THE CERTIFIABLE PLANNER™

As financial advisors we spend a ton of time collecting client’s goals for “the future”. I am certain that most financial planning software is literally overflowing with goals that clients will never bother to act on. Not because they can’t afford to, but because nobody is pushing them to pull the trigger.

Can you imagine spending 30 years doing something regularly, having it work out really well, then one day be expected to start doing the exact opposite?

This is exactly what an entire generation of recently, or soon to be, retired people is expected to do. Transitioning from saving and investing for the future, to withdrawing and spending for today. This really is an epic mindset switch.

The financial advice community really loves to talk about “investor behavior”. How many books and blog posts are written, my colleagues included, about how big a part behavior plays in a successful wealth accumulation plan? But what about when the accumulation part of your plan is done?

The financial advice industry has spent the last several decades doing everything possible to bring new investor dollars in. There are more than $25 trillion dollars currently sitting in qualified accounts in the US that needs to be spent on vacations, weddings, college educations, and all the other line items collecting dust in a financial plan somewhere.

Whatever is happening in the world right now may cause your retirement account’s value to fluctuate some, but will not likely impact your long term plan. That is, unless you decide to behave poorly and “get out of the way until this / it passes”. 

Dimensional Funds puts out some truly fantastic research, they really nail this point here:  

From 1970 to 2013 the S&P compounded at 10.40%, not bad. However, had you missed the single best trading day over that time frame you found yourself earning slightly less at 10.13%. At first glance that may not seem like much. That is of course until you realize you are talking about 1 day over the course of 43 years having a measurable impact on the outcome. What if you missed the 5 best days? 9.33% The top 25? Well you would have earned 6.86%, which is only slightly higher than what One-Month T-Bills did over the same time period: 5.17%

We simply do not have the ability to know when the best days are going to be, no one does. 

Here are a few factors that actually do matter: 

Awareness of what long-term actually means

According to a study done by Dalbar, the average holding period for a mutual fund in the US is 3 years. This tells me that most people have an unfortunately limited grasp on the concept of long-term. 

Having a strong belief in what you are investing In

Are you making an investment, or just buying something? If it’s the latter, you should probably rethink your decision. Having a strong belief in what you own will go a long way towards helping keeping your behavior in check. 

Being diversified 

Do you own a well thought out variety of asset classes in appropriate weightings? Aside from potentially adding significant returns over time, diversification will really help to mitigate the effects of volatility fatigue on your psyche. 

Managing your behavior 

Instantly accessible information has made seriously cynical consumers out of us all of us. Using our surgically connected devices, everything gets checked out. At this point, basic purchases require a forensic audit of every mention the item or service has ever had long before we are ready to commit. 

Bottom line, multiple well-vetted citations are needed prior to our confidence being won over. One review on Yelp or Amazon won’t do. We require more sources than tough-grading graduate level professor in order to complete our narrative. 

Try this as an experiment: Google the term “best toothbrush”. It likely won’t be your first inane attempt to conclude what the “best” product is. It wasn’t even my first time looking into the nuance of oral hygiene technology. Best part? The search yielded nearly twenty million results.

Let’s take it a step further and exchange topics from the pre-purchase research of low-end consumer goods to more costly items, like professional services. Specifically those who make a living playing the role of expert and dispense advice for a fee. 

When was the last time someone’s opinion, or advice about anything meaningful to you went un-googled? I bet you can’t even remember. And why not? With a few key strokes we can drop our bucket into a bottomless well of information using a device that is likely no more than three feet from you right now. And come on, what feels better than debunking someone’s BS? Not much. 

So I searched for another phrase. I swapped “best toothbrush” for “questions for a financial advisor”, this time I got almost twenty-three million hits. 

There were literally dozens of “Top Questions to Ask a Financial Advisor” posts and articles ready to annihilate any chances you had of feeling confident before or after talking with a potential advisor. 

I personally attribute this demand for answers to two key factors: a deservedly high level of public distrust for the financial services industry and a lack of institutionalized financial education. Students spend more time learning about a plant’s cell walls in school than they do figuring out how to balance a checkbook, never mind understanding the basics of investing.

As a result of these mistakes, many of us end up starting off relationships with financial professionals on pretty bad footing. 

I spend a great deal of time talking with interested potential clients here at our firm. I am fortunate because most of the people coming to us have been reading my partners Josh Brown, Barry Ritholtz, or Michael Batnick for a decent amount of time, sometimes years. This results in a relatively high level of financial literacy, contrasted with someone coming to a typical firm based on a game of golf and a steak dinner.  This wasn’t always the case for me; I spent the first 5 of my nearly 8 years as a financial advisor in a major wirehouse brokerage firm. In the wirehouse, golf and steak overwhelmingly trump reading as the primary motivator for purchasing services  

Consumers are basically adrift on an ever expanding, (mostly) un-curated ocean of noise. Someone desperately afraid of running out of money in retirement ends up justifiably bewildered. It is difficult to decipher signal from noise when there is so little trust, and so much noise. 

In my opinion, there are the 3 characteristics good financial advice should contain: 

It should be given by someone you like who is qualified to be giving advice. This may seem so elementary, but it’s absolutely worth noting. Financial success is not typically something that happens in short periods of time. Most times it requires long stretches of behavioral adjustment. Therefore, the giver of advice is likely someone you will want to develop a relationship with. Relationships without chemistry are not usually very successful for any useful period of time. They should also be qualified to be giving the advice. A great place to dig into their background is brightscope.com. You can see their work history, and whether or not it contains any disciplinary actions or misdeeds along their path. 

It should only be given after arriving at a conclusion based on an exploration into your needs. Taking off the cuff financial advice should be avoided at most costs. If it is simply a fact or specific rule that applies to anyone - like IRA contribution limits at a certain age / income level, that’s fair. But if it has to do with how you should be allocating assets, how much you should be saving, what types of accounts you should have - these are all things that require developing a far deeper understanding than a brief conversation can offer. 

It should be simple for both the receiver and giver to understand. If the person giving the advice has your better interest in mind, they will have a deep grasp whatever it is they are recommending you do or invest in. If they truly do, it will be conveyed with ease. It may require some detective work on your part, but it shouldn’t be too difficult to figure out if you are listening to someone who doesn’t deeply understand the stuff they are talking about. 

“A good traveler has no fixed plans, and is not intent on arriving.”

-Lao Tzu 

My wife and I love to travel, but we approach it differently. She prefers following a strict itinerary. Her best case scenario involves coupling maximum predictability with minimum variability. She will spend months planning for a week long trip. Her expectation is that the probability of a fulfilling experience can be increased by actively reducing unplanned moments. 

Fortunately for us I am a counterbalance to this kind of behavior. After transportation and accommodations are taken care of, I am game to just see how things go. A little bit of aimless wandering around unfamiliar territory actually gets me really excited.

It should come as no surprise that I approach investing and financial planning very differently than I do travel. I prioritize planning to reach the destination far above savoring the journey. Here at the practice, I make sure our clients do the same. 

With investing, and mostly everything else, disciplined behavior plays an outsized role in determining the probability of success. Expecting repeated bouts with wanderlust in any multi-decade endeavor should come as a given. Anticipating it when it comes to investing, and preparing accordingly will help you tremendously. 

A well structured plan should have enough gravitational pull to bring you back to your baseline in the face of constant distraction. That baseline is whatever is required in order for you to accomplish your goals. It could be the percentage you need invested in equities, your optimal annual savings rate, perhaps it is simply sticking with a portfolio of investments in the face of volatility fatigue.

The White House recently issued a report which concludes that the cost of conflicted advice to retirement investors in their 401k & IRA accounts combined exceeds $17 Billion dollars annually.  The report finds that a great deal of this comes from client assets being directed to funds that may not be the best option for the client, but are the most lucrative to the broker.  

This is part of an ongoing national conversation, specifically around who can offer advice on how to manage your retirement plan. 

The report cited above argues in favor of the a fiduciary standard for advisors.  

A financial advisor acting as a fiduciary to you must act in your best interest all of the time. If they are aware that a superior option exists, they must advise you accordingly. If you are paying for something, you must know exactly how much. The business relationship simply has to be 100% transparent.  

Brokers sell products. The only qualifier is that they can be deemed suitable for you. The existence of a potentially superior alternative doesn’t matter. Certain products compensate the broker more than others, which is between the broker and the vendor. Your relationship with a broker is transparent to a point, everything else is as grey as they want it to be. For example, the commissions you pay when purchasing individual bonds from brokers does not need to be disclosed to you.  

There are hybrids who are both brokers and investment advisors. As brokers, their job is to sell a product, but as advisors, their implied job is to help you. The problem is, it is sometimes difficult to tell when they are playing which role. This is especially true and important when they are pitching you.

Outside of going at it alone, business owners setting up a 401(k) plan for the benefit of their employees have two places to turn for help:

(a)  brokerage firms (b) Registered Investment Advisors

If they choose (a), there are likely better products available, but brokers are unable to sell away from their firms. Anything not on that brokerage’s platform would be considered to be away. As a result of this restriction, potentially great options absolutely can not be presented to clients. 

Employees may be better served by a low-cost, plain vanilla plan rather than the brokerage firm's options. On top of the misaligned incentive, some of broker sold plans are loaded with layers of confusing high fees and expensive mutual funds. Brokerage firms love them, and as a result they are everywhere.  

As a result of the stance taken in this White House report I suspect this issue will quickly become very political. The brokerage lobby is very well funded, and most firms will do their best to avoid further transparency.  Although as Josh Brown pointed out today, at least one of the larger firms is looking to get ahead of this issue.  I hope others follow, but I doubt it.  

The single worst investment strategy is the one that you aren’t able to stick with. 

Let’s assume for a moment that you followed Warren Buffett’s sage advice for smaller investors.  You called up your broker and exchanged your high-cost, actively managed mutual funds for the S&P 500 in the lowest cost vehicle available.  As a result, you proudly ponder that it may have been one of your finer decisions.  

But..What if you are taken off course?  Or as it turns out, you just can’t stomach the volatility inherent in an all-stock portfolio?  Maybe the S&P experiences another 2000-2009 and you are too disillusioned to stay invested.  Worse yet, you may simply pay heed to the itch to try something new.  

If it turns out that you were ill suited for the investment in the first place and you abandon ship,  Buffet’s wisdom will have been for naught. 

When it comes to investing, you may have been better off heeding another piece of advice: To Thine Own Self Be True. 

Buffett’s recommendation left out the incredibly important emotional dynamics of investing. Most investors become fatigued by volatility, and fatigue tends to drive them off the road.  You simply may not be cut out for investing 100% of your available capital in equities.  

The other thing is, It’s likely that you don’t actually need to be fully invested in stocks.   A 60/40 diversified asset allocation portfolio would overtime likely prove to be the right solution.  Furthermore, there is a possibility that you shouldn’t have all of your investments set aside as long-term.  Your personality may benefit from a small “play” account where you can lose money all by yourself.  Whatever it is, there is more to this than just buying and walking away.    

When it comes creating a successful investment plan a little bit of introspection will go a long way.  

Why do you invest?  

I bet you can offer a couple of decent reasons why you have money in the financial markets.  I explain to my clients that the purpose for their portfolio is simple:  It is designed to protect the purchasing power of their saved dollars for some point in the future.  If you are a long term investor, I imagine your answer would be fairly similar to mine.  

What if you looked at this from another angle.  What if you were asked for the reasons why you don't invest?  I am not asking for the reasons why you keep money out of the market.  Instead, I am asking you to think about the results you should not expect to come from investing.  

One important reason not to invest is because you believe that your investments will immediately begin appreciating starting from the moment you bought them.  Although the possibility exists for this to be the case for a period of time, it should in no way be expected.  Keeping a short term perspective and anchoring yourself to the date you purchased investments or initiated a financial plan will inevitably lead to disappointment.  The problem is that for most people they intuitively believe this to be the way investing works.  

Like everything else about investing with a long time horizon, having the discipline to accept this concept is very difficult.  Especially lately.  If you invested in a globally diversified asset allocation strategy that doesn't seriously overweight the S&P within the past several years, you may be considering something that would help prove a really unfortunate statistic: the average holding period for a mutual fund in the US is only 3.3 years.  I have never seen a long term investment plan with a 3.3 year time horizon.     

For your long term investment plan to work, you must begin understanding the right reasons you invest.

If you are 50 years old and stand a chance of living until you are 85, you have 420 months left to receive brokerage statements for your retirement accounts.  That's a fair amount of wasted paper, but it's a ton of unnecessary stress and strain.  I firmly believe that our tendency towards hyper-vigilance when it comes to the unavoidable ups and downs in investing is one of the worst habits we have developed as investors.    

According to an often cited research report published by Dalbar the average mutual fund holding period is 3.3 years. If they are right, then you supposed long term investors will have swapped the last fund you bought ten times  before you make your last trade. Which is ironic considering you likely bought it because of its "great long term track record".  

For context, here are the last 420 months of the DJI: 

And here is the most recent month of the same index:

Let's be optimists here and assume for a moment you have done the right thing. You have on your own or with the help of a trusted advisor built a low cost asset allocation portfolio. It is specifically designed to get you through a tremendous amount of time, multiple decades in fact. It is tied to some form of a financial plan which has taken into account all sorts of potential pitfalls; inflation, market turbulence, taxes, future withdrawals, and then some.  For all intents and purposes you are in great shape.  Ignoring all of this you tear open your statement like it's Christmas morning month after month. Because despite the time you have committed and the mountains of data against it, you are hoping that this was the month you knocked the cover off the ball.  Most of the time you end up disappointed.    

So what is the end result of you keeping score of something as arbitrary as the month to month movements of your retirement account?  Well for one, you are likely to confirm Dalbar's study and make unnecessary trades.  That won't help you hit your goals.  Or worse, your terrible habit  will cause you to abandon your plan all together.  

At it's core a Financial Plan is a behavior management tool. 

It can be a 30 page PDF produced using sophisticated software, a single printed page, or an app on your phone.  It's the message that matters, not the medium.  

It should contain at the very least these three elements:

It should help you decide what to do or what not to do when your emotions inevitably drift.  Simply referencing the plan should be enough to sway you from making decisions that would be detrimental to your long term success.  

It needs to be amendable for when your life also inevitably drifts.  What if you have a child?  Or a second one.  What if you decide traveling the world has greater value than building beach house?  It's likely that the expectations you have for future spending will shift.  Much of your life will eventually change and your plan should be elastic enough to deal with these inevitabilities.  

It must be viewed as realistic.  It doesn't matter how well some investments may perform, if your goals are out of sync with your own reality they will never happen.  You must be able to view what you are setting out to achieve as achievable, otherwise you will not respect the plan enough to stick to it. 

Unnecessary complexity will compromise your plan, and bad financial behavior will destroy it if left unchecked.  For those reasons alone simply incorporating these three elements from the beginning will put lightyears ahead of those who don't.  

Success in finances and investing like so much else in life is determined disciplined behavior. A Financial Plan administered on your own or with the help of a trusted advisor should help you keep this fact front and center.  

You've been told since you were a kid not to make mountains out of molehills, but you do it all the time.  Human emotion simply gets in the way and acts as a drag on some of the most mundane things we do.  

Financial planning is a perfect example.  

The most relevant organization in the profession identifies the task of financial planning rather succinctly right here (from cfp.net): 

These six steps aren't meant to be sexy or exciting.  They are meant to be actionable and mechanical.  Clients and planners with the help of a few basic tools should be able to methodically take these steps together leading disciplined participants on both sides of the table to a relatively pain-free and ultimately rewarding experience.  

If only.  

Each one of these six steps basically invites emotional interference, and it's not all on the part of the client.  Step 1 is the perfect opportunity for a planner to set expectations for a long healthy client relationship, but too often the desire for new business turns it into an unrealistic sales pitch. Step 3 is prime time for a guarded or self-conscious client to intentionally or not over or underestimate their own situation, starting the plan of on the wrong foot from day one.  But it's Step 6 where I believe most problems occur.  

Using the Vanguard S&P 500 as an example, too often when the client sees this:

The planner often simply points to this:

In these examples, neither party would be wrong.  Both of those time frames accurately represent a period of progress of an investment in a very widely used vehicle.  The problem here is not one of black and white accuracy, but emotional perspective.  It does not have to make rational sense, if a client sees that there account is down 20% for the month it's the planners obligation to acknowledge the strain this causes them.  In fact, it was the planners job to identify the inevitable volatility prior to it occurring.  

The problem here is not simply that short term volatility has occurred.  A period of poor performance is likely irrelevant when it comes to the mathematical success of a financial plan. Instead, the problem is that we have the tendency to turn molehills into mountains.  Emotion is what too often truly derails the most well intentioned plans, not performance.   

Here's my recommendation going into the new year: simplify your financial plan. 

I strongly believe that the likelihood of achieving any goal diminishes as the endeavor's complexity increases.  

It's my educated suspicion that the majority of investors are planning for retirement.  I would venture to say that many of them are overwhelmed by the task.  As a result most end up either 1) procrastinating and do nothing or 2) come up with a one time hyper detailed plan, placing truly unrealistic expectations on themselves.  Either way they are setting themselves up for failure.  

What to do?

The first question I always ask when creating a long term plan for clients is very simple, yet few are able to answer it without being stunned for a moment or so... 

Putting discretionary extras aside, what does your month to month lifestyle cost you?  

The answer to this question is your number.  This is the base you have to be able to write a check for every month for the remaining years of your life after giving up the nine-to-five.  

Forget the multi million dollar figure that some piece of software is spitting out at your for moment.  Before you come up with any esoteric future account value you need to make sense of the basic cost to keep you going. This may seem like an oversimplification to you, but it's not.

I challenge you to sit down over the coming days and sort this out.  If you are one half of a couple, invite the other half to join you.  I think the best part of this is not the outcome, but the journey.  You will likely learn something along the way.    

In a world scattered with financial pitfalls, carrying high cost debt is the worst. 

Deliberately making the decision to pay someone close to 30% for the ability to purchase consumer goods is the peak of cognitive dissonance.  It’s like handing someone a shovel to dig you into a hole that just keeps getting deeper.  It is quite literally the exact opposite of investing in a low cost index fund. And like any other vice that can become a habit, it is especially terrible when you start young. 

This weekend my Daughter received a “student credit card” offer in the mail, and it’s beyond belief.  Please see the picture below for some context.

  The idiotic images of freedom and consumerism in the picture above are actually stickers for the student to place on their 1st Financial Bank USA credit card.  This type of garbage is on par with the years of now banned tobacco marketing that was aimed at children.  Just look at the one that says “Top Secret - I Love Math”, it is just comical in it’s absurdity. The offer comes along with a 29.9% APR, it’s not likely that any holder of this card would be mathematically inclined whatsoever.  

According to debt.org the average undergraduate student carries $3,200 in credit card debt and the average graduate student now carries $7,800 which is up 60% from 1998.  If the undergrad stopped adding debt now and only made the minimum payments of $164 it would take 15 years to pay down that $3,200.  The graduate student would take closer to 20 years to pay down the balance.  And this is on top of the average student loan debt of $29,400.  

Want a quick way to improve your financial situation?  Increase your 401(k) contribution, even it only by a little.   

You probably won't. You are concerned that increasing your contributions will dramatically impact the amount in your paycheck.  You certainly would be reducing your take home pay, just not by nearly as much as you think.  

I have run some basic calculations for you, starting with a few assumptions:

*you have a $100K salary  *you claim 3 dependents (you're married with 2 kids)  *you are investing in a low cost S&P 500 Index Fund, and earn 8.3% average returns over multiple decades  *your employer does not match your contributions 

A 4% contribution works out to be roughy $93 (bi-weekly) less in your paycheck.  That $93 dodging the current tax hit works out to be right around $153 invested. 

Upping it to 7% takes you down another $75 each paycheck (or $168 monthly) and gets $269 into your account.  

10% gets $384 into the account and means a reduction of $249 from your take home pay.   

Be sure to understand that these figures are dependent on a number of factors: your various other pre-tax deductions, the amount of dependents you claim, etc.  But it should be close. 

So what does that mean for the long run to you? If you are saving now, and are in your mid 30s, investing in an S&P 500 Index Fund earning 8.3% average over the next several decades (with retirement at 65)..

At a 4% contribution rate: close to $900,000 

At a 7% contribution rate: close to $1,500,000

At a 10% contribution rate: close to $2,100,000

calculation cred: paycheckcalculator.com 

"What's the market doing?" This is a somewhat acceptable conversation starter if you work in active money management. If you don't, here's what your answer should be: "Who cares?". 

What any one major index is "doing" at any given point throughout the day should simply not matter to you.  

 Here is what you should ask yourself before the next time you check on "the market": "What impact will this information have on my financial life?"

If you are doing the right thing for your long term investment success the real answer should be clear - none.  If you have a plan in place, your job is to stick to it.  Market up?  Stick to the plan.  Market down? Stick to the plan.  

Why do you feel the need to do it then?  I'll tell you why - because the financial services industry aggressively solicits your voyeurism.   The industry makes a boatload less money if you do the right thing for yourself.  The beast needs to be fed.  It requires daily activity from you, it thrives off of it.  Your emotional reaction to market movements is simultaneously profitable to investment companies and detrimental to your success.  

Before you pull up any one of the big sites for the latest read on "the market", ask yourself: 

Are you imagining that todays movement in the Dow will have any impact whatsoever on your long term financial plan?  The companies selling plans hope you think so. 

Are you hoping that the machinations of the three most followed stock markets will help you pick an ETF or Mutual Fund to outperform another?  The product manufacturers are. 

Do you believe that the most recent % change will help you sort out what your next trade will be? The brokerages are banking on it. 

In most industries we associate a new idea with progress, this is not generally the case in finance. In finance ideas are often no more than catchy stories about an investment told in order to sell it.  This culture of acting on "ideas" is a big part of why so many investors end up confusing random portfolio activity with good financial advice.  

There are ideas for when the market is going up.  Ideas for when it is correcting.  They even have ideas for when it is flat.  The thing is, very few of them have anything to do with your long term investing success. 

Mutual Funds companies are really good at packaging ideas.  A favorite method in the tool box of mutual fund salespeople is the long term mountain chart.  Investors are presented with 10, 20, and sometimes 30 years of performance that the fund has provided it's investors.  What's left out is that after fees and taxes an investment in an S&P 500 based index fund would have likely yielded better results.  Couple that with the simple fact that you are just very unlikely to own the investment for anywhere near 10, 20, or 30 years. Actually, the data says it's quite a bit less...

ACCORDING TO DALBAR, THE AVERAGE HOLDING PERIOD OF AN EQUITY BASED MUTUAL FUND IS 3.3 YEARS.  

Why so short you ask?  Well, someone likely had a good idea they shared with you along the way to real investing success.