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Advice for My Younger Self

Getting old is not all bad. Occasionally, after making the same mistakes over and over again, we actually learn and adapt. In other words, we become wiser. 

I've noticed a growing number of posts that seek to provide advice to a 25 year-old self or something along those lines. The concept is interesting even if much of the time the lessons learned are cliche. Self reflection is always a good idea, especially when it's intended for mentoring others in how to avoid the same mistakes. 

In this post, I'm not going to provide generalized advice to trust in yourself and follow your dreams. There are literally thousands of others who have already written that one.

Instead, I want to speak specifically to financial planners and advisors who are trying to navigate a profession lacking in practical guidance. Based on my own personal experience as well as having trained dozens of new planners over the years, there is one main theme that I’ve come back to repeatedly. Precision does not equal accuracy.

Technology provides the option - and the ever present temptation - to model everything with exacting detail. When clients ask for these things, it can be hard to say no. Want to show a new car purchase every 3 years for the rest of your life? No problem. Run a probability analysis of a thousand iterations of various life expectancies or inflation rates? Done. How about showing a stream of rental income for the next 42 years inflating at 4.2% annually?

Here's the point: Just because you can illustrate extreme precision in plans doesn't mean you should

There are several reasons why too much precision is problematic. First, you run the risk of getting lost in your own numbers. Second, by including too much information, it is very easy for clients to become fixated on meaningless details and miss the bigger picture. Third, it can imply a far greater degree of precision and predictive ability than you actually have.

Planning technology is a great thing, but we can become too reliant on these tools. It's like GPS. It is fantastic to have when you are looking for that restaurant somewhere in the vicinity that you can't quite locate. 

However, when you are driving around a brand new city and the GPS is instructing you to go to a location that no longer exists, it’s a real problem. You don't know what you don't know. If you become too reliant on it, you can end up completely lost and heading in the wrong direction without even realizing it. 

The same thing can happen with a financial plan. The aggregation software works phenomenally well until it doesn't. Let’s say an account doesn't link for some reason. Now, if it's a small checking account, no big deal. But if it's a $500,000 brokerage account, it's a problem. Or maybe it's a data entry mistake: entering a monthly pension as an annual amount.

In either instance, the retirement funding report will be inaccurate. Mistakes and technical glitches happen, but the question is will you catch it? If your head is down and you are crunching numbers - agonizing over various minutia - you may very well miss the fact that the plan is entirely off base. 

The GPS is failing… You could spot the problem if you stepped away from it for a minute and asked a couple key questions: Which direction am I headed? Which part of town am I in right now?

Likewise, with the financial plan, you need to routinely step back and diagnose the planning results. Does this look right? Why is a client whose withdrawal rate should be unsustainable show such a successful outcome?

Over the years, I've found an increasing likelihood of planners failing to notice major problems as the level of detail and complexity of the plan increases. 

Early on in my career, I was a detail junkie. I learned on a cash flow based software and ended up building out my own Excel-based program because it allowed for even more precise calculations, particularly with regard to tax rates. 

Then I moved to Denver and began working there with an independent planning firm. A large contingent of the firm’s clients were retired engineers who had lots of questions and (shockingly!) wanted to see all of the details. Except in this case, the owner/advisor wouldn't give it to them. 

I remember the client meeting when I first heard him respond by saying "I'm a rounder." The clients received no detailed tax analysis. No 40-year retirement projections with a litany of inflows and outflows. Just a retirement needs summary using lump sum present value amounts reflecting capital available, capital needed, and the surplus/shortfall amount. I was bewildered. I'm thinking to myself, "Is he serious?"

But I was forced to grapple with the legitimacy of this approach. After all, this was not an upstart practice. It was a very successful fee-based, comprehensive planning firm. And these engineer clients - with lots of time on their hands to analyze away during retirement - accepted this seemingly cryptic explanation and equally cryptic planning assumptions. And over the years I transitioned from major skeptic to a convert of elegant simplicity. I, too, had become a "rounder"!

I came to realize the danger of distracting – not only myself – but clients with all kinds of “noise” in the plan. When you show a client a long term retirement forecast, you run the risk of having them fixate on the $30 million balance at age 95. I knew that if I tweaked one main assumption, that balance vanishes, but the clients didn't understand that. They just walked away from the meeting having way more confidence than they should. 

My point is not to make a blanket statement that long term projections should never be used or that detailed cash flow reports are superfluous. The key is to think through the trade-offs of what you choose to include in the plan. Often, when it comes to delivering a plan, less is more.

(Read the book Made to Stick for a good explanation of how important it is to clear out the noise and make the main point crystal clear. Not enough advisors do this.) 

It's not that details don’t matter. It's just that many times we need to admit we know a lot less (about things like future tax rates, return assumptions, and inflation) than we let on. When you show someone a rate of return of 6.23%, they tend to remember it. They really latch on to that number.

On the other hand, if you show a client a 6.00% gross return, they understand that's an estimate. Round numbers imply less certainty. That's a good thing when we are dealing with numbers we cannot confidently predict for this calendar year, let alone for several decades into the future.

My time capsule is broken, but hopefully this is some help to those of you who are in a similar position to where I was 20 years ago. Remember, too much precision is dangerous to your wealth (planning).