / needs analysis, referability, emotive reaction, the environment). The “Understanding” scores were relatively high (ranging from 75.2 to 85.4) suggesting that the advisors consistently did a good job understanding the client needs. But the advisors’ ability to satisfy the need with a quality solution or strategy scored between 58.5 - 72.2. In other words, the advisors came up with a substantial range of different (and varying quality) solutions and recommendations to the exact same client situation and needs.
And beyond the range of mastery of the relevant financial planning knowledge from one professional to the next, the reality is that sometimes we get tired, or distracted, or clients don’t present all of the relevant information we needed to know (and we don’t realize the unasked question that needed to be asked)… or we simply forget an esoteric rule in a situation that doesn’t often come up.
As a result, while studying extensively and gaining experience as a professional – e.g., by earning CFP certification – is a crucial first step in becoming professionally diligent to minimize the risk of errors or omissions for clients, it’s rarely sufficient to prevent all the potential errors and omissions and lead to consistent quality advice.
Financial Planning Checklists And Flowcharts To Ensure Diligent Advice
As highlighted in his famous book “The Checklist Manifesto”, author (and doctor) Atul Gawande illustrates that one of the easiest ways to handle the daunting complexity that face professionals today is simply to create a checklist of the key steps that must be taken, or the key factors that must be considered.
One of the first groups of professionals to employ checklists were airline pilots. Because, as the pilots discovered when testing “next generation” bombers in the years leading up to World War II, airplanes had already become so much more complex than the first generation of simple gliders and propeller planes flown by the Wright brothers, that even experienced pilots couldn’t always remember the proper steps to take, especially in the heat of the moment – leading the first test of the Boeing B-17 bomber to result in a fiery crash due to pilot error (where the pilot was the Air Corps’ highly experienced Chief of Flight Testing!). Yet ultimately, a subsequent 1.8 million flight miles occurred in the B-17 bomber without a single crash… once a series of simple checklists (no more than a dozen or two items at a time for the pilot and co-pilot to review together) were created for takeoff, flight, landing, and taxiing.
Similarly, an experiment with checklists in the medical context was conducted at Johns Hopkins in 2001, and later expanded into an even larger multi-hospital experiment, where Dr. Peter Pronovost created a simple checklist to help reduce the frequency of infections when inserting a central line (a large 12-inch catheter inserted into the jugular vein in the neck to administer major medical interventions like chemotherapy, kidney dialysis, or long-term antibiotics). Pronovost created a simple 5-item checklist for the doctors: 1) wash hands with soap; 2) clean patient’s skin; 3) place sterile drapes; 4) wear sterile mask/hat/gown/gloves; and 5) put a sterile dressing over the site once the catheter is inserted. All were steps that doctors already knew, and had long since been trained to do. Nonetheless, once the initiative was rolled out, and anyone/everyone on the team was endowed with the authority to ensure the checklist was followed (and call out the doctors for not following it), the 3-month infection rate fell literally to zero. Just by having a simple checklist to ensure the key items were always, consistently followed.
The key point is that checklists don’t need to be terribly complex to reduce the frequency of adverse outcomes in complex situations. They’re not necessarily intended to cover every possible situation – as the edges of complexity are still where professional expertise reigns – but instead to ensure that the core essential steps that at least cover the overwhelming majority of cases are applied consistently. And the professional is at least prompted to spot where there may be an issue that in turn merits further diligence.
On the other hand, one key challenge of checklists is simply that approximately 65% of the population are visual learners, who need to see what they’re learning or are supposed to do in order to fully assimilate the information. As the saying goes, “a picture is worth 1,000 words”.
Accordingly, in professions like engineering and computer programming, it is more common to use flowcharts as a way to sort through and evaluate the key information in a process. The basic concept remains the same – the flowchart serves as a means to ensure that all the steps of a process are properly considered and followed, in the proper sequence, without skipping any key steps that could lead to the wrong outcome. And can be especially effective because the visual nature of the flowcharts allows small, lesser known rules to place just as much “weight” as the other rules, since it clearly shows all the relevant options to consider at each decision point. In fact, one of the earliest uses of flowcharts was specifically to help ensure quality control for complex processes that required consistent outcomes.
Introducing fpPathfinder For Financial Planning Flowcharts and Checklists
Several years ago on this blog, I made the case that it was time for financial planners to adopt checklist as a way to improve the consistency (and therefore the overall quality) of financial planning advice. The more comprehensive financial planning becomes, the more complex it also becomes, and the greater the risk that even a well-trained and well-intentioned advisor fails to identify and spot every possible planning issue, opportunity, or concern from memory alone. And as Gawande illustrates in his book, checklists (and flowcharts) help to reduce this risk and better ensure a consistently diligent planning process.
Notably, though, such tools aren’t just a means to have simpler navigation of complex processes, and as a way to ensure that a financial planning situation is thoroughly researched and considered from all angles. Instead, financial planning flowcharts and checklists have a number of important uses, including:
- Client educational tool: Clients can benefit from checklists, and especially visual flowcharts, just as much as a planner. Much of what individuals hear and learn from the mass media related to financial planning is incomplete, and does not fully capture the complexity of the financial planning process. It can be overwhelming for clients, leading them to make a bad decision because they did not invest the time or energy to learn everything they needed to about the issue. Flowcharts in particular provide an alternative method of presenting that information, in a way that allows the client to quickly and easily understand the scope of the issue, and the advisor can walk them step by step through the key decisions that must be made along the way.
- Respond to client questions faster: Some of the best opportunities to create value for clients comes from quickly addressing their challenges in times of need – the unscheduled client call with what “should” be a simple and straightforward planning question that has important consequences. But if the planner is preoccupied or distracted, he/she may not give the most thorough answer, or not remember to ask the appropriate probing questions. At best, this could lead to the planner needing to do more research before calling back with answers (which takes a lot of time). At worst, the planner could give improper advice off the cuff that could actually harm the client (either through error or omission). Checklists or flowcharts readily available as a desk reference for the planner ensures that all the major decision points and issues have been addressed right there on the spot, saving time for the advisor, and getting the client the answer they wanted quickly.
- Show actual complexity: Sometimes clients may be unaware of the extent of how complicated financial planning decisions can really be. Flowcharts in particular can be used to more effectively frame the depth and complexity of a conversation. A good example deals with the issues related to eligibility and timing for claiming Social Security. It is especially important to show and consider the number of less-common-but-extremely-important rules and exceptions that must be considered before claiming, such as the Earnings Test, deemed filings, the Windfall Elimination Provision, and the Government Pension Offset rules. From a client’s perspective, this can give them confidence knowing that their planner is thoroughly covering all the issues.
- Uncover more planning opportunities. There are times when planners may not connect the dots between two seemingly separate planning issues. In reality, many planning issues are interconnected, and advice in one area can open advice discussions in other areas. For example, a planner could use a flowchart as a guide to remember possible IRMAA penalties before doing a Roth conversion, and a discussion about the taxability of Social Security benefits could lead to a discussion about changing a municipal bond portfolio because its income is still included in Social Security provisional income for tax purposes.
- Quick introduction to a new concept. Using a checklist or flowchart prior to doing research on a financial planning issue is akin to providing a 10,000 foot overview. It doesn’t provide all the detailed knowledge, but it quickly gets the planner to hone in on the major issues that affect the client issue they are working on. From there, the planner can jump into other resources to clarify or deepen his/her understanding.
- Avoid careless errors. In some cases, planners run the risk of making a mistake. They may misremember one of the steps in a Roth conversion, or don’t think through a Backdoor Roth contribution correctly, leading to a slew of subsequent problems for the client. Perhaps it could be as simple as a careless error, or perhaps it’s caused by a planner who was unqualified to give the advice on a specific topic and didn’t take enough time to (re-)research the issue first. While no tool can prevent those problems from happening 100% of the time, a series of easy to use checklists can drastically reduce the likelihood of those mistakes happening.
- Remember old / odd rules: There are many cases when financial planners are simply rusty on certain rules, or the nuances associated with those rules. Rules around IRA contribution amounts and contribution limits are often a sticking point for many planners, because the numbers change (i.e., are inflation-adjusted) almost every year.
- Multi-Advisor Quality Control. In his “Checklist Manifesto” book, Gawande references a finding that doctors and nurses make a mistake 1% of the time. But what’s surprising is that doctors and nurses do so much every day, that a 1% error rate translates to about 2 mistakes per day, with potentially fatal consequences for patients. Applying that finding to financial services, planners can use simple tools like checklists and flowcharts to improve the quality of advice and client outcomes across their entire practice, especially when multiple (especially newer associate) advisors are involved, ensuring that they make fewer mistakes (and making the compliance and legal departments happier!).
- Study tool: For students and new planners working toward their CFP certification, checklists and especially visual flowcharts can be useful study tools to help make a concept “stick” and easy to recall. What makes flowcharts particularly interesting is how the CFP Board exam tends to test not just on the rules, but on the exceptions to the rules (often using “tricky” questions). In these cases, flowcharts excel due to their ability to illustrate not just the rules, but the nuances and exceptions associated with the rules, in a visual format most conducive to the majority of the population who are visual learners.
- Quick reference: Instead of cracking open a voluminous reference guide, or trying to verify the most accurate rules online, it can be easy enough to have a series of fast reference checklists or flowcharts within arms reach.
Given all these opportunities and uses, we’re excited to announce the launch of fpPathfinder, a new business specifically created to provide checklists and flowcharts for financial advisors, to use either internally in their own practices when evaluating client scenarios and formulating recommendations with clients, or directly with clients as a way to illustrate and explain key concepts, or simply walk through the decision-making process and the key choices and issues to consider with the client.
As a starting point, we’re offering a “Retirement Planning Essentials” package of visual flowcharts that can be used to cover key retirement planning issues, from eligibility to make tax-deductible IRA contributions or take tax-free Roth distributions, to the specialized claiming rules for Social Security benefits for divorcees or surviving spouses, delaying RMDs from a traditional IRA, or the rules for when and how to make a backdoor Roth contribution.
Over time, we plan to launch an ever-wider range of flowcharts (both within and beyond retirement planning), a complementary set of checklists for common planning scenarios, a voting system for members to choose which flowcharts or checklists they’d like to see next, and the opportunity to white-label the flowcharts and checklists with your own name and your firm’s logo (in a range of color choices).
Because again, as the Checklist Manifesto, and the entire history of flowcharts and checklists have shown, even diligent professionals can benefit from simple tools to help ensure they’re giving the right recommendations to the clients they serve! And fpPathfinder aims to fill that void when it comes to helping financial planners better serve their clients!
(Disclosure: Michael Kitces is a co-founder of fpPathfinder.)
So what do you think? Do you use checklists or flowcharts in your practice? Can flowcharts help with client education? What flowcharts would you find most useful? Please share your thoughts in the comments below!
