The 2018 World Cup has come and gone. The world's best soccer teams took the global stage in Russia, with their home fans glued to their TVs cheering and gasping with every turn of the ball. How can you not get swept up in the jubilation that erupts whenever a goal is scored?
Given their focus on goals, it seems an opportune time to talk about goals in a financial context. There's been a lot of focus on goals-based planning and outcome-based investing over the past few years. All of the popular planning software has steadily shifted away from focusing on cash flow to goals-based planning, making it the dominant method of implementing financial plans.
Working with goals is easier than predicting cash flow, it's more scalable and ultimately more adaptable to clients' needs. But let's not forget that every plan has its shortfalls.
1. Every plan ever written is wrong. No matter how advanced the reporting or the mathematical modeling, every financial plan suffers from false precision. That's because every plan has errant assumptions. It would be wonderful if we could predict every nuance of the future, but we can't. At most, every financial plan is our best estimate of how the future might unfold given all the facts we have in our grasp today. It is a hopeful prediction with mathematical analysis attached.
2. Goals will change. The day you meet your future spouse, your goals change. When your children are born, your goals change. Goals can change when you see your dream house or you go to Europe for the first time. Then there are those times when your goals change because of unpleasant surprises, like being diagnosed with cancer or going through a divorce. One thing is certain: every person will change their goals throughout their lives. That means every plan, no matter how accurate the math, has bad assumptions.
3. Life is unpredictable. Lawyers and doctors don't pretend to have certainty when none exists and neither should advisers. Accept the truth: Life is completely unpredictable. Markets will do things that no Monte Carlo simulation will account for when combined with the unique circumstances in any person's life. It might be mathematically correct to say someone has 95% confidence in accomplishing their goals, but it is not in fact true if you overlay the unpredictable nature of any person's individual life.
No, it most definitely is not. Planning is imperative to help people actually succeed in their financial life.
However, I do think the focus needs to shift from the financial plan as the product to the important discipline of sound decision-making as a service. Some important ways to make the shift:
1. Intentions and values are more permanent than goals. We all want more than we can have. That means life is a series of trade-offs; private school versus a nicer home, or a new car versus nicer vacations. How do we decide between different goals? Our values and intentions are the filter. Every person and every family has their own set of priorities. Helping people define and articulate what really matters to them is one of the most important aspects of being a great adviser. Doing so helps clients to clearly understand which goals are more important than others. Values and intentions are not fickle like goals. For example, if it's important to someone to not be a burden to their family, that will probably be true until the day they die. United Capital's proprietary prioritization exercise revealed that the most important intention across 20,000 clients is for them to spend time with people they care about. In many cases, that means saving for vacations and making time for family and friends right now might take a higher priority than saving more for retirement.
2. Your value is to monitor and adapt the plan. Knowing that the financial plan is always just a best estimate of what we know today makes it easier for clients to understand that they are working with you to amend and change the plan as life unfolds. It also means going beyond retirement as the singular goal and discussing far more of their life's desires. The more defined and broader the goals, the more important the plan becomes as a blueprint for the client's entire financial life.
3. Identify blind spots. People have biases that cloud their judgment. Most of us would rather not discuss all the things that could go wrong in our lives. But we all know that things will go badly at some point. Mapping out scenarios and walking through what steps people would take helps them prepare to adapt to even the most painful of circumstances. It can sometimes negate potential challenges they might face.
There is no doubt the winners did not get there by coincidence. They prepared for years, they adapted to unforeseen challenges, and the players on the field and the coaches at their side worked together to make the right decisions in order to win. Kind of like the winners of the financial life tournament: Clients working with their adviser in a disciplined way to adapt and change their strategy, accomplishing goals along the way, and celebrating a life well-lived at the end.