Studies suggest that most—at least 70%—of financial planning recommendations aren’t implemented. While we can hypothesize a number of singular reasons why this number might be so ugly, I’ll suggest that it’s actually a confluence of (at least) four factors that have led to this failure, two that are systematic and two that are psychological:
1) Sales-orientated industry – Financial planning as a true profession is still relatively small and young. The financial industry, conversely, is large and long-standing. The industry has used financial planning as a sales tool for the sake of selling brokerage, insurance, and banking products.
To be fair, we’ve come a long way since I entered the industry 23 years ago, but here’s at least one unofficial study that suggests we still have a long, long way yet to go, through the lens of the lacking training that new advisors receive. Heck, it was just this year that the most recognizable brokerage firm banned its antiquated practice of smiling-and-dialing for prospects. (Look out LinkedIn, here comes the bull.)
This predominant sales-orientation sets clients and advisors—or customers and salespeople, really—at odds. Even when we don’t know what we’re buying, we tend to know when we’re being sold, and the apparent bait-and-switch breeds resistance to adherence.
2) Solutions-centric advisors – Even in the more evolved space of independent, comprehensive planning firms that hold themselves to a fiduciary standard, you’ll tend to find solutions featured on center stage rather than clients’ hopes and dreams. When 401(k) rollovers, retirement income strategies, Roth IRA conversions, strategic asset allocation, and tax minimization, for example, are the ends, clients have a tendency to become the means. However useful, these (and a host of other) tools and techniques just aren’t all that motivating because they are advisor-driven rather than client-inspired.
3) Hyperbolic discounting – Hyper-what!? Yes, hyperbolic discounting is the answer to the question, “Why do we have so much trouble saving for the future?” It’s because we’re psychologically—even biologically—wired to prefer satisfying our needs and wants today, rather than in the future. The further that future, the more our brains discount the benefits.
Therefore, because most financial planning tends to be retirement-driven, clients tend to see advisors merely as the guardians of their financial future, rather than bringing benefits to their lives today. Financial planning is more like a have-to than a get-to, a breeding ground for procrastination.
4) Emotionally absent – Most of us have been trained as advisors to believe that “emotional” is synonymous with erroneous thinking. We’ve been taught that in order for clients to make good financial decisions, they need to leave their emotions at the door. But through the field of behavioral finance, we now know that it’s impossible to do so—that most of our decisions, including our financial decisions, are made with the responsive core processor in our brains, System 1, not the more rational System 2, whether we like it or not.
Advances in advisor training and continuing education have raised the standard of quantitative excellence in the technical aspects of our work, but most advisors receive little to no training in the realm of the qualitative. Therefore, advisors are still trying to separate the inseparable rather than engaging in healthy exploration of emotional client drivers which, when effectively navigated, can result in the enlistment of emotions as the spark of ideation and the source of resolve in our planning.
Note one reason that is not among those listed: lazy clients. This is the gaping mistake into which many advisors fall, especially in the echo chambers of professional circles. It’s easy to say, “Well, I told them what to do, but they just didn’t follow through.” But the ideal advisor isn’t a dictator, a salesperson, a judge, or even a professor on a pedestal.
The Ideal Advisor
The ideal advisor is a guide, a coach. She leads with empathy, not instruction. He subverts his agenda to one of the client’s making. She is trained not only in personal and corporate finance, but also behavioral finance.
As Nobel-prize-winning behavioral economist, Richard Thaler, once told me, “No one would think that somebody’s qualified to be a financial advisor if they don’t know the difference between a stock and a bond, but people think it’s perfectly fine to be a financial adviser without knowing the difference between ‘System 1’ and ‘System 2’ or loss aversion.”
The ideal advisor finds a way to bring value into the lives of clients today, not only in the future, through customized recommendations that enlist the imagination as well as the spreadsheet. He breaks down multi-step recommendations into simple and clear next actions. She expects less in the short term in order to achieve more in the long run. He stops overwhelming clients with voluminous comprehensive plans filled with jargon and embraces ongoing planning that he works to translate into the client’s personal vernacular.
The ideal advisor works to craft an experience that truly puts the client at its center. She begins with, and regularly returns to, life planning—guided self-discovery that helps ensure the client’s values and priorities are ends to which financial solutions are merely means.
And the ideal advisor is not only a fiduciary according to the letter of the law, but driven by the spirit of truly putting the clients’ needs above those of the advisor or firm.
It’s important, of course, to understand that the ideal advisor doesn’t actually exist. We’re all imperfect, but the key is to be making progress toward that ideal.
Your job, as a client or prospect in search of a financial advisor, is to ask your advisor if she works as a fiduciary *only*, not just acting in your best interest part of the time. Your job is to ensure that you’re truly at the center of your experience, not the advisory firm’s boiler plate tools or techniques. Your job is to gauge how well your advisor listens, which begins with you talking more than him, and uses your words instead of industry lingo. Your job is to determine if your advisor is a dictator, professor, judge, or salesperson—or the right guide and coach that you and your family needs.
Your job is to be sure the advisors you work with are part of the solution and not the problems listed above. Our job, as advisors, is to keep evolving toward the ideal.