Financial Advising vs. Financial Planning – Episode 008

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler, and No BS Money Guy, Todd Strobel. Hey, everybody. Welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, welcoming my co-host and bestselling financial author, Kim Butler. How are you, Kim? Very fine. I’m really looking forward to this part two, if you will, of what’s a financial advisor? How do I pay for one? Why do I need one, et cetera? Are we on the right track of questions there? Super. Today, we’re going to be focusing on financial advisor versus financial planner or financial

[00:49] advising versus financial planning. It is interesting when you use those words, you know, I used to be a certified financial planner and CFP is a designation that people get. It’s similar to a CPA. It takes the same amount of time and tests and continuing education, et cetera. And I held that designation for about 20 years of my professional life. But then I finally, because of the continuing education that I had to do, got absolutely frustrated and even mad about the information that was being put forth on the various tests that I had to take to get my CE credits. And I finally put my foot down and said, I’m giving this designation back. Take it. Take my name off the list. I don’t want to be associated with it, affiliated with it or anything else.

[01:40] And it was a hard designation to get. And it was something that for many, many years I was very proud of. But I have a real challenge with it today, and that is because of the term planning. So certified financial planner or planning is indicating that you can actually plan your finances. And right off the bat, I’ve got a problem with that because we all know in our financial lives that there are all kinds of things that can derail plans. And a typical financial plan is designed to be a road map. It’s designed to say, OK, you’re here today. You want to be there tomorrow. Well, there’s problem number one right there. Where is there? Where is the there tomorrow that you want to be? And you ask a typical 30, 40, even 50 year old

[02:27] what they want to see 10, 20, 30 years down the road in their finances. They can give you some answers, but they are absolute pure guesswork. And so you take this guess. So this is the process of a financial plan. You throw it into a computer, could be online, could be something the proprietary that the quote planner has. And then a whole bunch of assumptions are added to that. So we’re faulty right from the beginning, but then we make it worse. We add assumptions of tax rates, interest rates, timeframes, longevity, et cetera, et cetera, inflation. And then we take this quote computer program and we spit out some answers about what’s going to happen. Now, they’ve made sophisticated computer programs.

[03:12] Now there’s something called Monte Carlo, where you can actually vary the information that gets put in there. In other words, instead of a four percent inflation rate the whole time, it can move around a little bit and the computer can handle that calculation. But it’s still all assumptions. So this idea that we can, quote, plan our finances 10, 20, 30 years out in the future is very, very faulty. And so I have a real challenge with the concept of financial planning. And I absolutely treat any financial plan that I see that a client might bring, whether they did it themselves or whether somebody fancy did it for them as an English paper with an F grade. And I take a red pen to it and I circle all the assumptions

[03:58] and I mark out all the numbers that could be totally, totally wrong. And the biggest challenge with these financial plans is that they generate a very false sense of peace of mind. They cause people to think that this is actually going to work. But it’s a real case of garbage in versus garbage out. Financial advice, on the other hand, to me, separates and makes a distinction there. Now, somebody could absolutely say financial advising, financial planning, same thing, and I can see that argument. But I’m going to separate it out because it doesn’t have the word plan in it. Financial advice says, OK, here’s what you’ve got today. And yeah, we might try to make a few assumptions to get a sense of what’s going on 10, 20 years out there.

[04:42] But frankly, the only thing that we can concentrate on is the next three to five years that we can see in our lives. Now, they can still get derailed. But the next three to five years, we can see in our lives so enough that we can say, all right, this investment will work. That insurance strategy can play a role. This thing over here that we could add or subtract will help us. And we can see those benefits right away. Now, again, we may play with some numbers 20, 30 years out just to get a sense of what might happen. But I tell people all the time, take that piece of paper and draw a big line through it or even throw it away because it’s really beneficial today. It’s instructive today to make some decisions with,

[05:27] but it isn’t going to help you in the future. There’s really no value to it in terms of its honesty down the road. Super. And I actually have one of those software programs pulled up right now. This was one that was just featured in a Wall Street Journal article as attempting to revolutionize our industry. Question number one is your current age and your projected retirement age jump on that one. Yeah, I’m on my soapbox already. Your projected retirement age, like you have a clue. I mean, think about the typical 30 or 40 year old. They’re going to give you 65 because that’s what society says. And yet you and I know literally thousands of 65 year old people that have absolutely no business retiring

[06:15] because they can’t handle it financially, mentally, emotionally, socially. Economically, physically, what other term can I come up with? Psychologically, it is not right for human beings to stop work. And most of us can’t handle the finances anyway. Think about this. You’re 65. You’re healthy. You got another 40 years to go. And yes, there’s absolutely some families that can handle that financially, but people are not made to sit around and do nothing. So if you want to define retirement as a second career or a whole bunch of service work, that’s great. But typically people that are 65 absolutely need to have something else to do. And they most of them still need to keep earning money because you cannot make that amount of money work for 40 years.

[07:04] It’s just too long of a time frame. And you cannot guess when you’re 20, 30, 40, 50 years old, what quote age you’re going to retire. I mean, you can hear it in my voice. How irritated I get with that question. It’s just wrong on every level. All right. Well, let’s move to question number two. Select your risk tolerance. Conservative, moderate or aggressive. You got to be kidding me. Can’t you get to a question like three or four before I react? The risk tolerance question we have talked about before on previous conversations, and it is such a joke like you have any clue what your quote risk tolerance is. Now, let’s get clear. The definition of risk tolerance. How much money do you want to lose?

[07:51] I mean, what client is honestly going to answer that with a positive number? I know my number is zero. I don’t want to lose any money. And yet people all the time say, we want to be aggressive investor, but I don’t want to be aggressive loser. I don’t even want to be a conservative loser. What was the other word? Moderate, conservative, moderate or aggressive. I don’t want any of that. None. Zero. That’s not acceptable. And yet here we put forth these risk tolerance questionnaires. Now, that one’s real simple. Thank goodness it wasn’t a 10 question one where we have to score ourselves. But the idea is a joke. Now, just to be the middle of the road, I selected the moderate risk tolerance. So in number three, it’s starting to build some assumptions.

[08:36] So based upon my moderate tolerance, I can expect an average market return of seven point three percent. And if the market turns poor, I will earn three point five. OK. So box number, whatever we got here, average. You got to be kidding me. This is a huge problem with financial plans. The difference between average and actual. And so if we take a one hundred thousand dollar account and we grow it by a positive one hundred percent and then a negative 50 percent, we’re going to end up dollar wise. Sorry, I did the math wrong. Positive 100 in the negative 100. We’re going to end up dollar wise in the exact same place. And yet over a period of time, that would mathematically qualify for an average rate of return.

[09:36] And that is mathematically correct. And yet literally as opposite as you can get, because average means absolutely nothing in actual terms of how much money is in that account. And also, let’s look at the average that they do put forth seven point three after taxes, fees and inflation. That’s about a one percent account. How is that an investment? Well, and you know, the other question that came to my mind is I’m assuming that 2008 going into 2009 would probably qualify as a poor market condition. And I wish I got three and a half percent back then. I mean, it would be nice to even have a positive rate of return. So, you know, in this nice little curve I’m looking at here, it’s always going up in a bad year.

[10:30] I get three and a half and an OK year. I get seven point three. It doesn’t address that principal loss part. Yes, I had a client say the other day, your advisor suppose he was saying this to his wife because they had separate advisors. Your advisor was supposed to get you eight percent this year. She had a million dollars. Where’s your 80,000? And that’s how people think of it. They think that average means if I have a million, I’m going to get 80 grand. She had like 20. Super. And then, you know, just just to kind of round out this conversation based upon these few questions that I answered. It told me that my total target portfolio stock bond split is 84 16, the 84 percent stock, 16 percent bonds.

[11:17] That’s all I need to know. I’m ready to go. Good heavens. And from that, you’re now going to go into the stock market where you could easily get cut in half in the next 12 to 16 months. That’s not a projection. Just we know that’s going to happen at some point. And you’re going to go into the bond market, which has potential if interest rates go up to lose value. And how from that are you going to get three to seven percent? I just don’t understand that. That is that’s really hugely misleading, in my opinion. Super. And I think that’s really that that’s the target. That’s really what we wanted to kind of get into today is to just get people to take that little bit of common sense, that voice in the back of your head.

[12:00] If you haven’t lived through 2008, well, bless you. You know, there’s another one that’s bound to happen because it is a continuous cycle. And, you know, these websites, though they are free to potentially inexpensive, hit the button that says full disclosure. If you read the full disclosure, it tells you, Kim, I’ll let you explain this, what your actual results could be. Well, actual results can be none of the above. They can be negative 100. You can lose absolutely everything in the stock and the bond market. You know, those that were in muni bonds thinking they were safe, but had Ventura, California, whose city is shut down for a while. You know, they lost all their money. So, yeah, good idea to read the full disclosure.

[12:53] And my gosh, who does these days? Because every single thing on every single website, social media, etc. You just hit the terms and conditions, accept, accept. Yes, you know, we don’t even look at that fine print anymore. And it is hugely detrimental. So I always want to give people options. OK, what do we do if we can’t do that? What do we do? And what you are so much better off doing is looking at all your dollars today and getting the most out of them for the next three to five years. That’s all you should be focused on is what are we going to be doing in the next three to five years? Now, it doesn’t mean you don’t have a long term perspective. We talk about 30 years out all the time, but your real decisions need to be in the next three to five years.

[13:36] What are you going to do and how are you going to control your wealth? And our alternative to this financial planning mess is something called prosperity economics, and it enables us to do just that. We’re going to look at optimizing every single thing that you have. And what the word optimize means is that we make everything as efficient as it can possibly be. And that is investments. But also, where’s your cash? That’s one of the biggest issues for peoples. Where is your emergency fund, your opportunity fund? And so many people are having that stored in banks and money markets at brokerage houses, earning less than one percent taxable, where we have alternatives that earn four to five percent

[14:19] without taxes on that cash. So check in with us. Partners number four, Prosperity.com. We’re happy to help you with our cash alternatives and our investment alternatives where you do not lose principle and you do not suffer from the ravages of inflation beating upon your cash account. Super. Well, that’s going to wrap us up for today. This is No BS Money Guy Todd Strobel. Once again, special thanks to bestselling author Kim Butler. And this has been the Prosperity Podcast. Take care, everybody. Thank you for listening to the Prosperity Podcast to take control of your money and have it work for you. Visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.