Nerd's Eye View blog

Ten Planning Conversations To Help Clients Now During the COVID-19 Pandemic

March 25, 2020 12:04 pm 7 Comments CATEGORY: Client Trust & Communication

With a market decline of nearly 30% in just a few weeks as the coronavirus pandemic expands and amidst eye-popping daily market volatility, most financial advisors today are simply trying to help clients to remain calm, stay the course, and not engage in panic-selling. As while it’s relatively ‘easy’ to keep clients focused on the long-term and to stick to their established plans when their retirement accounts are marching steadily higher, it’s a different story when a major disruption occurs. Yet, in practice, following the advice to “do nothing” in the face of historic volatility is challenging, as it’s human nature to want to do something – whether to fight or flee – in the face of a dangerous threat.

However, just because advisors may be guiding clients to “do nothing” when it comes to selling out of their portfolio, it doesn’t mean that nothing can be done. Instead, recent market volatility does present a number of other financial and tax planning opportunities, from the more ‘obvious’ topics, like rebalancing and tax-loss harvesting, to other potentially necessary adjustments, and even opportunities, that might not be readily apparent mid-crisis.

As a starting point, advisors should re-run clients’ retirement projections, which could mean communicating some not-so-pleasant news (such as having to adjust the plans they’ve made for their retirements and/or even their current lifestyle). But knowing whether their path has changed (or in some cases, not!), and by how much the plan will need to be adjusted (often far less than what clients fear) will go a long way towards mitigating their current stress levels.

Advisors can also help clients effectively adjust their budgets as needed. While many have likely already changed some of their spending habits (if only because they are constrained by social distancing from many of their usual activities), some will need to make longer-term adjustments. And while severe (but shorter-term) spending restrictions might seem like the immediate 'best' option to follow, oftentimes smaller (but permanent) cuts can be far easier to adapt to (and can actually be more effective in the long run!).

From another budgeting perspective, making contingency plans for next-in-line sources of cash, should a client deplete their emergency fund, is an important step. While such an event may not seem very likely at the moment, game planning for such an event can at least provide peace of mind, especially since some of those options (such as using a home as a source of funds) take time to secure.

Other potential planning opportunities include reducing loan payments to lenders making special accommodations for those affected by COVID-19, using the once-in-a-lifetime option to transfer funds out of an IRA and into an HSA, fixing “asset-location” problems that have (up to this point) been impractical from a tax perspective, and reviewing (and maybe revising) healthcare proxies, living wills, and advance directives to account for current travel restrictions and the healthcare implications, should a client contract COVID-19.

Ultimately, the key point is that financial advisors are uniquely positioned to help clients – almost all of whom are under an unusually high amount of stress at the moment – by making mid-course adjustments to their plans, staying focused on the bigger picture, creating contingency plans, and generally providing them with some peace of mind in these highly uncertain times. And more generally, doing something – with respect to the financial plan – can help clients feel like they are more in control (even as advisors guide clients not to panic-sell from their portfolios). As with everything, this too shall pass, but the important thing is for clients to take steps to control those things that are in their power to control.

#FASuccess Ep 169: Combatting Advisory Fee Compression By Unbundling Investment Management And Financial Planning Fees With Alexandra Levi

March 24, 2020 07:07 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 169th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Alexandra Levi. Alex is the Founder and Managing Partner of Element Financial Group, a hybrid RIA with the Commonwealth platform that oversees nearly $430 million of assets under advisement for 170 clients. What's unique about Alex, though, is that, with a firm providing both investment management and financial planning services, she, in fact, has been able to grow her revenue to be almost fifty-fifty between the two with a $4,000 to $11,000 a year annual retainer fee for financial planning. And that she did so specifically as a strategy to combat the risk of fee compression by more clearly and separately articulating the value and the price of each service.

In this episode, we talk in-depth about Alex's approach to financial planning and how she prices it with her clients. The way she does a demo of the eMoney advisor’s dashboard in her prospect meetings with potential clients to show them the way she'll keep their lives organized on an ongoing basis. The way Alex shortened the upfront financial planning process with clients to just two meetings but then conducts ongoing quarterly meetings with all clients in recognition that financial planning is much more about the ongoing planning process than the upfront plan itself.

And how, thanks to technology, Alex's quarterly meetings with her clients have increasingly become virtual while leveraging video conferencing software, but how the reduction in physical in-person meetings hasn't impeded her retention rate that remains in the high 90% range for her multi-thousand dollar a year annual retainer fee.

We also talk about Alex's journey through the advisory business itself. Why she chose to start out her career working for a major mutual life insurance firm instead of a wirehouse. The reason she ultimately decided to make a pivot to the independent broker-dealer channel for back-office compliance and other infrastructure that a broker-dealer can provide. Why she hired an independent recruiter to help her find the right BD to work with. About the partnership she almost entered into with another advisory firm for support but had to bail out of at the last minute. And the way she eventually found her ideal business partner, so she didn't have to be a lone wolf responsible for everything and not feel so alone in building her now jointly-owned advisory business.

And be certain to listen to the end, where Alex shares her perspective on why she thinks time in the business is such a major determinant of success. Why it's so crucial to be proactive about networking early – and always – in an advisory career. And why she views the entrepreneurial opportunity of owning and building your own advisory business to be especially appealing for women who want to control the direction and duration of their careers.

Pivoting Quickly To A “Work From Home” Model: What Advisory Firms Need To Know

March 23, 2020 07:01 am 2 Comments CATEGORY: Practice Management

With the coronavirus pandemic triggering widespread quarantines and social distancing, many advisory firms are implementing measures to set up their operations as a Work-From-Home (WFH) environment. While this allows everyone in the business to do their part preventing the spread of disease, it also poses challenges for these firms of simply staying operational and providing seamless customer service.

In this guest post from Matt Sonnen, CEO of PFI Advisors (a consulting firm that helps financial advisors build more impactful and profitable enterprises), Matt explains that in times of crisis such as the one we are currently facing, firms that switch to a WFH model have important decisions to make as they transition their employees and infrastructure to a new and unfamiliar way of doing business. For financial advisors, in particular, compliance plays a big role when implementing new technology solutions; specifically, firms need to ensure that client data remains safe and uncompromised (whether that be accomplished through a Virtual Private Network (VPN) or secure internet connections), and that all employees understand and follow safe cybersecurity guidelines.

From a Human Resources perspective, firms may need to provide employees who work from home with more flexible hours, as it can be challenging for some to balance personal and work responsibilities in a home setting (e.g., children or other dependents also staying home who may distract parents from working during normal business hours). Yet, at the same time, it is also very important for advisors to practice good leadership skills by communicating clear and specific expectations for all team members, making sure that everyone knows (or can quickly learn) how to function smoothly as a WFH team.

For financial advisors, business infrastructure considerations include not only the standard business tools such as computers, phone systems, and communication protocols, but also some RIA-specific requirements, such as custodial interactions; processes around performance reporting, trading, and rebalancing; and CRM and financial planning tools.

Ultimately, the key point is that, even though there are many considerations to make when transitioning to a WFH model, the flexibility granted to employees and technology tools available can make it a very practical move allowing for firms to continue operations and to provide excellent client service with minimal downtime. In these times when social distancing is crucial to mitigate the impact of coronavirus, the WFH model not only provides employees with the autonomy to continue working as a team while helping them to stay healthy, it also provides the firm with a good opportunity to ‘test’ the soundness of their business continuity plan and to identify ways to improve upon business operations once things begin to recover and go back to normal.

Weekend Reading for Financial Planners (Mar 21-22)

March 20, 2020 02:48 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the Federal government is officially moving the tax filing deadline from April 15th to July 15th, not only allowing tax payments to be deferred but the entire tax filing process (though it remains to be seen whether/how states will follow suit as well, and those seeking tax refunds to get cash in their pockets now will likely still want to file as soon as possible!).

Also in the news this week is discussion that the U.S. is considering whether to issue 50-year(!) government bonds to finance the looming coronavirus economic stimulus package to take advantage of ultra-low interest rates, and that the economic stimulus package may also include a provision allowing the U.S. Treasury to provide a backstop guarantee to money market funds to prevent the risk of recreating a repeat of the panic run on (institutional) money market funds that happened during the 2008 financial crisis.

From there, we have a number of articles about investor behavior during the current market volatility (and how advisors can help), including a look at the data showing that in reality most investors do not panic sell (but the few that do can be especially poor under-performers as a result), how your brain reacts emotionally to market volatility in a form of fight-or-flight response (for which rational explanations of markets don't necessarily help), and some tips on how to reassure clients during these volatile times (and even remind them that you're available to help their friends and family who may be in search of a financial advisor to help them through the volatility, too).

We also have a few articles on the emerging practice management implications of the recent market decline, including why advisory firms that didn't run 'healthy' 20%+ profit margins may now face forced layoffs to right their expenses relative to their revenue and the fees they charge, how market volatility and potential layoffs may at least create an opportunity for firms to refocus themselves for the future, and why the recent market decline may not necessarily tank the valuations for advisory firms that want to sell (at least, as long as the seller is willing to bear more of the risk by making a portion of their price contingent on the market recovery that's anticipated in the coming years).

We wrap up with three interesting articles, all around the theme of dealing with our own thoughts and personal disruptions caused by coronavirus: the first provides tips about how to get comfortable and find more 'calm' in the face of a pandemic that may feel particularly challenging to fight (given that it's an enemy we can't see, and one that forces us to socially distance and isolate when, as human beings, we tend to come together in times of stress); the second provides a powerful reminder that it's "not crazy" to be fearful of covid-19 and to be thinking about the potentially challenging long-term implications, and the importance of finding others who share (or at least are willing to listen to and hear) your concerns to talk them out; and the last provides an uplifting reminder that the wave of meetings, events, and activities now being cancelled is unexpectedly presenting us all with a "gift of time"... raising the question of what those "if I had more time I'd get around to it" activities and goals we'll all be able to take up, now that the time is being forced on us anyway?

Enjoy the 'light' reading!

Kitces & Carl Ep 30: Conveying Rational Overconfidence In Talking To Clients About Coronavirus Fears

March 19, 2020 07:08 am 3 Comments CATEGORY: Kitces & Carl Podcast

As financial advisors everywhere are fielding phone calls, emails, and meeting requests from clients who are stressed out about the current global economic and health crisis, and also (understandably) about the safety of their retirement accounts, advisors are once again in the position of conveying confidence and reassuring their clients that the best course of action, as history has proved itself time and time again, is to stay the course and stick to their financial plans. But given the seemingly unprecedented nature of the coronavirus pandemic, how can advisors convince their clients to stay the course if they themselves have their own (natural) nagging doubts and concerns, not only for their clients, but for the viability of their own businesses, and whether the coronavirus pandemic really will be resolved in a timely manner and not compound into something even worse?

In our 30th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards talk about their experiences in dealing with past bear markets and financial crises, and that no matter how different these events have started out in the beginning (with each event’s seemingly ‘unprecedented’ nature at the outset) or how destructive the events may have been as they ran their course, history has consistently repeated itself with respect to how these events have always ended: they eventually wind down and pass, things regrow, and life returns to normal. Yet, even so, especially in times of crises, it is sometimes impossible for individuals – even for financial advisors themselves – to be 100% confident that, even in the end, things will turn out okay.

In other words, it is normal for even advisors to experience at least some small level of doubt and fear about our now-more-uncertain future; yet, even so, we persevere through that doubt and continue to reassure clients that things will ultimately be okay, trusting in the likelihood of a good outcome (based on the weight of historical evidence) much more than the fear of a bad outcome.

This practice of ‘rational overconfidence’ – being perhaps a little “overconfident” based on the available facts and still-limited historical data, but rationally so as a way to be a leader for our clients – is often best, simply because for unprecedented events, there usually is no truly feasible alternative plan other than staying the course, which makes the original plan (based on research using 95+ years of stock market data) the most logical (or “only” viable) course of action.

Which means that while it may not actually be possible to completely quell the doubts we as advisors may still have about future uncertainty, it doesn’t have to stop us from trying to convey confidence to clients to help them stay the course, and recognizing that often doing so is still better than any other potential alternative. In fact, asking questions such as, “How frequently in the history of modern markets, has that [alternative] solution ever really made sense? And would it really make sense to forsake the original financial plan, which can involve a whole restructuring of goals and long-term assumptions, for something that makes sense for probably just a fleeting moment in history?” can help both advisors and clients re-focus and dampen some of the alarm.

Ultimately, though, the key point is that advisors are just as prone to fear and doubts as their clients, and it is perfectly normal and okay to have those feelings of fear and doubt in the face of such uncertainty. More importantly, it is critical for advisors to acknowledge those doubts, to give them space as valid concerns, and to understand that while doubts are a natural human response to uncertainty, advisors can (and should) practice some level of “rational overconfidence” with their clients. Because in the end, clients rely on their advisors to be a confident leader during difficult times!

Self-Care And Self-Compassion In Times Of Financial Stress And Anxiety

March 18, 2020 07:54 am 3 Comments CATEGORY: Planning Profession

In these stressful times, as we deal with fears arising from the coronavirus pandemic and market volatility, many financial advisors are being inundated by scared and panicking clients worried about how their assets (and financial goals and futures) will fare. And while advisors have a responsibility to try to calm their clients and talk them off the ledge of these scary market conditions, advisors have their own health and emotional well-being to care for, as well. Because in times like these, clients who are worried about the resources that advisors may be managing for them often take their fear and anxiety out on their advisor, despite the advisor’s best efforts and intentions to help them weather the storm. And for advisors who deal with fearful, stressed-out clients day after day, meeting after meeting, the emotional toll that they experience can itself be traumatizing and, without taking time for self-care, can have serious adverse effects on the advisor’s own physical and emotional well-being.

As while clients may experience stress from painful events they experience directly (i.e., “Direct” trauma-related stress), advisors are more prone to “Indirect” trauma-related stress when dealing with so many of the same client fears and concerns (not to mention the direct trauma-related stress of what the market decline may be doing to the advisor’s own business). After all, when advisors take on one fearful client conversation after another, it’s often difficult not to start internalizing their clients’ concerns, whether in the form of “vicarious traumatization” (when the advisor begins to identify with the client’s concerns personally as if those concerns were actually their own), or through “compassion fatigue” (when the advisor begins to personally experience the emotional pain and suffering that they perceive the client is actually experiencing).

And unless the stress is somehow dealt with, a range of adverse symptoms can result – from physical changes to emotional, behavioral, and relationship changes. On top of being harmful to the advisor themselves, this stress can also have an adverse effect on the client relationship, because if left untreated, prolonged stress can result in an individual isolating themselves to avoid relationships (and the stress they’re inducing). Which in turn can halt the communication process between the advisor and client, ultimately leading to the client straying from their financial plan and even leaving the advisor altogether.

An effective remedy to cope with traumatic stressors is to practice self-care through self-compassion, which is a person’s ability to comfort and soothe themselves. Research has shown that self-compassion, unlike self-esteem, has been a key factor for individuals to motivate themselves through pain, failure, and feelings of inadequacy. Some simple suggestions to practice self-care include protecting personal time and setting hard boundaries on when to start and stop work, to communicate those time boundaries to others, and to create short ‘white space’ breaks throughout the day to mentally recharge. Additionally, meeting with clients outside the office can create a change of scenery and avoid an environment (e.g., the advisor’s office) that might trigger a stressful response, reducing (or stopping) the amount of news watched or listened to, and working collaboratively with a partner or in teams to share the load of client meetings that may be potentially emotionally charged.

Ultimately, the key point is that for financial advisors whose clients are currently experiencing high levels of fear and anxiety due to the current market environment, the stress of dealing with those traumatized clients can elicit severe trauma-related stress for advisors, and the symptoms of that stress, without proper care, can ultimately compromise the advisor’s ability to communicate effectively with their clients. Accordingly, advisors should practice self-care and self-compassion so that they can continue helping their clients stay the course of their financial plans, and without themselves suffering from the adverse effects of vicarious traumatization or compassion fatigue.

#FASuccess Ep 168: Building An Advisory Firm That Can Be Sold Even When Your Name Is Still On The Door, with Erin Botsford

March 17, 2020 07:16 am 4 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 168th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Erin Botsford. Erin is the founder of Botsford Financial Group, a hybrid RIA with the LPL platform that oversees nearly $1 billion in assets under management with offices in Dallas and Atlanta. What's unique about Erin, though, is the way she built and evolved her firm over the years, from being entirely centered around herself as the lead advisor, to the end where even still having her name on the door of the firm, Botsford Financial Group, presented no impediment at all to her selling the firm and transitioning the clients. Because in the end, it's far more about the mentality of the founder to build the business beyond themselves than how they happen to name the firm.

In this episode, we talk in-depth about how Erin built her advisory firm over the past 30 years, the transformation she went through after spending the first 10 years of her career working hard to grow to $300,000 in gross revenue and then, after a breakthrough coaching session, made a deliberate shift to transition herself from lead advisor of the firm to being rainmaker and CEO instead, and nearly 10X’ed the growth of the firm in barely three years. How Erin developed herself into a lead rainmaker role for the firm after self-admittedly not being a natural business developer and the way that Erin balanced letting go of being the lead in client relationships but still maintaining vigilant oversight of the firm and know that the work was being done properly for clients.

We also talk about how Erin actually shifted control of client relationships and execution of the firm, the three-meeting approach she used to transition clients, next-generation advisors who would manage the relationship in the future, the after-action meetings that Erin conducted with her advisors after the client meetings to instill lessons about how to better manage those relationships, and the steps that she took to initially institutionalize all the firm's processes and procedures as someone who isn't naturally inclined towards writing out her own processes and procedures.

And be certain to listen to the end where Erin shares why she ultimately decided to sell her advisory firm, the reason she felt drawn back to the advisor industry to teach other advisors how she built her firm by tying it to one of her charitable passions, and the way that Erin came to embrace the radical authenticity approach that she now takes in everything she does after a breakthrough meeting early with a client whose child was suffering through a terrible accident similar to something Erin herself went through as a teenager.

The Smaller AND Bigger AND Better Trends In The Business Of Financial Advice: Why I Chose Buckingham

March 16, 2020 07:40 am 4 Comments CATEGORY: Nerd's Eye View

Over the past decade the ongoing evolution of technology, from the rise of robo-advisor platforms to the broader reach of the internet and its ability for APIs to connect “everything”, has spawned both changes to advisor business models, (proposed) major shifts in regulation, and an entire wave of systemic changes to the financial planning landscape.

The end result of this overall industry evolution is a growing pressure on financial advisors to “step up” and add more value for clients, leading to the launch and growth of our own Nerd’s Eye View blog focused in Advancing Knowledge in Financial Planning, and over the years increasingly shared an ever-widening range of actionable insights with our community of financial advisors around broader industry trends (and what that means for both their clients and their careers).

Along the way, I’ve also become a ‘serial entrepreneur’, trying to leverage those industry insights to (proverbially) skate not to where the puck is but to where it’s going, and have co-founded and/or grown several business to not only take advantage of those emerging opportunities, but to (hopefully) help nudge the industry along, with an eye towards forever expanding our reach and impact to help more advisors and their clients by enabling real financial advisors to better hone their craft to become better and more successful.

Accordingly, I announced last week that, after 17 years, I was leaving from Pinnacle Advisory Group to go to Buckingham Wealth Partners, one of the few independent ‘mega-RIAs’ with nearly $50 billion of assets under management and advisement, that offers both wealth management services to consumers and a TAMP and other outsourced investment services for other RIAs. Which, in turn, has raised several questions around why I chose to change firms at this juncture, particularly to a “mega-RIA”, and what my move says about where I see the next batch of opportunities for our industry.

Specifically, I believe there are three broad trends that will determine the next stages in the evolution of financial planning the years ahead. First is that technology and so-called “Turnkey Advice And Planning Platforms” will allow “smaller” advisors to better compete with “large” firms by not only giving them the tools and capacity to provide the same level of service to their clients, but by facilitating new and more focused business models that larger firms can’t easily replicate (into increasingly focused niches and specializations), thus making financial advice available to more people than ever before. At the same time, the emergence of several firms with more that $10B under management suggests that the biggest firms will continue to get even bigger, through both organic growth and inorganic acquisitions, and reach national-scale, attracting a disproportionately large percentage of high-net-worth households, and shifting to a more ‘traditional’ business model where their advisors are employees (versus the legacy independent advisor percentage-of-revenue eat-what-you-kill model). Finally, as the industry moves farther away from being product-focused to advice-centric, advisor education, training, and experience will play an increasingly important role, as clients will demand increasingly complex and sophisticated advice, which advisors will have to be able to deliver if they want to differentiate themselves and defend their fees from amid a sea of advisors who all have the same value propositions.

Ultimately, the key point is that, as financial advice becomes more accessible to a wider audience, there is ample room for firms of all sizes, business models, and fee structures, because each can serve different segments of clients and be a good fit for different sorts of advisors, who each have their own personal/career goals and preferences. At the same time, technology will remain a constant influence, and will allow not only smaller advisors to thrive, but for “mega-RIAs” to achieve the sort of scale that was merely a pipedream just a decade ago… while at the same time pushing advisors to invest in their own expertise.

Of course, there are a number of mega-RIAs that I might have affiliated with, and for me, I chose Buckingham in particular because their emphasis on being technically proficient and willingness to develop a framework of “evidence-based” financial planning that aligns nicely with our own focus here on the Nerd’s Eye View, in addition to having a client-centric planning-centric culture, and a solid base of next generation leadership who are focused on how to do this sustainably for more and more clients over the decades to come. In other words, at some point decision of what firm to affiliate with isn’t just about a particular model or size, but choosing a firm with a clear vision and a concrete plan on how to be at the forefront of the next stages of financial advice.

Weekend Reading for Financial Planners (Mar 14-15)

March 13, 2020 02:47 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that President Trump is working on an economic stimulus package in response to the coronavirus pandemic that could lead to new tax planning opportunities for clients with potential payroll tax relief. Also in the news this week - beyond the market decline itself - are some signs of the related 'cracks' in the financial system under duress, including a prospective shortage of Treasury bills (at least until the Treasury proactively decides to issue more), and some odd positive correlations between bonds and stocks on big down days (rather than having bonds rally as a flight to safety) suggesting that beyond just the market sell-off there is some significant deleveraging happening within the financial system (leading those investors to sell everything at once, including stocks and bonds).

From there, we have a number of articles about how the coronavirus pandemic response may play out in the coming weeks, including a look at the epidemiological research on why it's important to "flatten the curve" by implementing policies that socially distance us from one another to slow the pace of the virus spreading (and avoid our medical system from becoming overwhelmed), the importance of emergency preparedness in an advisory firm in the event that the government limits employees from going to work for a week or few, the technology tools and systems to implement to prepare for the potential of curve-flattening work holidays, and whether the curve-flattening response to coronavirus could fundamentally shift the way we think about working from home and telecommuting in the future (as the country may en masse need to learn quickly to do so in the coming weeks?).

We also have a few articles on how to have the difficult conversation with clients, from how the 'real' question clients have isn't about what's happening in the markets but simply whether they're going to be 'okay' in the end, why it's important to be mindful of the impact that prolonged market stress can have on client's own systems (as stress hormones are released into the body for a sustained period of time), tips on talking through "corona panic" with clients to keep perspective, and why it's better to view the advisor's role in working with clients through their coronavirus fears as being less about the expertise in how to manage the portfolio in response and more about simply being the 'leader' that conveys a sense of calm amidst uncertainty and helps to paint a picture of how the future is still bright.

We wrap up with three interesting articles, all around the theme of the sometimes unanticipated and unexpected side effects of the coronavirus pandemic: the first explores how scammers and hackers are trying to exploit the focus on coronavirus for a new wave of malware and phishing scams (important to warn clients!); the second looks at how the spike in volatility and recent market declines will probably create a fresh wave of lawsuits against (bad) advisors as previously inappropriate and unsuitable investment recommendations now come to light as losses; and the last provides a crucial reminder that as advisors create value by serving as an outlet for client stress and fears and help them to stay the course, the risk of burnout of advisors is greatly elevated as well, which means that self-care for advisors also becomes more important than ever before in these difficult times!

Enjoy the 'light' reading!

Kitces & Carl Ep 29: Helping Clients Who Unexpectedly Start Overspending From Their Retirement Accounts

March 12, 2020 07:01 am 0 Comments CATEGORY: Kitces & Carl Podcast

Over the past several years, the media has paid plenty of attention to the so-called "Savings Crisis", as a disproportionate number of Americans haven’t saved nearly enough to handle unexpected emergencies, much less generate sufficient cashflow in order to retire. However, there’s a flip-side called the “Epidemic Of Spending”, where retirees who have been frugal for (literally) decades and have diligently saved for their retirements suddenly start spending and even dangerously splurging… potentially to the point of no longer being able to sustain the original retirement goal they so effectively saved for in the first place. Sometimes, such tendencies can be attributed to a desire to ‘just live a little’, but other times, overspending may arise for reasons other than just being faced with the temptation to splurge – for some clients, significant life events can change long-term goals and precipitate dramatic changes in spending habits.

In our 29th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards talk about ways to manage conversations with clients who may be spending at unsustainable levels and are in danger of jeopardizing their own goals, and how important it is to understand why clients may have changed their spending habits in the first place. Notably, the most straightforward path for advisors – simply telling clients that they’re being unreasonable and that they can’t continue spending at their current levels if they want their plan to work – can result in the client simply hiding their spending from their advisor in the first place.

Instead, the importance of connecting the “no” to a bigger “yes” can help clients see a path down from the ‘branches’ of emotional decision-making back to the foundational ‘roots’ laid out in their financial plans – in other words, telling a client they need to reduce their spending should tie to their bigger financial goals that they initially identified were most important to them.

However, it’s also important for advisors to conduct conversations around spending with empathy and objectivity. Because it’s possible that changes in spending behavior are not a result of reckless irresponsibility, but instead a result from a deeper reason, such as a (not-yet-disclosed) terminal illness diagnosis, or the loss of a loved one.

When the cause of erratic spending habits is unknown, advisors can use a three-step process to better understand what may actually be happening in the client’s life that is causing the behavior change. The first step is to restate the fact pattern based on observations made by the advisor and information obtained from the client (e.g., how much is being spent each month; what the initial financial plan goals are/were); step two is to identify the story from the advisor’s viewpoint (e.g., spending at this level will deplete assets by age 70, versus age 95 as originally planned for); and step three is to ask the client to help clarify what’s really happening, offering a safe space for open discussion without judgment.

Ultimately, the key point is that, when clients exhibit unusual spending behaviors, there can be a range of different explanations. And by delving into those reasons with an objective, empathetic approach with a goal of truly understanding any possible mitigating factors, advisors can help clients either get back on track with their original plan or craft new goals to accommodate whatever changing needs they may have.