The Financial Forest

Finance, no matter how broadly or narrowly construed, has become witheringly detailed and complex.  Whether the issue is physics envy, active investment management, high-frequency trading, neuroeconomics or any other finance-related area of inquiry, the discussion is increasingly dominated by experts, real and alleged, and the communication is increasingly specialized, detailed and inaccessible.  This trend is recognizable across-the-board, whether the focus is institutional or retail, big firm or small, financial planner or investment manager, bulge bracket or independent, broker or investment adviser.

Lest you think that I am yet another Luddite tilting against the windmills of progress, I hasten to emphasize that I think such inquiries and the resulting specialization are appropriate and even necessary.  That said, this trend makes it more and more difficult to discern the proverbial financial forest for the trees, especially as it relates to those who would be the object of our financial services.

No plan – whether it’s a financial plan, an investment plan, a retirement plan, or some other plan – can succeed without a thorough understanding of the overall context in which it must operate.  That means acquiring a comprehensive understanding of the client’s situation as well as the client’s existing, deferred and contingent needs, goals, objectives, obligations and aspirations. Advisors must then ask careful and probing questions about that context – to stress test it – so as to begin a series of dynamic conversations designed to acquire and achieve a full understanding of who the client is, ought to be and wants to be, where the client is financially as well as in the aggregate and where the client wants to go.

These conversations are necessary in large measure because of the behavioral biases we all suffer together with the unfortunate reality that we see these problems and issues much more clearly and readily in others than in ourselves.  My friend Tom Brakke’s point about the investment process applies in this broader context as well – to succeed, we need to have the right people involved in having personal and organizational conversations with the right issues addressed.  Moreover, the ongoing dialogue should meander in constructive rather than destructive ways.

Whether one’s focus is broad-based financial planning or some aspect of it (such as retirement planning, for example), investment management, advisory services or some other segment of our industry, it is crucial that advisors keep the financial forest in mind for the clients they serve via regular assessments and re-assessments built into one’s process. I trust that this broad rubric will provide readers with a solid basis for thinking about, developing, evaluating and re-evaluating the essential elements of all things financial. 

Ultimately and obviously, this type of analysis must include a thorough-going self-analysis of and by the client. This analysis should consider the following seven areas of inquiry which can help to focus the inquiry on who they are in order to ascertain where they are.

Not surprisingly, a consideration of one’s financial well-being begins with money.  But too often we jump straight to what we want our money to do before considering what money means.  Doing so requires thinking about money in a larger context.  How important is money to you, and how much of it do you need to lead the life you want?

In Tolstoy’s story, How Much Land Does a Man Need?, a peasant farmer is advised that he can take ownership of as much land as he can encircle in a day. The farmer then pushes himself to the utmost so as to run around as large an expanse as possible, whereupon he keels over and dies.  It is an obvious parable, obviously, but it can help us to focus not just on things of immediate or temporal value, but of lasting and intrinsic value.  As the saying goes, nobody lies on his deathbed wishing he’d spent more time at the office. 

Once that basis is established, we can move on to consider what money we have, how much we need to have, how much we’d reasonably like and can reasonably expect to acquire, what we’d like the money to do, how best to hold onto it and in what time frames this all can happen.  It’s no easy task. 

Vocation connects to money because how we spend our time is limited by the financial resources we have at our disposal. Most of us have to make a living.  After an initial screening process based upon talents and abilities, my career advice to my children has centered on three primary questions:

• Does it matter?
• Is it enjoyable?
• Does it pay well?

In my experience, the trade-offs involved in considering these questions provide a solid foundation for deciding upon one’s vocation.  Unfortunately, a “clean sweep” doesn’t happen very often. 

Where vocation is established, what it means to the financial process can be examined.  As Moshe Milevsky has so eloquently pointed out, a client’s human capital is a crucial component of the planning process. A client with a relatively safe job (e.g., tenured professor) can and should plan differently than a client with a relatively risky job (e.g., hedge fund trader).

A related issue is leisure.  Modernity has provided us with a measure of “free time” to use as we see fit. Accordingly, these non-work activities are also constrained by the available resources.  Moreover, for many people retirement “leisure” includes vocation – due to choice or necessity – albeit perhaps at a different pace, with less financial pressure, or even involvement in something that is totally new.

Neither vocation nor leisure may be undertaken without adequate health. Obviously, that means making provision for healthcare, current and future.  It means making provision and allowances for health issues and concerns.  It also means caring for one’s health and deciding what one’s health has to do with one’s activities.  For example, some experiences must be pursued when young and vigorous.  If one has a major goal of climbing K2, one probably shouldn’t wait until age 70 to try to do it, even if it entails financial sacrifice.  Life-cycle investing is important and valuable – what one’s life “looks like” during those periods is important too.

Every client lives in community to at least some extent.  It usually begins with family, of course, and radiates out from there.  This community provides social capital, the expected collective or economic benefits derived from the preferential treatment and cooperation derived among individuals and groups.  Those in different communities and different types of communities will have differing financial outlooks and needs. For example, those with large and closely knit families have different needs and concerns than those without family.

Death can supply much-needed context for thinking deeply about financial and related matters.  Unfortunately, most of us avoid thinking about our death and its consequences.  Thinking about mortality reminds us how fleeting our lives are and pushes us to consider what our legacies can and should be. The prospect of death can help us to see more clearly how we want to spend our days and how we wish to be remembered.  It can also spur us into better planning for those we will leave behind.

Undergirding this entire discussion is the concept of meaning.  We are meaning-makers as a matter of course.  We want our lives to have meaning and purpose.  What we value will necessarily influence how we look at all the elements discussed herein.

This list isn’t exhaustive.  Different people will go about thing differently.  Your mileage may vary. But this sort of endeavor is crucial to the planning process. As Lewis Carroll expressed it, if you don’t know where you’re going, any road will get you there.  And if you don’t know who and where you are, you’re defeated before you’ve begun.

It is possible, however (as Michael Kitces pointed out to me), to focus on the client so much that the overall “forest” of financial planning research and understanding is neglected.  A client who is willing or even anxious to reject what is demonstrably best (when that is clear) because of claims that his or her “situation is different” needs to be carefully cautioned about the risks and potential consequences of doing so.  Every financial plan involves assorted weightings of interests and compromises of various types, but we advisors are all too often willing to accede to a client’s erroneous wishes in order to keep the peace or even keep the client. 

Not every client is even willing to engage in these types of conversations.  Perhaps it’s a matter of privacy or even a lack of trust.  In those instances, a financial planner can only do the best job possible under the circumstances while looking for opportunities to probe the areas deemed off-limits and to emphasize and demonstrate the importance of more and better insight.

My father taught me that whenever I went somewhere new, I should try to understand “the lay of the land” both physically and metaphorically.  That meant getting a feel for the broad sweep of things – the general context, in other words.  At the risk of mixing metaphors, that means we should understand the financial forest before getting down to the nitty-gritty particulars of the planning process (the individual trees).  Nearly all advisors know that this is true, but it’s easy for us to get ahead of ourselves to jump straight to “the financial part.”  It can feel like planning to plan instead of actual planning. 

Finally, when the planning process is thought to be complete, it is helpful (imperative!) to take a step back (again) and consider the plan in light of the financial forest.  If it fits the contours and the context of the client’s life – both actual and aspirational – you have a good start at a working plan.  However, no good plan is ever set in stone.  It must always remain subject to change based upon changed circumstances, new information and better understanding.  After all, a healthy forest, like the trees within it, continues to grow.