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A Structured Planning Process

“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where–” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“–so long as I get SOMEWHERE,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”

If you read the statistics at the top of the Financial Well-being section, you’d realize that a shocking percentage of our society will not achieve the vision they have for themselves or their family.

They won’t retire when and how they want to, and they won’t endow their children with a post-secondary education without a student-loan balance that impairs both their own, as well as their child(ren)’s standard of living. There are a number of reasons for this phenomenon, but there is one, in our opinion, that stands out as the primary culprit: The globalization of commerce, and the extraordinary strains it is placing on both parents and students.

The financial burden of higher education might be the most vicious aspect of the globalization of commerce.

Financial and physical capital can move anywhere around the globe today, in astonishing speed and efficiency. This means that the global labor pool becomes accessible to even some of the smallest enterprises. This creates competition among aspiring employees on a global scale, making wage gains harder to obtain, and the natural offset to that, higher education, increasingly mandatory. And while the cost to educate our younger generation hasn’t risen significantly in the past few decades, the proportion of the overall cost that parents and students must shoulder has risen significantly. In other words, students and their families are forced to eat an increasingly large piece of the pie.

Families, therefore, are forced to decide between saving for their children’s college education, and their own retirement.

Because of global labor competition and slowing wage growth, the proportion of families capable of balancing both is dwindling. The end result is 1) a student that gets an education, but is saddled with thousands of dollars of debt that they must pay off before they can start saving for their own retirement, and/or 2) parents that fall behind on saving for retirement, which they often attempt to compensate for by reaching for higher returns within their investment portfolio. They do so despite the fact that reaching for higher returns comes with a higher degree of risk and portfolio volatility (since risk and return are two sides of the same coin), which can rob a family of sleep at night.

It’s a vicious cycle, but it’s not unbreakable.

So how are families supposed to break this cycle? Hint: It can’t be accomplished solely through investment returns. It starts with a plan of action, a strategy, a roadmap. A structured planning process. Sounds simple, right? So why don’t more families employ one? For two reasons, in our opinion.

First, because the reality of planning is not as simple as the description would otherwise indicate. Second, because implementing a planning process necessarily incorporates accountability, for both the investment manager, who is responsible for delivering the required rate of return, as well as the family, who is responsible for consistently saving the required amount. Let’s start with the reality of planning, which can be summarized by the following question:

How can I plan for the future, when the future itself, as well as the path to get there, is not only unknown, but unknowable?

Pretty daunting task, eh?  So why even bother? For two reasons. First, because the alternative is complete and utter dependence on Lady Luck, which, unfortunately, is the path too many investors choose, as irrational as it might seem. Second, because while the question suggests an insurmountable task, the truth is quite different.

Although our financial future is unknowable, planning for it only appears to be an insurmountable obstacle.

Our clients have no problems clearly articulating their goals in life, and because of their clarity, we can, with a reasonable degree of confidence, attach financial requirements to those goals. We can identify various options, which represent all of the various paths a client can take to achieve their goals. We can also, pretty clearly, understand the various options and paths, their advantages and drawbacks, and when certain options and paths are simultaneously possible, and when they are mutually exclusive.

In truth, the only really daunting aspect of planning is the fact that we don’t know what path will unfold on the way to achieving our goals.

  • What will we be able to save every year?
  • Will we have to save less to take care of the leaky roof, or will the bonus be larger than expected, which will allow us to save even more?
  • Will our child(ren) get financial aid, like scholarships, grants, or other help when they go to college?
  • When will I retire, and will I still do something that comes with an income?
  • What will Social Security benefits be like for me when I reach the age where I’m capable of drawing them?
  • What will our investments return over the course of the next 20 years?

Who knows, but the key is, we don’t have to know the answers to those questions today. Not if we employ a critical element to the planning process, one that goes under-utilized all too often: Flexibility. We help our clients make decisions that balance moving forward toward their goals, while at the same time, maintaining the appropriate level of flexibility.

In other words, we fight fire, with fire.

The future is unknowable because it’s dynamic and fluid. Successful planning processes counter that dynamic and fluid nature with a healthy dose of flexibility. If (or more accurately, when) something unexpected occurs, clients can react and adjust because they’ve retained a high degree of flexibility. Previous decisions provide the flexibility to adjust to the new circumstances, rather than being locked into a rigid path with zero, or unpalatable, alternatives. Fluidity is the enemy of rigidity. The goal is to avoid rigidity unless there are clear benefits to making a decision that leaves little flexibility down the road.

Once the insurmountable obstacle of planning for the unknowable is overcome, the real question becomes one of accountability.

We suspect that families and advisors are equally reticent to engage in the planning process because a structured planning process necessarily incorporates two-way accountability. Implementation requires action, and action contains the risk of failure. If a family isn’t held accountable by their advisor, who helped them develop and commit to a plan, if the family fails to take the required actions, life in the near term is easier for both the family and the advisor, because both get to avoid an uncomfortable conversation.

If the advisor doesn’t help the family develop and commit to the plan, they are not committing to achieving the required rate of return that is part of that plan. In other words, they are not committing to achieving the rate of return their clients need in order to achieve their goals. This gives the advisor an excuse for their own, as well as their client’s, failure: the overall “financial markets” and the poor rate of return for an arbitrary stock index.

In other words, both parties are reluctant to step into a situation in which they could be held accountable, and therefore, be accused of failure.

It is exactly this accountability that makes both parties partners, and gives them both the best chance of achieving their mutual goals. In other words, it gives both parties the best chance to get where they want to go, without walking long enough to get there.

If you’re interested in reading about how the planning process can be tailored specifically to certain situations or how it dovetails with a disciplined investment process, we encourage you to review the following sections:

  • Business Succession Planning – For entrepreneurs and business owners, the insurmountable obstacle of planning for the unknowns of their business succession is truly daunting. It not only requires a heavy dose of financial planning, but more importantly, it requires a heavy focus on life-style planning, a topic that is typically rooted in the core of an individual’s identity.
  • Special Needs Families – Special needs families face an intimidating array of challenges that include heightened emotional and economic stress, confusing legal complexities, and government assistance programs that are intentionally opaque. Special needs families can rejoice in the fact that life expectancies for special needs family members are rising, treatment options are growing, and in general, there seems be a greater recognition that individuals with special needs can be highly productive members of society, which merits both a greater inclusion in the various roles they can successfully fulfill as well as higher expectations for their quality of life. This is a highly specialized form of planning that requires a highly specialized team of advisors.
  • Physicians and Medical Professionals – For many medical professionals, the industry is not what it used to be. Health care is possibly the most targeted industry when it comes to the nation’s fiscal austerity, which means physicians and medical professionals are likely to experience a more challenging environment going forward. And while the uncertainty might lead one to believe that planning is less important than it otherwise would be, we believe just the opposite. Change brings both risk, and opportunity.
  • A Fundamental, Disciplined Investment Process – All the planning in the world won’t amount to a hill of beans if the implementation of that plan fails. The investment management of a client’s assets is the implementation. Where the rubber meets the road, so to speak. In order for investors to achieve the rate of return that is required to meet their goals, they much employ a disciplined process that is well-grounded and has a proven track record of success. Then it must be structured and utilized in a way that makes it a repeatable process.

If you believe accountability should be a part of your relationship with an advisor, and are comfortable in being held accountable yourself, we encourage you to review the following section:

  • Client-centric Structure – Accountability is a key attribute to success. Unfortunately, it is often a missing component of the typical financial advisory firm, in large part because of how they are structured. If you’re interested in learning more about the importance of a firm’s structure, and how it relates to a client’s experience, please click Client-centric Structure.

If you want to learn more about the importance of a structured planning process, find yourself asking any of the above questions, or have your own questions and would like answers, we encourage you to contact us only to answer your questions, not to sell you our services.