As an advisor, there are three traps you––and by extension, your clients––can get caught in:
1. Predicting the future
2. Executing perfect timing
3. Focusing on outperforming last year’s returns
You could argue that these are simply goals and a reflection of confidence in yourself as an advisor. That may be true, but you’re also setting up yourself (and your clients) for failure. Eventually, something will give and it’s most likely going to be your clients’ faith in you.
Why put that kind of pressure on yourself? Instead, focus on what you can control, instead of promises you cannot deliver. Remember, you’re a financial advisor, not financial prognosticator.
How often have you heard a client ask, “What do you see happening in the markets in the next year?” Keep in mind that the advisory sector has encouraged such questions in the past because this was where they were placing their value: on soothsaying next year’s developments. The truth is, none of us can predict the future—those who do are usually wrong.
To execute perfect timing, you only have to know two things: exactly what is going to happen and exactly when it’s going to take place. In one study, from 2002-2021 the average difference between the target price estimates by industry insiders at the beginning of the year and the final price for the index for that same year was less than 10 percent! You would have better odds by just flipping a coin. Heads, the markets go up. Tails, they go down.
When it comes to measuring your client’s financial progress, tying your value to measures you can’t control, including competing funds and indexes, can set you up for failure before you’ve even gotten started. It is not how they are performing against some outside measure, but rather how they are performing against their personal potential that matters most. What they are doing to hasten their progress is the first order of business. How the markets performed is a subsequent conversation to the first.
Focus your conversations on gauging progress with your clients. By definition, progress is a very personal issue because it cannot be measured without first taking inventory of where you are now and where you would like to be in the future. The common dialogue in financial services has mistakenly placed more emphasis on where clients would like to be rather than on where they currently are––and that has the potential to put them at a disadvantage. Why? Some clients have unrealistic expectations on future returns because they are being unrealistic with their current cash flows and spending habits. Progress is impossible to gauge without a clear picture of “where we are at.”
Predicting the future by looking backward is projecting how investments will perform tomorrow by viewing what has already happened. Do track records matter? Of course, they do. But do you want to be held responsible for the unexpected? The most successful advisors know it’s worth their time to explain to clients that what happened yesterday is generally a poor indicator of what will happen today and tomorrow.
The right question to ask your client is, “What return do we need, and what amount of risk can we tolerate for your specific situation?” This is a more applicable measure than measuring how you did against such and such an index. By measuring returns based on individual client needs and capabilities, we are measuring what matters most and are––by virtue of life transitions––measuring dynamically. The kind of return your clients aim for will change as their life situation changes.
Doesn’t it make more sense for you and your clients to anchor your value in factors you can genuinely control and impact over time, rather than forces over which you have minimal control? Of course, quantitative measures are useful, but they should be focused on a more personal number.
Each client’s life situation is unique. Their obligations, goals, challenges, and opportunities require an individualized attention to detail. There is a very good chance that your client’s “number” is going to be found in the balance between meeting obligations and staying on track with goals.
Personal financial planning requires personalized measures for progress. How you go about calculating this number will be a work in progress, because it’s hinged to life transitions and changes in scenarios that never sit still. The rate of return you and your client agree to pursue isn’t as important as the fact that you are unfettering your practice from the stress of always trying to predict the future, execute perfect timing, and beat someone else’s returns.
When authoring The Life-Centered Financial Planner, my coauthor and I talked to an advisor whose firm had begun using a system that monitors what clients said they would save, how much they actually did save, and how the difference was going to impact their plan over time. The first time the advisor used this report with a client was on the heels of having just discussed that client’s returns. The epiphany that both this advisor and his client had was that the numbers clients committed to and actually achieved (i.e. the monitored numbers) were much more relevant than the return’s number.
Good track coaches have a practice of getting runners focused on their personal best, not on beating state records. The reason is, if athletes focus on some unrealistic number “out there,” they can be easily discouraged. Instead, if they focus on constantly improving their personal best—instead of someone else’s—they can stay focused on improving their performance.
As you plan for 2024 and beyond, think about focusing on establishing personal bests in overall financial performance: spending, saving, protecting, investing, and giving. The best measure of success is knowing you have run the race well. And this is the best gift you can give your clients—and yourself.
