3 Things Most Financial Planners Do Wrong

A reporter once asked me “What are the three things that most financial planners do wrong?” It was actually a great question that led to a great discussion. I have always believed that a client’s success is achieved by combining great planning and prudent investment management. So where do many financial planners go wrong?

Selling vs. Advising

In a new financial planning relationship, most advisors want a client to say “yes.” That is what we learn in our training. Many advisors, especially when new in their career, hear a lot of “nos,” so it is only natural for all of us to want to hear yes more often. At the end of the day, the important thing is for the client to be better off down the road and help them make the hard decisions even if you know they won’t be happy hearing the truth. Here are some examples that financial advisors face throughout their careers:

  1. "My last broker didn’t get me the returns I wanted…will you get me higher returns?" Of course, we all want to say yes so the client will say yes. However, but the right answer should be, “How did you determine the returns you ‘wanted’?”
  2. "I really want to retire at 60. I am 55 and I feel I haven’t saved enough. If I hire you, will you find a plan where I will be able to retire at 60 and not run out of money?" All advisors want to say, "We will  build a plan to get you to your goal!” What really should be said is, “Let’s discuss all your goals and make sure you can reasonably reach them with a high probability of success. If we can’t hit 60, then we will find a goal that is reachable. Is that OK?” (For more from this author, see: What's the Minimum I Need to Retire?)

Bottom line, financial planners will learn more about the client when they ask the right questions, even if the answers are not what they want to hear!

Focusing on Investment Returns and Not on Your Planning Goals

Many financial planning relationships start off by talking about investments (stocks, bonds,ETFs, mutual funds, etc.). Then they tend to move to talking about the returns of a client’s portfolio vs. benchmarks like the S&P 500. All investors want to work with financial advisors so they can "beat the market." However, having a goal of beating the market is a poor strategy. Returns are merely the means to help you reach your goals and they should not overshadow the goal itself. In order to beat the market, you may have to take on substantially more risk which can really work against your real financial planning goals, such as hitting a retirement date target.

Bottom line, the S&P 500 will always rise and fall (don’t forget it was down over 37% in 2008). You would have “beaten the benchmark” if you were down only 35% (that means $1,000,000 would have been down to $650,000 on December 31, 2008), but is that a victory? The answer is no! The only true benchmark you and your advisor should be worried about is whether you are on track to meet your goals…beating your personal hurdle rate.

You must believe you have a financial plan you can stick with in both good and bad markets. Most investors make the mistake of wanting to buy more into the market when it is doing well (buying on greed) and want to go to cash when the market is doing poorly (selling on fear). When you follow the pattern of buying on greed and selling on fear, you do exactly the opposite of what you are supposed to do.

Focusing on Financial Products, Tools or Tax Savings vs. Client Goals

Many advisors focus their efforts on saving taxes and/or protecting wealth using a myriad of technical and confusing planning strategies (like IDGT, FLP, ILIT, 1031 exchanges, etc.). In my experience, clients want to take care of their loved ones, save taxes and protect wealth. Because of that belief, advisors assume their clients would jump at the chance to move forward with brilliant planning strategies. However, advisors are often disappointed by the response of “I want to think about it.” What those clients are really telling their advisor is: “I have no idea what you just said or how it helps me based on my goals.” 

Financial planning starts with having a deep, meaningful discussion with the client about their family goals and issues, current assets, and “what keeps them up at night.” If you and your financial advisor haven’t had a talk like that in a while, it is probably time to do it. (For related reading, see: 7 Financial Advisor Red Flags.)

These planning ideas end up in limbo not because of time, cost or biases. It happens because meetings are not fun and they are confusing to clients. Advisors tend to tell their clients what to do instead of trying to understand what they want and then finding a plan to get them there.

Why don’t clients say yes to advisors?

  1. They really don’t understand what you are saying (but won’t admit it).
  2. They want to shop other opinions (especially when complicated or expensive).
  3. They get “paralysis by analysis” and just cannot make a decision (I’ll think about it).
  4. They are not sure of that decision's impact on other issues or on future decisions that still need to be made.

In the end, working with a financial planner is really all about:

  1. Better understanding a client’s goals,
  2. Modeling the impact of their decisions vs. other alternatives, and
  3. Coordinating the work with that of their other advisors to get the planning implemented.

Before executing your financial plan, you may have better results (and feel better) if you start with a great conversation with your advisory team. Once the team is working together to achieve your goals, and when everyone is on the same page, I bet you will find it much easier for you to say “yes” and feel good about it!

(For more from this author, see: Planning for Retirement the R.I.T.E. Way.)