Planning is about addressing a client’s hopes, fears and expectations. Recall that they can not spend the same dollar or the same hour twice. Further recall that optimized and perfect are not synonyms. Once we carry those two ideas into the planning sphere it becomes possible to make tradeoffs that suit the overall plan, the client, and the times.
Planning is about managing conflict. The most common ones are growth versus security, spending versus savings, and now versus then.
Now versus then is the most fundamental. How do you relate to time?
For me, I am a little too future oriented. Lots of things to look forward to, time to work them out. Pretty much optimistic and confident in my ability to get it done. If we look at a time scale that says 0 is 100% past oriented and 10 is 100% future oriented, then I am probably about a 6+. Five is probably better. Present orientation is better for drawing the most out of life. In planning, it is difficult for me to sell urgency to a client. That is a flaw.
Where are you? You need to know because your plans will reflect it to some extent. Once you know, you can adapt to your client’s time orientation.
Past orientation, say a 4, tends to overvalue security. Their memory of bad things is a bit too good. Risk tolerance decays quickly. You need to balance it up a little. For every extra bit of security you give a little growth.
The conventional key conflict in financial planning has been growth versus security. It still is a huge issue. Will people risk going backwards a little for the opportunity for a large gain. Some cannot. Sometimes the time orientation discussion can give you a clue as to why. One of the easy steps is to relate to their age. There is a theory of human development that says you form your values around age 14. The Cohort effect. If the world was a dangerous and hostile place, you will be more careful than someone who got there in good times. I recall a movie about this. “You are what you were when” if memory serves.
People will give you a set of answers to a questionnaire but you should put them in context. People tell you what they think they should say. The conscious mind speaking. The unconscious is not going away, and it will reappear under stress. Someone who turned 14 in 1967 will have an almost totally different world view about security than someone who turned 14 in 1980 or 1935. Probably 2009 will fit there too. I would rather trust this indicator than a risk tolerance questionnaire although it would be harder to explain to the compliance folks. Best to use both.
Spending versus savings will fall out from here too. The past oriented folks will save too much and miss out on some things they could have done. The fully present oriented folks may save too little because they are not good at attaching the future to the present in ways that are fully rational. You can see their future self crying over decisions that please the present self but harm the future self. Saving pays off in the future, spending pays off now.
Financial planning is about building a time machine. We take money from now and send it into the future to be used when we arrive there. Hopefully with some interesting growth side effects. At the same time, we take money from the present and by way of debt payments send it back to the past to when we bought whatever it is we are paying for now. Good work means you find efficient ways to do these things.
As advisers, we need to address conflicts so the client can see and understand the process. We can provide the tools that help to optimize the lifestyle that results from past decisions, future hopes and expectations, and present lifestyle. All the while paying attention to the fears that tend to restrict action. Without a way to see the overview, clients tend to live in about a 6 year time envelope and miss most of the opportunities.
Something to think about.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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