Real Financial Planning Is Closing the Gap Between Values and Actions

This week on Morningstar's The Long View podcast, Carl Richards, certified financial planner, author, and "Sketch Guy" columnist for The New York Times, broke down how advisors can give "real" financial advice and how they fall short. According to Richards, a real financial advisor should "diagnose before they prescribe."

Explaining that real financial advice means closing the gap between values and actions, Richards discussed how to reconfigure use of capital--money, time, energy, and attention--to better align with values. Richards further talked about the impact of this process and how advisors can help clients articulate a strong statement of financial purpose.

Richards also touched on retirement, what it means to "relax out loud," and why he is not dismissive of recent trading trends.

Here are a few excerpts on financial planning and working with a financial advisor from Richards' conversation with Morningstar's Christine Benz and Jeff Ptak:

Do You Need to Work With a Financial Advisor?

Ptak: Is it essential to work with a financial advisor to construct actionable financial goals? Do you have any advice for those who don't?

Richards: That's a good question. I'm a big fan of real financial advisors. But I know two things: number one, they're really hard to find; and number two, not everybody needs one. So, given those two circumstances, my hope is that this kind of work will help everybody, whether you can find a real advisor and work with one or not. I can reinforce the idea that they do exist, and I would recommend taking the time to find one. But if you can't, of course, you can take yourself through this type of thinking: Why am I doing this? You can read Simon Sinek's book, Start With Why, and just apply it to your financial decisions.

It is helpful, though, to have a third party involved. That third party could be a friend, a spouse, or a partner. I have a financial planner because I've got huge blind spots. This is really important to understand. If you think about a Venn diagram without an overlap, it's really just two circles on a page with a gap between them. In one circle, write "values." The long-form version could be: What's really important to me? In the other circle, write "actions," or what am I actually doing? There is a gap between these two circles because that is what it means to be human. There is almost always a gap between what we do and what we say is important to us. The process of real financial planning to me is closing that gap.

In other words, this process means aligning your use of capital--money, time, energy, and attention--with what's really important to you in the value circle. This gap exists for everyone. So, who has permission to enter that gap with us? My favorite phrase is, "You might fire me for what I'm about to say, but you should definitely fire me if I don't." Having a third party who has permission is critical, because most of us have a strong disincentive to enter that conversation. Find somebody to whom you can grant permission to enter that space and challenge you based on what you said were your values. That discussion can happen with somebody other than a financial advisor.

What Makes the Ideal Financial Planner?

Benz: What are some clues that someone is on the right track with finding this type of financial planner?

Richards: That's a good question. So, some clues first. Is the prospective planner listening more than they are talking? Are you getting a sense that you're being heard? There was a survey done that I read about in Russ Alan Prince's book, The Private Client Lawyer. There were high-net-worth families that valued and were willing to pay for advice. They hired an estate attorney, and they paid for an estate plan to be done. And then they didn't do anything with it. The question they were asked was, "Why didn't you implement the plan?" And over 90% of the people said, "The plan didn't reflect what I wanted." So, how does that happen? Well, the way it happened is that the attorneys were too busy crafting monuments to themselves instead of listening to the client. And the way it happens in our industry is we're too busy pitching product, too busy talking about how smart we are, too busy talking about how big our firms are, how many assets we manage, as if it mattered.

So, the first clue is, are they asking good questions? Are they listening? The client is trying to decide if the planner can get them to their desired future state. And the planner's value is discounted based on the client's uncertainty about the planner getting them to that desired future state. If an advisor hasn't taken time to ask about your desired future state, the discount for uncertainty is 100%.

One of my second favorite clues is when you ask them how they're compensated for their advice, they don't run from that question. And again, these aren't foolproof by any stretch, because the charlatans know this, too, but it's at least a start.

The other clue is, if you ask them about conflicts of interest, they acknowledge that they exist. There is a strong sense in our industry that we can get rid of conflict. We can't get rid of conflicts. Whenever there is money exchanged, there is a conflict. So, what I want to see from financial advisors, and the ones that I love, are the ones that say, "Here are our potential conflicts, and here's how we manage them."

So, to recap: First, are they understanding and listening to you? Second, do you understand how they get compensated? Two questions there: How do you get compensated, and how do I pay you? There sometimes can be different answers, and you want to understand the difference. And then the last bit is how do you manage conflicts of interest? There isn't an exact checklist, but you are looking for clues. To me, the ultimate clue is, are they listening? Are they asking the right questions? Does the plan match what you want?

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.