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The Problem With Financial Plans

Don't fall prey to the industry's false sense of precision.

Carl Richards, 06/23/2010

I have no idea what is going to happen during the next 20 years, and the truth is that neither do you--we just don't know. Yet, we expect our clients to know this information, and we even ask them to define it for us. Think of all the assumptions that we ask clients to make when we begin the planning process: savings amount, retirement date, retirement lifestyle, and even date of death.

In the traditional financial-planning process, there is too much emphasis on getting the assumptions "right." This focus has led to a false sense of precision that has become pervasive in our industry. If we aren't careful, this false sense of precision can even lead people to think that we actually have control over the outcome! The truth is that we don't know what the next 20 years will bring. Sure, planning will require us to talk about the future in order to define goals, but in reality, these projections just represent the clients' best guesses, so why obsess over them? Make the best guess you can and move on. We have to recognize and educate clients that, in the real world, the moment they walk out the door our plan will be wrong. Life is messy. Goals change, the unexpected occurs, and clients make big investing/ behavioral mistakes in reaction.

Plans Versus Planning
While traditional financial plans might be worthless, the process of planning is critical. Clients need an objective advisor who can help them overcome the emotion that overtakes the best of us when we're talking about our hard-earned dollars. What people need is a planner, not a plan.

Think of the difference between a flight plan and the flight itself. The plan consists of the pilot's best guesses about weather and terrain. No matter how long the pilot spends making assumptions, he will be wrong. After all the guessing is over and the plane is in the air, it is the pilot who will have to make the necessary course corrections to arrive safely at the destination. It's about the course corrections, not the plan.

Planning for Now, Not Later
I am convinced that this is about more than semantics. If our job is to help clients enjoy their lives, then all this energy that has been spent on making guesses takes our focus away from that. I also think that the false sense of precision we have developed leads to some of the major behavioral mistakes clients make. Clients start to think that the two-inch-thick plan we give them represents how things are actually going to play out. Then, they start to confuse the map with the landscape. When things don't go according to the plan, they're surprised. Often that leads them to re-evaluate the investments (the part that most often goes "wrong"). We know what happens next: the sell-low, buy-high cycle starts all over again with a new plan.

The solution is to admit that we don't know what is going to happen. Stop pretending that these assumptions are any more than guesses and start helping clients find the delicate balance between planning for the future and enjoying today. I've started to call this "planning for now." It's all about making the small corrections along the way to avoid feeling the urge to do something crazy. It's about less planning and more quality action. It's about less tomorrow and more today. Once we admit to ourselves and our clients that we really don't know what is going to happen in the future, we can make it clear that we will be there to help them deal with whatever comes up.

Letting Go
Real financial planners function much more like mountain guides than defenders of outdated maps. We need to tell clients that we really don't know what is over the next pass, but because we have a lot of experience, we know how to deal with the changing environment. It is our job to make course corrections.

Of course, every so often we need to shift back into plan mode and redefine the destination and course, but then we get right back to "planning for now." Once we have a general idea of our own destination, the focus should shift to what we can do over the short term to get there. Thinking in shorter time frames inspires us to behave correctly instead of worrying about all the things that are out of our control. It's time to let go. Set a course quickly. Realize that you will be wrong, and plan on making course corrections often. Maybe then we, as financial planners, can make a small dent in the universe and help close the behavior gap.

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