One of the concepts bouncing around in my head for years is that many of the most important things in life are simple but not easy.
Financial planning is simple. Investing is simple. But they are not easy.
There really are only a few things that you have to get right (simple), but because there are so many ways to get it wrong, it seems complex.
It’s simple, but not easy.
Part of the reason for this paradox is because of the tyranny of choice. There are so many ways to invest. So many people willing to sell you crap. So many entertainers pretending to provide advice.
Part of it is because so many in the financial services industry feel like complexity is some sort of intellectual gift (or at least a way to sell more crap). They have spent so much time with complex models, spreadsheets, and charts that they actually fear simplicity. When you have spent your entire career thinking that your value is in complex models, simplicity is not only scary, it is a threat to your way of life.
This is called the ignorance premium [thanks Hugh]. In the financial services industry, the ignorance premium is what you pay (and what they earn) for not knowing any better. But, the ignorance premium is going away. It’s going away because people are interested in engaging in a smarter conversation. When they find out that some salesperson pretending to be a financial planner sold them expensive insurance (to pick one random example) they didn’t need, they tell other people.
Smarter conversations are killing the ignorance premium.
The good news is that there is also a simplicity premium. People value (and are willing to pay for) simplicity. More than ever, the true value of a financial planner is in the impact they can have in simplifying peoples’ lives. Financial planners do so by focusing on those few, simple things that you have to get right, simplifying the process of dealing with money.
A few months ago, a client of mine was telling me about an experience he had one day at work. He is a ER doctor at a hospital that backs right up to some of the most beautiful mountain trails in the world. During his lunch break he was heading out for a run and passed the physician break room and saw his colleagues (that also love to run in the mountains) watching CNBC. He said that he just laughed as he headed out for a great, worry-free run. He realized then that he spent hardly any time thinking about this stuff anymore because he knew that someone else was.
That is the value of having a financial planner.
Simplicity.
{ 25 comments }
Huh, “Financial planning is simple. Investing is simple. But they are not easy”.
If financial planning were simple or investing was simple, everyone would be doing it. These are neither simple or easy. It takes effort and commitment to properly manage ones finances. Look at how many millionaires have gone broke because they did not understand fiunancial management. They worked hard and were able to gain huge contracts (pro athletes) but were unable to sustain the gains.
Huh, “Financial planning is simple. Investing is simple. But they are not easy”.
If financial planning were simple or investing was simple, everyone would be doing it. These are neither simple or easy. It takes effort and commitment to properly manage ones finances. Look at how many millionaires have gone broke because they did not understand fiunancial management. They worked hard and were able to gain huge contracts (pro athletes) but were unable to sustain the gains.
@Mike C – To your point . . . everyone is already doing “it” — access to investing and even financial planning has become easy and commonplace. I agree that it's simple.
However, the fact that the vast majority of people still struggle financially speaks to the “not easy” issue.
Think of it this way. The way to lose weight is simple, but it's not easy. Despite the fact that we have a nationwide obesity problem, I'm sure you can think of several friends or co-workers that are on or have been on a “diet” already this year. However, the answer is easy. Eat less, but more nutritious foods and exercise. That's the simple part.
The “not easy” part is doing it day in and day out over time to realize the results. I would say the same is true of financial planning & investing.
@Mike C – To your point . . . everyone is already doing “it” — access to investing and even financial planning has become easy and commonplace. I agree that it's simple.
However, the fact that the vast majority of people still struggle financially speaks to the “not easy” issue.
Think of it this way. The way to lose weight is simple, but it's not easy. Despite the fact that we have a nationwide obesity problem, I'm sure you can think of several friends or co-workers that are on or have been on a “diet” already this year. However, the answer is easy. Eat less, but more nutritious foods and exercise. That's the simple part.
The “not easy” part is doing it day in and day out over time to realize the results. I would say the same is true of financial planning & investing.
@Mike-
Like Russ said, there are many things in life that are simple but not easy.
Losing weight: eat less, or burn more, or both.
Personal Finance: spend less then you make
Investing: buy good things and hold on to them forever.
But you are correct that most of us do not do it! The reason most people
don't do it is because it is hard. it requires discipline, long term
discipline. The industry have tries really hard to make it seem complex
because somehow they think that is the only way to sell crap to people.
My point is that people need help just solving the very simple problem of
executing on what we all already KNOW. This is not about skill, it is about
behavior.
We don't need anymore knowledge, we need wisdom.
@Mike-
Like Russ said, there are many things in life that are simple but not easy.
Losing weight: eat less, or burn more, or both.
Personal Finance: spend less then you make
Investing: buy good things and hold on to them forever.
But you are correct that most of us do not do it! The reason most people
don't do it is because it is hard. it requires discipline, long term
discipline. The industry have tries really hard to make it seem complex
because somehow they think that is the only way to sell crap to people.
My point is that people need help just solving the very simple problem of
executing on what we all already KNOW. This is not about skill, it is about
behavior.
We don't need anymore knowledge, we need wisdom.
Question: What makes you believe that hiring a financial planner to wacth over your investments has value? I get the simplicity. It's nice to have some compent person doing that.
So my real questions are: Do you have any evidence that planners/advisors know what they are doing?
I understand how they do no harm during bull markets, but how many people do you know who were saved (in 2008) by talented and dedicated planners?
Thanks.
Question: What makes you believe that hiring a financial planner to wacth over your investments has value? I get the simplicity. It's nice to have some compent person doing that.
So my real questions are: Do you have any evidence that planners/advisors know what they are doing?
I understand how they do no harm during bull markets, but how many people do you know who were saved (in 2008) by talented and dedicated planners?
Thanks.
Mark-
Great question. Unfortunately for most people dealing with someone from the financial services industry had be less then optimal (to put it mildly). The industry is full of conflicts of interest, and lots of complexity marketing.
BUT my experience is different! One of the reasons that I started this site is because I kept running into incredibly gifted, HONEST, and ethical financial planners. But no one can hear them over the noise of the huge marketing budgets if the industry salespeople. I kept seeing first hand the difference these planners make in people's lives.
Planning done correctly has massive power to simplify and improve peoples lives.
There are planners that do it correctly.
Most people don't know that.
I want to make sure more people know that and find a great planner that will work for them.
Fantastic (original and follow-up) posts Carl. Of all the great comments I have read here, this is one of my favorites. As the prior posts indicate, there is a pretty fine line in this conversation, but at the end of the day, the “easy” part of the simple things comes down to discipline.
For many investors, the formula for successful investing is having the time, temperament and talent to succeed. Few investors have all three characteristics; most are limited to one or two. Unfortunately, the formula doesn't work with two out of three.
To comment briefly on Mark's question of saving clients in 2008, an endless number of examples come to mind, however, they are often buried below the surface. One of the most difficult conversations planners have had to have with clients in the last 5-10 years is convincing them to buy smaller homes than their real estate agent or mortgage broker was telling them they could buy. These salespeople were selling a dream (emotion – irrational) that we are trying to combat (reason – rational) and besides, homes always go up in value, right? Another very tough conversation through the past 5+ years of a raging bull market has been keeping enough money in cash for emergencies or future withdrawals. Believe it or not, it has been remarkably difficult to keep portions of clients' money OUT of the market since 2003!
In times of uncertainty such as this, the first thing we focus on is account values and we ignore all the other good things happening around us. I've heard many planners state that their real value is saving people from themselves.
Mark-
Great question. Unfortunately for most people dealing with someone from the financial services industry had be less then optimal (to put it mildly). The industry is full of conflicts of interest, and lots of complexity marketing.
BUT my experience is different! One of the reasons that I started this site is because I kept running into incredibly gifted, HONEST, and ethical financial planners. But no one can hear them over the noise of the huge marketing budgets if the industry salespeople. I kept seeing first hand the difference these planners make in people's lives.
Planning done correctly has massive power to simplify and improve peoples lives.
There are planners that do it correctly.
Most people don't know that.
I want to make sure more people know that and find a great planner that will work for them.
I had not considered all the clients who INSISTED on remaining fully invested. Or overpaying for a huge house.
There's not much a planner can do about that.
My experience with professional planners only comes from newspaper interviews. I know that's next to nothing, but the little I know leaves me underwhelmed. I do like Carl's approach. More people should know he exists!
Fantastic (original and follow-up) posts Carl. Of all the great comments I have read here, this is one of my favorites. As the prior posts indicate, there is a pretty fine line in this conversation, but at the end of the day, the “easy” part of the simple things comes down to discipline.
For many investors, the formula for successful investing is having the time, temperament and talent to succeed. Few investors have all three characteristics; most are limited to one or two. Unfortunately, the formula doesn't work with two out of three.
To comment briefly on Mark's question of saving clients in 2008, an endless number of examples come to mind, however, they are often buried below the surface. One of the most difficult conversations planners have had to have with clients in the last 5-10 years is convincing them to buy smaller homes than their real estate agent or mortgage broker was telling them they could buy. These salespeople were selling a dream (emotion – irrational) that we are trying to combat (reason – rational) and besides, homes always go up in value, right? Another very tough conversation through the past 5+ years of a raging bull market has been keeping enough money in cash for emergencies or future withdrawals. Believe it or not, it has been remarkably difficult to keep portions of clients' money OUT of the market since 2003!
In times of uncertainty such as this, the first thing we focus on is account values and we ignore all the other good things happening around us. I've heard many planners state that their real value is saving people from themselves.
Have too many of us relied on complexity as a selling tool?
I think so…Even those of us in the passive investment world find ways to make things complicated. The use of optimization software (false sense of precision), using custom benchmarks to “prove” something other than tracking error (like advisor skill), attempting to add value via rebalancing strategies or tactical allocations (advisor skill again), slicing up a portfolio into multiple unnecessary components (which creates more required trading, but shows clients you are “doing something”), etc. are just a few examples that come to mind.
How many advisors feel the need to recommend something more complicated than…
VTI
VEU
BSV
or
DFTCX
DFTWX
VMLUX
Adding a few extra parts (TIPS, REITS, etc.), may be called for, but the urge to make it even more complicated is definitely there. After all, these portfolios are very low maintenance. Why should a client pay you to manage something like that? You have to have a good answer for that question (hint – it's not about portfolio management). Or you can avoid the question by promoting something that requires more hands-on management…If you really believe a lot of the hands on management we do is worth doing (especially after cost), well that's another discussion.
On the planning side, it's more about conversational advice than it is about manufacturing elegant documents. It's more about helping people understand the relationship between what they have and what they want to do with their life than about the latest complicated tax strategy. Don't get me wrong, some things are complicated, but we shouldn't be creating unnecessary complexity.
Most planning concepts are and should be simple IMO. We certainly have great planning tools at our disposal now. Communicating ideas in an understandable fashion is the hard part.
Will people pay a simplicity premium? They do in just about any other part of their lives…
Simplicity unclogs part of our brain and allows us to focus on what really matters. Advisors probably need to simplify more than their clients do lol. That would do them both a big favor.
I had not considered all the clients who INSISTED on remaining fully invested. Or overpaying for a huge house.
There's not much a planner can do about that.
My experience with professional planners only comes from newspaper interviews. I know that's next to nothing, but the little I know leaves me underwhelmed. I do like Carl's approach. More people should know he exists!
Have too many of us relied on complexity as a selling tool?
I think so…Even those of us in the passive investment world find ways to make things complicated. The use of optimization software (false sense of precision), using custom benchmarks to “prove” something other than tracking error (like advisor skill), attempting to add value via rebalancing strategies or tactical allocations (advisor skill again), slicing up a portfolio into multiple unnecessary components (which creates more required trading, but shows clients you are “doing something”), etc. are just a few examples that come to mind.
How many advisors feel the need to recommend something more complicated than…
VTI
VEU
BSV
or
DFTCX
DFTWX
VMLUX
Adding a few extra parts (TIPS, REITS, etc.), may be called for, but the urge to make it even more complicated is definitely there. After all, these portfolios are very low maintenance. Why should a client pay you to manage something like that? You have to have a good answer for that question (hint – it's not about portfolio management). Or you can avoid the question by promoting something that requires more hands-on management…If you really believe a lot of the hands on management we do is worth doing (especially after cost), well that's another discussion.
On the planning side, it's more about conversational advice than it is about manufacturing elegant documents. It's more about helping people understand the relationship between what they have and what they want to do with their life than about the latest complicated tax strategy. Don't get me wrong, some things are complicated, but we shouldn't be creating unnecessary complexity.
Most planning concepts are and should be simple IMO. We certainly have great planning tools at our disposal now. Communicating ideas in an understandable fashion is the hard part.
Will people pay a simplicity premium? They do in just about any other part of their lives…
Simplicity unclogs part of our brain and allows us to focus on what really matters. Advisors probably need to simplify more than their clients do lol. That would do them both a big favor.
Amen Derek.
I still remember sitting in a investment committee meeting and listening to
advisors debate which was the right allocation to emerging markets: 17.5% or
20%. It really doesn't matter if when we realize that a planners primary job
is simplifying peoples lives and helping them make smart decisions about
money.
Amen Derek.
I still remember sitting in a investment committee meeting and listening to
advisors debate which was the right allocation to emerging markets: 17.5% or
20%. It really doesn't matter if when we realize that a planners primary job
is simplifying peoples lives and helping them make smart decisions about
money.
The acts of choosing what mutual funds/stocks/ETFs, etc. to use, what type of life insurance to buy, which college savings plan is appropriate are not that complicated. They're pretty simple. But as Carl says, the difficulty comes in taking the long view and putting them together in a cohesive strategy.
The REALLY hard part is getting started. Sometimes I think that's the most valuable service I provide in my practice. Left to their own devices, most people won't ever take action… because they think it's hard and complex… the old “paralysis by analysis.” Once you get started you build momentum. It becomes clear how easy it really is.
The other thing a qualified planner provides is accountability. Regular reviews highlight progress (or lack thereof) toward goals. A planner can be the “bad guy” that tells you you're spending too much and not saving enough. Not being the cause of that marital conflict yourself has got to be worth something, right?
The acts of choosing what mutual funds/stocks/ETFs, etc. to use, what type of life insurance to buy, which college savings plan is appropriate are not that complicated. They're pretty simple. But as Carl says, the difficulty comes in taking the long view and putting them together in a cohesive strategy.
The REALLY hard part is getting started. Sometimes I think that's the most valuable service I provide in my practice. Left to their own devices, most people won't ever take action… because they think it's hard and complex… the old “paralysis by analysis.” Once you get started you build momentum. It becomes clear how easy it really is.
The other thing a qualified planner provides is accountability. Regular reviews highlight progress (or lack thereof) toward goals. A planner can be the “bad guy” that tells you you're spending too much and not saving enough. Not being the cause of that marital conflict yourself has got to be worth something, right?
Good point Brian. Setting the course is not nearly has hard as making the
necessary course corrections along the way.
Good point Brian. Setting the course is not nearly has hard as making the
necessary course corrections along the way.
A few months ago, a client of mine was telling me about an experience he had one day at work. He is a ER doctor at a hospital that backs right up to some of the most beautiful mountain trails in the world. During his lunch break he was heading out for a run and passed the physician break room and saw his colleagues (that also love to run in the mountains) thrift savings plan watching CNBC. He said that he just laughed as he headed out for a great, worry-free run. He realized then that he spent hardly any time thinking about this stuff anymore because he knew that someone else was.
A few months ago, a client of mine was telling me about an experience he had one day at work. He is a ER doctor at a hospital that backs right up to some of the most beautiful mountain trails in the world. During his lunch break he was heading out for a run and passed the physician break room and saw his colleagues (that also love to run in the mountains) thrift savings plan watching CNBC. He said that he just laughed as he headed out for a great, worry-free run. He realized then that he spent hardly any time thinking about this stuff anymore because he knew that someone else was.
A few months ago, a client of mine was telling me about an experience he had one day at work. He is a ER doctor at a hospital that backs right up to some of the most beautiful mountain trails in the world. During his lunch break he was heading out for a run and passed the physician break room and saw his colleagues (that also love to run in the mountains) thrift savings plan watching CNBC. He said that he just laughed as he headed out for a great, worry-free run. He realized then that he spent hardly any time thinking about this stuff anymore because he knew that someone else was.
Comments on this entry are closed.
{ 1 trackback }