Financial Planning Insights
6 minute read time
When people learn that I have spent my entire career working with and around financial advisors, they often ask me what they should look for when hiring one. My response has dramatically evolved over time. I used to give a typical answer: “You look for a person who is a technical expert and trustworthy.” With wisdom (and gray hair), I now recognize that answer is not wrong, but it is incomplete. There are actually three things you should look for.
A financial plan and an estate plan are strategies designed to use the assets and income you have to take care of the people you care about so you can maximize your, and their, happiness. When these strategies are well executed, your plan tells your story. Your story begins with uncovering what makes you happy and what scares you. Your story then explores your values and what you believe. Some examples:
As you can see, several of these beliefs completely contradict each other. That is exactly how it should be. Your story is different than your neighbor's story, both of which are different than my story.
Next, those beliefs get translated into goals. The beliefs are about your why, the goals are about what you are going to do about them. For example, if you believe memories are better investments than things, your plan will be designed to invest in memories, such as annual extended family vacations to meaningful locations. Or if you believe wealth should be used to make your children's lives easier than yours, then your plan could allow generous distributions designed for your children's wants. Alternatively, if you believe children need the pain of economic hardship to become emotionally mature adults, your plan might only provide distributions to them when necessary.
A great story blends independence, experiences, legacy and social impact. It answers the question of how income and assets should be used to:
But telling a compelling story is hard work, and great biographers are hard to find. True storytellers penetrate their subjects' souls and get to the essence of who someone truly is. That process takes time; asking thoughtful questions that go beyond the what and how to the why. When done right, a great story opens a window to the soul, and a great plan is the execution of someone's deepest hopes and wishes.
So now, I ask you to consider your plan and your advisor. Does your advisor understand your soul? Does your advisor know your story? Does your advisor care to learn your story? Is your plan the execution of your deepest wishes, hopes, dreams and desires? Or is your plan a collection of generalized “good ideas” for people “like you”? Simply put, is your plan actually your plan, or is it your advisor's plan? How are you feeling? Can you do better?
The studies of behavioral economics and neuro economics have proven that human beings have neurological challenges that get in the way of their financial goals. For example, people experience the pain of a loss twice as acutely as they experience the joy of an equivalent gain. As such, we tend to overprotect ourselves from actual loss and undervalue the loss from an opportunity not taken. This phenomenon is known as loss aversion. When unmanaged, it can prevent proper asset allocation. In addition, people give greater credence to information they can more easily recall, thereby overweighting information that is more recent or more memorable. This is known as availability bias and can cause investment decisions based on memorable but irrelevant information. Finally, people can make decisions based on how the information is presented to them — for example, in a positive or negative framework. Framing bias can cause investors to act on irrelevant information solely based on how the provider of the information frames it. In a world of 24‐hour news cycles and smart phones, the risk of receiving and reacting to the wrong information has become even more acute.
This is why your story is so important. When you're tempted to give in to these biases and react to irrelevant information, your advisor can remind you of your story: your values, your goals, your plan. In these situations, our best advisors act as objective yet empathetic mirrors: Empathetic because they have taken the time to understand you and understand your story; objective because, as students of behavioral finance, they understand the power of these biases and their destructive nature. These mirrors can reflect your story back to you, and then mathematically prove that giving into the fear these biases create will actually move you away, rather than toward, your wishes, hopes, dreams and desires.
Great advisors focus on you, not themselves. You want an advisor whose sole goal is to uncover what you believe, what makes you happy, what you should do to maximize your happiness and how that gets done. The advisor should also help you figure out what could get in the way of your happiness and how to avoid those obstacles. In other words, you need someone adept at uncovering and solving current and future problems.
When hiring an advisor, you should investigate what incentives might get in the advisor's way of being solely focused on uncovering and solving your problems. For example, some advisors are affiliated with organizations that want them to sell their products. Other advisors have sales goals that require them to sell a minimum amount of a certain type of product, such as insurance policies or annuities. Finally, others have affiliations with brokerage houses that incent the sale of securities that they have a position in.
Can these advisors be impartial, objective problem solvers? Sure. But it's important to ask about and understand these incentives so that you can recognize when your advisor has an uncanny propensity to uncover the exact types of problem for which an annuity, for example, solves.
Incentives that create bias are not the only thing to watch out for. Advisors, like all humans, find great comfort in focusing on their areas of expertise. An advisor with a deep knowledge of investments might spend most of a meeting focused on the market, while an advisor who has grown up in the insurance world might focus on the power of whole life insurance, and an advisor who is a tax guru may focus on saving taxes.
While all of these skills are helpful, you should not be looking for the advisor who runs around like a hammer and sees all problems as nails. Rather, you should have a detective who considers all issues and helps you prioritize solutions. Simply put, if your advisor keeps uncovering the same problems and offering the same solutions (touting his or her expertise), you probably have a salesperson. You need a consultant.
This is your plan. It contains your story, your values, your goals. It's designed to maximize your happiness. It should not be your advisor's plan. The advisor's job is not to come armed with solutions seeking aligned problems. The advisor's role is to be your biographer, mirror and consultant. If your advisor is falling short, we would love the opportunity to help you discover your story, solve your challenges and avoid human pitfalls.
This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank and Johnson Wealth Inc. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE