Solving for the Qualitative Deficit in Financial Planning

“The whole financial planning process is wrong,” says George Kinder, widely recognized as one of the chief educators and influencers in the financial planning profession.

But what exactly does he mean, and how does he justify this bold statement?

First, let’s separate the work of financial planning into two different elements–let’s call the first quantitative analysis and the second qualitative analysis.

Quantitative analysis is the more tangible, numerical and objective. It’s where planners tell clients what they need to do and, perhaps, how to do it. For example:

  • “Your asset allocation should be 65% in stocks and 35% in bonds.”
  • “You need $1.5 million of 20-year term life insurance.”
  • “Have your will updated and consider utilizing a pooled family trust.”

The qualitative work of financial planning is the intangible, non-numerical pursuit of uncovering a client’s more subjective values and goals, and, hopefully, attaching recommendations like those above to the client’s motivational core–their why.

If quantitative work is of the mind, qualitative is of the heart.

Qualitative planning often has been dubbed “financial life planning”–or simply “life planning.” It is defined in Michael Kay’s book, The Business of Life, as the process of:

What A 12-Year-Old Ukulele Player Teaches Us About Authenticity In Our Work

I don’t watch reality television contests, because as a rule, the best participants rarely participate and when they do, they almost never win. Whether the over-commercialized, profit-over-art system is to blame—or the television audience, or both—I’d rather not suffer the invariable disappointment of an unjust outcome. But quite randomly, a 12-year-old ukulele player named Grace VanderWaal, inspired me to break my own boycott.

On our way to another channel, my family stumbled on America’s Got Talent a few months ago just in time to see one of my favorite instruments—the ukulele—adorning the neck of a diminutive blond girl. “Wait a second,” I said.

She’s clearly overwhelmed just to be there. “It’s crazy,” she says, as her voice cracks in response to the judges’ welcome.

Thank God Life (and Investing) Isn’t Like the Olympics

Originally in ForbesImagine that your entire life revolves around a single performance lasting less than 14 seconds. You’ve sacrificed your youth, close friendships and any semblance of a career in pursuit of validating your Herculean effort on the world’s largest stage. The hopes of your country on your shoulders. Tens of millions of gawkers eager to praise perfection — and condemn anything less.

And then.

You dork it.

Jeffrey Julmis

That’s precisely what happened to Haitian hurdler Jeffrey Julmis in the Olympic 110-meter semifinal heat when he crashed into the very first hurdle, tumbling violently into the second.

Wow. I love the Olympics, the pinnacle of athletic competition. I even see past all the corporate corruption and commercial sensationalism, drinking in every vignette, simply in awe of all that the human body, mind and spirit can accomplish in peak performance. But thank God life isn’t like the Olympics (even for Olympians).

We aren’t subject to the imperial thumbs up or down based on a single momentary contest (or even a handful of them). But we’re certainly capable of treating life that way, often to our detriment. Don’t believe me? When was the last time you said (or thought):

“This is the most important thing I’ve ever done.”

“It’s all leading up to this.”

We’re trained to think this way because that narrative is more likely to keep you from switching the channel, more likely to motivate you to buy that car (or house or hair product), all of it promising to be that singular moment or lead you to it.

This script is especially common in the world of financial products. If you surveyed the marketing collateral for a host of investment products, you’d think the product being sold was a sailboat, new golf clubs, a winery or beach house — a life without care. But success in investing is actually achieved through the tedium of saving and the application of a simple, long-term investment plan — not the sexy new investment product or strategy that pledges to deliver your hopes and dreams.

Thankfully, this is also true in life (and athletics). “Success” is cultivated in the millions of unseen moments, the application of simple disciplines employed in pursuit of goals that don’t expire the minute we’re out of the spotlight. And even at the moment of our most abominable failures, the humbled Haitian hurdler provided us with the only example we need:

He got up and finished the race.

Is Your Attitude Toward Work Killing Your Retirement Dreams?

Originally in ForbesDo you have a generally positive or negative impression of the word “retirement”?

I ask because it dovetails nicely with a series of questions (inspired by Rick Kahler) that I use to begin most speaking engagements. These questions are designed to incite self-awareness, offering us clues about how our life experiences have shaped the (often unarticulated but powerful) beliefs that unavoidably influence the decisions we make with and for money.

Work or retire as a concept of a difficult decision time for working or retirement as a cross roads and road sign with arrows showing a fork in the road representing the concept of direction when facing a challenging life choice.

Regardless of an audience’s homogeneity, their responses are consistently inconsistent. I have, however, seen some generational persistency on the topic of retirement. For example, on average, baby boomers have a generally positive view of retirement—no doubt shaped in part by the incessant financial services commercials that promise a utopian post-career existence with beaches, sailboats, golf and an unlimited supply of vintage Pinot Noir.

On the other hand, the finance and accounting students that I had the privilege of teaching at Towson University—almost all members of the Millennial generation—had a generally negative view of the notion of retirement. This is for two prominent reasons:

  1. They pictured hot, humid, early buffet dinners in rural Florida.
  2. They don’t think that the American dream of retirement is available to them.

Hope Deferred Makes the Heart Sick

The practical present application of ancient wisdom

Originally in Forbes“Hope deferred makes the heart sick, but a longing fulfilled is a tree of life.” So reads a Solomonic proverb penned in the 10th century B.C. Consider with me, however, a contemporary application of this ancient wisdom, especially in the realm of personal finance.

HOPE DEFERRED

“We’ve got to apologize, Tim,” said a financial planning client with whom I had a great relationship.

“Whatever for?” I asked.

“You know that new Lexus? The one that backs itself into a parallel parking spot?”

“Yes, I’ve seen the commercials.”

“We bought one,” the client said, with his head bowed in apparent shame.

I’d never communicated that these folks—or anyone, for that matter, who has sufficient means—shouldn’t use said means to purchase a vehicle of their choosing. But the general impression the public has toward financial advisors and educators seems to be that we all think the best use of money is in storing it up and avoiding its deployment. Defer, defer, defer.

How Money Destroys Relationships

Originally in ForbesMoney destroys relationships because people can’t compete with money. Money, after all, doesn’t disappoint you, or express disappointment with you.

It’s not that money is inherently bad or evil, but it’s not inherently good or righteous either. Money is simply a neutral tool that can be used well or poorly. It only has the value—the personality and the relational standing—that we give it.

One of the few criticisms I have of the movement to explore the psychology of money is its use of the phrase “your relationship with money.” Unintentionally, this gives money entirely too much credit by implying personhood. Indeed, if you have a “relationship” with money, you’re likely elevating it unnecessarily, and maybe even subconsciously devaluing those in your life who actually have a heartbeat.

How did we get here, to the point where we’ve personified—and in some cases deified—the “almighty” dollar?

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Behavioral Economist Richard Thaler’s Message to Advisors: ‘Nudge For Good’

Originally in MoneyDaniel Kahneman and Amos Tversky legitimized behavioral economics—the study of how people really behave around money, as opposed to how economists say a rational person ought to behave.

Then Richard Thaler and Cass Sunstein applied the lessons of behavioral economics to everyday life with their book Nudge. The duo nudged so successfully that in recent years, their prescriptions have been put to work in corporate retirement plans—and even public policy—on a global scale.

When I spoke to Thaler to discuss his newest book, Misbehaving, a series of stories documenting the rise of behavioral economics, he told me that he has a message for those who seek to employ his methods:

“Nudge, for good.”

And why does he say that?

Should You Really Be Buying That?

How To Decide If A Purchase Is Really Worth It

Originally in Forbes“It was totally worth it.” In this case, “it” referred to a Vitamix blender that a friend recently had purchased. He wasn’t the first. Indeed, I don’t know anyone who has purchased a Vitamix blender and didn’t share my friend’s effusive sentiment, even after spending between $429 and $719 (for the new line of G-Series models). For a blender.

But despite my appreciation for these friends and their opinions, I can’t help but notice their errors in judgment, explained by behavioral science, that, if followed, could lead to an unwise purchase for you or me.

To be clear, it’s not their purchase of the blender that I’m questioning. Rather, it’s their insistence that said purchase is a universal must. Worth, you see, is relative. What is “worth it” for you may not be “worth it” for me. Ultimately, determining the worthiness of your next purchase depends on many factors, but chief among them are 1) the joy you receive from using the product, 2) your personal cash flow, 3) how much you will use the product, and 4) the cost of available alternatives.

Riding the Elephant

Mastering Decision-Making in Money and Life

Originally in ForbesThe most compelling findings regarding financial decision-making are found not in spreadsheets, but in science. A blend of psychology, biology and economics, much of the research on this topic has been around for years. Its application in mainstream personal finance, however, is barely evident. Perhaps a simple analogy will help you begin employing this wisdom in money and life: The Rider and the Elephant.

First, a little background.

Systems 1 and 2

Daniel Kahneman’s tour de force, Thinking, Fast and Slow, leveraged his decades of research with Amos Tversky into practical insight. Most notably, it introduced the broader world to “System 1” and “System 2,” two processors within our brains that send and receive information quite differently.

System 1 is “fast, intuitive, and emotional” while System 2 is “slower, more deliberative, and more logical.” The big punch line is that even though we’d prefer to make important financial decisions with the more rational System 2, System 1 is more often the proverbial decider.

Many other authors have built compelling insights on this scientific foundation. They offer alternative angles and analogies, but I believe the most comprehendible comes from Jonathan Haidt.