Financial Planning and Garden Sheds

Financial planning is like building a garden shed.  Building it is simple enough that you and a helper can do it, but complicated enough that you will need to be organized.  There are three layers to the plan just as there are three layers to a first financial plan.  The layers are strategy, tactics and logistics.  In that order.

Is my vision  like this?


Or am I more ambitious?

gardenshed 2

The Strategy Layer involves answers to “W” questions” and will help resolve questions like that.

  • What is it for?
  • Why do I need it?
  • What must go into it?
  • What would be nice to put into it?
  • What size should it be?
  • What resources can I use to buy it?
  • What resources do I need to build it?  Tools and other materials.
  • Where should I locate it?
  • When does it need to be finished?
  • What limitations are there?  Bylaws for example.
  • Who will help me build it?  Do it yourself or contractor
  • What saving on materials and tools can I expect if I use a contractor?

I would need to know the answers to these questions before I decide to use a contractor or build it myself.  I especially need to know the answer to most of them if I choose the contractor route.

The contractor is responsible for the how and should have limited input to the “W” questions.  Ideally only to isolate conflicts and provide a few more that I forgot.  The contractor is tactical.

The Tactical Layer involves “How”

Tactical helpers know more about the details.  They have done this before and have learned from their mistakes.  They can provide valuable insight into your strategic choices.  Things like, “That is good place for the shed in the summer, but in the winter you will have no place to put the snow.”

They will be familiar with processes and materials that may provide a better answer than the fuzzy one that the strategist holds.  They can buy needed things cheaper.

They will ask clarifying “How” questions.  Like:

  • How would you like me to build the foundation?  Choices involve a concrete slab or patio slabs properly organized.  Here are the pluses and minuses for each.  Which would you prefer?  I recommend slabs because with your terrain, they will work and save you money.
  • How should I organize my time?  Can I start at 7:00 AM or will the neighbors complain?  Should I have a crew of four at higher cost but done sooner?  Your call?  Do You want to survey the neighbors before you decide?
  • How should I design my job?  Would you like ongoing maintenance or done right once and forever?  I recommend done once. A perfect job requires more skilled and thus more expensive tradesmen.  As another choice, there is a somewhat more expensive shed kit that is much easier to assemble.  We could do that with cheaper labor and it would save you a little money.

The important observations are that the contractor has specialized skills and knowledge that far exceed those of the strategic planner.  As a result, the contractor can provide optional methods that will achieve the goal.

The contractor should check back for a decision in this form.  Here are the choices and their differences.  Here is what I recommend because.  What do you prefer?

The Logistics Layer is the one many people overlook.  It is the actual doing of the job.  It is all fine to get strategy and tactics worked out but if the logistics is clumsy, the job will end badly.

In military action, the political layer determines strategy.  Churchill could say,  “Take back continental Europe” but it isn’t going to happen until Eisenhower and others determine how.  And even if the what and the how is perfect, nothing will happen until there is air cover, a force on the ground who have the right food at the right place at the right time, the proper number of boots and bullets, gas for the tanks and a thousand other little things that collectively are a big thing.  “Dilettantes discuss strategy, amateurs discuss tactics, professionals discuss logistics.”

Over time, building your financial plan is harder than building the garden shed.  Financial plans evolve, while the garden shed can be in the done right, done forever model.  Financial plans need one more layer of activity.

The Review and Revise Layer

This process involves reviewing the strategic and tactical background with a view of determining what if anything should change given the new information that we possess a year or two later.  If there are no changes needed, that is fine, but there are usually things that go onto a “watch list.”  They are not adverse yet, but the concern is there.  A “watch list” provides the opportunity to take action before the next scheduled review date.

In the world we see today, every watch list contains questions about bonds and precious metals.    Some include personal real estate and resource based equity.  A properly designed watch list should include the reason the item is on the list and what would be the trigger to change the old decision.

The good side is that the review is active and clients can be involved, and can learn things about their situation that will lead to better decisions or more appropriate vigilance in future.

We, in North America, live in interesting times.  We can more easily navigate the future with a mix of vigilance, discipline, options, and decisiveness.  Having a plan you understand, a helper to add detail, and evolving current decisions will serve you well.

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.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Be The Best At Something

This book intrigues me.  Just Start: Take Action, Embrace Uncertainty, Create the Future, I think because it suggests a course of action that I agree with.  Its promise is this:

If you employ the handful of principles in the following pages, whatever you want will come closer within reach.

Postscript: We are not guaranteeing success.  But we are guaranteeing that if you fail, you will fail quickly and cheaply and that (as you will see) is almost as good.

Its course of action involves several things I believe in:

If you work on your strengths you can make them exceptional. If you work on weaknesses, you can those skills mediocre.  Be the best at something and delegate the rest.

The moral:  Fail Fast.  Quit Quick.  Learn from mistakes.

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.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Financial Plans Are Not Facts

Financial plans are in their simplest description a model of the future as related to the money parts of our life.  The key is that they are a model.  They are not fact.  They may not even be close to reality.

You and I both need to recognize that reality exists independently of us and what we rely upon is our interpretation of that reality and that interpretation is based on our beliefs.

To some extent our beliefs are conditioned by experience, family, friends, colleagues, culture and society at large.  They are unique to us, both personal and subjective.  Once formed they are difficult to change by argument, logic or reason.  It has been said that no one ever changes their world view by reasoning.  Most beliefs have an emotional part.

Clients and advisers both need to notice that the brain is a superb pattern finding mechanism.  It will find patterns in meaningful information and it will find it in meaningless information.  Worse it will infuse patterns with meaning, intention and agency.

Once these patterns are formed the brain seeks confirmation.

For the adviser it is not enough to know what a client believes, the adviser must also know how the client came to hold the belief.  If you know how the belief came to be, you can address it from the same place as its formation and have a hope of connecting it to a more current reality.

For example, a client says that life insurance is a bad investment.  Reason will not change that view without more.  From further discussion, you determine that he has accepted this reality based on his father’s belief delivered in 1954.  You can easily agree with him and point out that his father was likely right, “based on what was true in 1954.”  Today however, these things have changed.  People live longer – mortality cost in insurance today is less than 20% of what it was then.  Costs to operate the insurance business are a tiny fraction of 1954.  No more acres of clerks with pencils.  Policies are more flexible.  Insurers can invest reserves more aggressively so can return more.  And so on.  The old belief remains true and it connects to current reality.

In financial plans reality is there but it has been conditioned by both the client and the adviser.  The model is probably a better description of how they think than it is of objective reality.  Fortunately there is a defense.

The defense is frequent examination of perceived reality, review of the plan’s connection thereto and revision to meet more evolved needs and circumstances.

Conscientiously applied, this technique will tend to cull misconceptions and delusional beliefs and retain the objective reality that surrounds the situation.  A financial plan is never finished.


Advisers:  Perform regular reviews.

Clients: Actively participate.

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.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Gold Again

I follow Nouriel Roubini on Twitter @nouriel because he has interesting views on many market subjects. Yesterday he retweeted a story that ran in Bloomberg News – Losing Faith in Gold From Ghana to Vancouver Proves Rout.

If you are thinking about gold as a defensive investment, it is worth a read. If you are thinking about it as a way to vast riches, it is a must read. The gist is that gold prices are probably not going up and there is considerable evidence to that affect.

The article printed out at 8 pages so I expect most will not read it. Here’s the gist.

  • The sevenfold run up in the 12 years to the end of 2011 has probably ended.
  • Many producers have discontinued because their cost to produce is higher than the market value.
  • Barrick Gold and others have taken $23 billion in writedowns because they do not see price recovery
  • The American economy seems to be recovering, albeit slowly.
  • Europe seems to be turning the corner.
  • Central banks have fared badly with their recent purchases.
  • Most hedge funds are getting out.
  • Gold costs to own
  • Some people have already lost a lot and are no longer committed to the metal

All interesting but not conclusive. There are some who are investing it its recovery. Dubai for example.

Where to go from here?

One convincing argument in favor is that during the bull market, from 1999 to 2011, gold rose 600%. True, but you need to pick the ends of period carefully to make the case. If instead I pick 1980 with gold at $850 I find that it took 28 years for me to breakeven. Today in constant purchasing power, I have lost half my money. Not a terrific inflation hedge.

There is too much hype. After it was released on July 3, how many ads did you see on television for the movie “the Lone Ranger.” Many! Why? Because the movie was a flop and they were trying to recover some money. As long as the recovery is greater than the ad cost it makes sense from a business outlook. The rule: Any movie heavily promoted after its release is a dud. No sane person would spend money on advertising unless they had to do so. If people were telling their friends how good it was, no need to advertise.

The same rule applies to other things. Like gold. Why do actors promote it every hour of every day? Because they get paid to do so and because enough people buy the product to make it worth the promoter’s trouble to pay actors and buy TV time.

Most of the comment is emotional as opposed to factual. (you are at risk, there have been huge profits made by others, you are missing something good) It is impossible to argue, based on facts, with someone consumed by bubble thinking, faith, or conspiracy theories. Any evidence is absorbed and made to confirm the preferred theory.

Here is a question that is hard to fit in to any theory. “If it is such a good idea to hold gold, why does anyone sell it to you?”

Answer: because they are commodity traders and they make their money by buying and selling both. You are expected to be a buyer only.

If only a few of the buyer-only types change their mind there will be further erosion in the price as the promoters look for new buyers to buy their first holding and new buyers to replace the old ones who are selling. Hard problem and it usually precedes a crash.

More food for thought on the subject Forbes 15 August 2013

The end of it all is gold is a commodity and it reflects the “value” of American currency. Based on the price-adjusted value of $US since gold was allowed to float in 1972, it should be selling at around $400. Even if the American dollar is overpriced by 100%, and it may be, gold should be around $800. See an old MoneyFYI blog piece. What should gold sell for?

I don’t know where gold is going in the short term, but in the long term it will reflect the functional value of the US dollar. If you think that gold will be $5,000 an ounce then you need to also believe that the $US will be worth about 1/12th of what is worth now. Gas at $50 per gallon. New York apartment rents at $40,000 a month. Minimum wage at $90.00.

It is a bit unlikely that that happens and afterwards, there is a viable economy anywhere on earth. To make money on that price you also have to believe that governments will not confiscate your gold. These are the same governments that you don’t trust now and use that as a reason to buy gold.

I hear people saying essentially this.

I believe the US economy will evaporate. I believe governments will let me make money while it happens. I believe in magic.

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. | Twitter @DonShaughnessy | Follow by email at moneyFYI

I Stand Corrected

For many years I have been a firm proponent of this idea, “Never give a job to someone who will be harmed if they do it successfully.” Apparently, this law is not universally applicable.

I have always believed that the least likely group to solve human rights problems is the Ontario Human Rights Council and that the Cancer Society is least likely to find a cure for cancer. I can recall explaining to my daughter that if I could fix air pollution for $10 per province, the only way it would get implemented is if I did myself. Certainly the authorities would have nothing to do with it because then their jobs would disappear with the air pollution.

Never give a task to someone who will be harmed by their own success. In the 35 years or so that this thought has been in my mind, it has never been challenged by a counter-example among public charities and government agencies.

Until last Sunday.

In the September edition of Discover Magazine, I chanced to read a story about how those running the Cystic Fibrosis Foundation may have put themselves out of a job. They attacked their problem, not only by fundraising, by education and by support groups, but by addressing the fundamental of the problem.

The fundamental is that not enough people have CF and therefore drug companies will not invest the money to cure it. Drug companies can afford to address symptoms but not the cause.

So CFF invested $40,000,000 with a young biotech company with the view to finding the genetic cause and once found develop ways to fix the problem gene, perhaps in partnership with others. 13 years later they look to have done so. CFF also negotiated a royalty deal on anything discovered and so have a source of funds for further research as needed.

Well done! Hands clapping!!

There are two keys here. First – address real problems. Do not try to just soothe symptoms. Second – focus. Find a helper who wants the solution as much as you do and who has skin in the game.

As long as your organization is content with what it delivers and how it delivers it, there will be no change. When you decide to change that and go for opportunity seeking and problem solving, you will need energy and single-mindedness. Buy that in, it almost certainly does not exist in a long-established organization.

In another context like a business, let the older guys supply the money and the younger ones supply the energy and tenacity. Bring in some partners. Everyone can win.

We see business and professional firms that have learned the lesson. It is at best uncommon in charities and invisible in government agencies.

Let’s rethink priorities. If you are a charity, is your structure organized to make the problem go away or to treat the symptoms and make the problem more visible – read as easier to raise money? If you are a government agency is your purpose to make the problem seem more pervasive and difficult to measure?

The old ways will not long remain affordable. It is time to think the problem to its root and address that. Some foundations are already moving that way. Do not go to the Gates Foundation or the Skoll Foundation looking for money to treat symptoms. You won’t get it. You have a better chance if you go looking for 20 or 100 times as much money and have a way to cure the problem. Business people try to fix problems, not make them tolerable.

For health based organizations, think through how much data you have now. The cure is almost certainly already there. Possibly a few brilliant information engineers, like the folks who started Google, could find a different pattern within that data.

That is the real problem. When there is too much information, there is no easy way to gather it together in the right order and without the non-essentials. We need new methods. The build files and discuss amongst ourselves is not an answer when there are hundreds of people and billions of pieces of data involved.

Like the 911 attack. After the fact it was easy to see that all the information needed to prevent it was available beforehand. The problem was that the event clarified how to look at it. That clarification was unavailable beforehand, so no prevention.

I don’t know, but I would bet that the data that could have been used to prevent the attack did not constitute 1/1000th of 1% of all the data available.

Retrospective analysis is easy. Information analysis is infinitely harder in prospect. Sometimes you just need to step back and try to see things a different way. Or maybe hire people who do not know or understand what you do now.

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. | Twitter @DonShaughnessy | Follow by email at moneyFYI

Niche, Ditch or Generalist

Bell, Rogers, and Telus are working hard to keep Verizon from becoming a player in the Canadian mobile phone business. With good reason. Thirty-seven years ago Bruce Henderson of the Boston Consulting Group proposed that there can be only three generalists in a market. Everyone else must be a niche player or be “in the ditch” the space between generalist and niche. You get to pick only one. Generalist, ditch or niche.

The ditch is an unattractive place. Too big to have the efficiency and agility of a niche player and too small to have the economics of scale and the financial ability to front new projects of the generalist.

Over the years we have seen the auto industry rotate the generalists. At one time GM, Ford and Chrysler were the Big Three and they dominated the North American car industry. Then came Toyota and one went to the ditch. Chrysler was consumed by Mercedes. Maybe not such a smart move by Mercedes as they had a wonderful niche going for themselves. Eventually the union ended; Chrysler was taken over by Fiat and Mercedes returned to their old ways.

There are more examples. How many anchor stores in a large mall. Typically three. Surrounded by niche players.

Recent study has shown that the rule of three tends to work.

Consider cell phone makers. Samsung, Nokia and Apple are the three largest. Motorola may be growing but many of the others are either product or location niche players. Blackberry is number 3 in the corporate smart phone market but heading for the ditch. Not wide enough distribution and not specialized enough. A bad combination.

The moral of the story is that there is only 100% of the market to divide up. If you need 20% of it to be large enough to afford operational efficiency and have cash flow strong enough to be able to develop new product as fast as the others, then there will likely be three generalists, a few in the ditch and some very successful niche operators.

In the late ’70’s and early ’80’s Jack Welch took GE out of products where they were not number 1 or number 2 in their market. This kind of focus frees investment money from the sale of the others and avoids time trying to nurture something that probably can’t make it.

When acquiring securities be aware of your target’s market position in the industry. Are they in the top three and moving up or falling in market share? Do they borrow for new product or for expansion that does not change their share?

Are they in a niche that has been profitable but seem to be moving toward generalist? Like Mercedes tried with Chrysler. How long until Porsche builds a pick-up truck? Ferrari gets it. They build only a few vehicles and charge whatever they happen to need.

In local markets the rule may apply but it is harder to be sure. Think about restaurants or dry cleaners or dental clinics or bakeries. There is likely a right size for the big ones and everyone else occupies their own niche.

If you get it right, then business will come your way almost automatically. It is worth the time and trouble to see what you need to do to be on just one side of the ditch.

And a pretty easy filter to apply when buying stock. Solid generalist or disciplined niche.

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. | Twitter @DonShaughnessy | Follow by email at moneyFYI

A Thought On Financial Literacy

I have followed some of the concern about financial literacy and have addressed it in this forum before.  Most recently here.  My concern is that few people seem to know what it is all about.  Fortunately I came upon a story about grammar in the Financial Post last Saturday,  10 August 2013.

As you can imagine grammar is not a well understood concept today.  “TechSpeak” seems to have taken over.  See Grammar4EVA

From the story an example of a modern communication from a prospective student to a professor.

” hi, can u pls clarify smthng 4 me?” read the email that landed in Karen McCrindle’s inbox a few years ago from a prospective student she had never met. “say i wnt to take intnl devt study w ur prgm. do i apply to bth prgms or just 1 n which 1 would it B. evry help is appresh8d. thk u.”

Hmmm!!?  Apparently the student did not get to enter University of Toronto’s journalism program.  How odd.

We can all appreciate the value of grammar although we may not always pay careful attention.  Like other rules, grammar helps clarify ideas and the structure thereof.  At a minimum, it prevents ambiguity and inadequate descriptors such as unreferenced pronouns.

How is this like financial literacy?

The article makes another salient point.  Essentially “Usage is more important than the rules.”

That is what we should be aiming at with financial literacy.

Clients do not need to know how the Black-Scholes calculation works or even if it should work.  They need to know about meaning rather than techniques and rules.  A bit like the email above.  While mangled, it still makes sense.

How confused are clients when some arcane number shows up as the annual return and it is because of the vagaries of the “annualized modified-Dietz” method for calculating rate of return.

“No, you did not really earn 317% on that tiny balance, well maybe you did but it does not mean anything and no, I don’t think all your money should have been there instead of where it was.”

It has been my unhappy experience that any explanation of a financial method that involves little Greek symbols lying on their side, fails.  Even when it is correct and accurate.

The problem with literacy is that some people think it means knowing literally.  Details confuse more than clarify for people who are not familiar with those details in the context of an overall structure.

I prefer to think that financial literacy will be an overview thing not an expert knowledge thing.  Like this idea in the Post story.

” When people talk about grammar, they’re often referring to usage, the professor of rhetoric said, and that’s how grammar ought to be taught; how effective and appropriate are my words and sentences rather than “what is correct.”

If we can help clients learn how to use financial information “effectively and appropriately” then our work here is done.

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.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Nothing Changes

What follows is a number story.  It is interesting because it makes us think in new and different ways.  One of the new ways is that the world does not work the way you think it does.  Failing to notice that could be expensive.  Failing to notice how easy it is to make logical arguments with numbers is important too.

It appears that the value of financial assets worldwide, is now around $240 trillion.  That is a very large number.  Too large to be meaningful by itself so let is put it into perspective.  Meaning is only derived by comparison and comparison is fraught with risk unless we understand the standard.  Lets ‘s begin.

The population of the world is about 7.1 billion, so the financial assets per person are now $33,800.  While we can argue that the range of assets owned is very wide and averages don’t mean anything, can we argue that it has always been that way?  Let’s say we can.

If I take those numbers and the population of the world as 200,000,000 in year zero, and assume that in today’s money everyone had financial net worth averaging $33,800 then,  the total value of financial assets on year 0, was about $6.75 trillion. (Today’s money value)

Suppose, for support,  I connect up to some other current data on this.  Forbes in 2013, says there are 1426 billionaires with a total net worth of $5.4 trillion.  An average of $3.8 billion each.   That is 2 billionaires for each 10,000,000 of population and 2.33% of the wealth of the world collectively.

So, in year zero there should have been 40 billionaires.  If they had 2.33% of all the wealth, that would be $157,000,000,000 in total and $3.9 billion each.  Pretty much unchanged.  We know specifically of at least one billionaire in Rome.  Crassus had a net worth in today’s value of around $70 billion.

We can see that the average wealth of billionaires has not changed much in 2013 years and so the distribution of wealth in the population probably hasn’t changed much either.  That confirms that per capita wealth hasn’t changed much and the increase in total world wealth is solely because of population growth.

Now the exciting part.  The rate of growth of the population over those many years is 0.1775% and therefore so is the rate of growth of total wealth.

It looks like this:

world wealth graph

The graph is not so unfamiliar.  Some things you could take away from all this:

  • Total wealth does not grow very fast.
    • If you want more wealth you will need to save it because growth is slow
    • You could try to get more than your share.
  • Total wealth is tied to population growth
    • Income distribution hasn’t changed much
    • Per capita income does not change at all
    • The only way to have more family wealth is to have more children

If you believed the conclusions then you need to work on skepticism.  There are several flaws in the argument and you should notice them.

  1. Long geometric averages probably don’t make much sense unless every period is like every other one
  2. It contains end point biases.  Things might be very different if I used a different start point.
  3. We don’t know that the growth in population is necessarily connected to growth in wealth.  It could be a coincidence of the “post hoc” error type.
  4. We are all individuals and we should not be overly concerned about “the others.”  The average.  If our life works, the rest of the people are not relevant in a financial sense.
  5. We believe growth is at a much higher rate than 0.1775%.  There must be more factors.
  6. In this data there is no indication of two or maybe more factors being involved.  a) growth as we expect it to be and b) something that destroys wealth to come back to the 0.1775%.  Something must destroy wealth almost as quickly as it accumulates.  War, plague, misplaced resources, governments, natural disasters and so on.  We really do not know what is happening unless we can assess both factors.

From a planning and management view, there may be value in avoiding the wealth destroyers and maybe not so much in trying to find spectacular growth.  Certainly spectacular growth attracts a lot of government attention these days.  Consider a wider search for wealth building situations and look for more benign governments.

The lesson from all this.  Pay less attention to people who tell you how macro systems work until you know how they captured and organized their data.

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.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Now and Then

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.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Don’t Take A Knife To A Gunfight

What, if any, is the duty of a financial adviser to educate their client as to macro and micro economics, taxation, psychology, longitudinal spending models, mortality and morbidity models, financial products and processes, financial planning in general, their plan in particular and how they are all connected?

Make no mistake, they are all connected.

If the client does not know enough, at some point the client ceases to be the planner and the adviser, by default, becomes the planner. That point will be different for every adviser and for every adviser/specific client relationship. It probably changes over time too.

It is when the client stops making the strategic decisions and the adviser adds strategic decision making to the tactical and logistical things they were doing before.

The ideal relationship is one where the client knows what they are trying to do, when they need it done, who is involved and with what resources it will be achieved. The adviser supplies methods of achieving the goals and implements the one or ones the client decides upon.

Problems happen when the client is incapable of deciding which tactics to implement because they have too little knowledge of the surrounding circumstances. This is when the adviser’s “closing techniques” become important. Advisers make little money if the client does not make a decision. So there is a problem. If the client cannot make the decision a skilled adviser ends up making it for them.

Most of the time that won’t matter because if the client knew enough about all the circumstances, they probably would have made the same decision. It becomes a problem under three conditions:

  1. The adviser did not know enough about the client and in fact the client’s decision would have been different.
  2. The adviser is acting in their own best interest
  3. The circumstances change later and the client accepts no responsibility for the failed decision

The world is a big and conflicted space. A well-armed adviser cannot take a poorly armed client into that space and believe that they can be the protector under all circumstances. That would be like the adviser going to a gunfight with the client. Adviser with a machine gun and body armor. Client with a t-shirt and a Swiss army knife. The adviser would have to be right every time for the client to have a hope of survival and the client could not contribute anything to make the adviser’s job easier.

Clients must participate. Client needs to understand both the purpose and the general idea of the techniques employed. They need to understand their resources and how their needs change over time. They need to be able to understand how they fit into the world and how their techniques might change if the world changes. They do not have to be experts but they need to know the general idea. Aware is good enough.

In the army the smallest fighting force is a mutually supporting pair. A well-trained pair is dramatically more powerful than two individuals. Individual soldiers do not do well in combat.

If you are smart as an adviser, you will train your client/partner. Your survival may depend on it.

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. | Twitter @DonShaughnessy | Follow by email at moneyFYI

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