Solving for the Qualitative Deficit in Financial Planning

Tim Maurer in Forbes on why life planning is a vital part of financial planning.

“The whole financial planning process is wrong,” says George Kinder, widely recognized as one of the chief educators and influencers in the financial planning profession.

But what exactly does he mean, and how does he justify this bold statement?

First, let’s separate the work of financial planning into two different elements–let’s call the first quantitative analysis and the second qualitative analysis.

Quantitative analysis is the more tangible, numerical and objective. It’s where planners tell clients what they need to do and, perhaps, how to do it. For example:

• “Your asset allocation should be 65% in stocks and 35% in bonds.”
• “You need $1.5 million of 20-year term life insurance.”
• “Have your will updated and consider utilizing a pooled family trust.”

The qualitative work of financial planning is the intangible, non-numerical pursuit of uncovering a client’s more subjective values and goals, and, hopefully, attaching recommendations like those above to the client’s motivational core–their why.

Qualitative planning often has been dubbed “financial life planning”–or simply “life planning.” It is defined in Michael Kay’s book, The Business of Life, as the process of:

• Helping people focus on the true values and motivations in their lives;
• Determining their goals and objectives as they see their lives develop; and
• Using these values, motivations, goals and objectives to guide the planning process and provide a framework for making choices and decisions in life that have financial and non-financial implications or consequences.

I think it’s fair to label the quantitative work as “traditional financial planning” because it’s what has long been seen as the outcome of a client and advisor working together. It’s also where virtually all of the training in the industry has been focused to date.

The central source of this training is likely the Certified Financial Planner™ Board of Standards, whose CFP® credential is the most visible sign that one has been educated and trained as a financial planner. No entity has defined the financial planning process to which Kinder alludes more clearly than the CFP® Board.

But while the CFP® training mentions the importance of “determining a client’s personal and financial goals, needs and priorities”–even prioritizing it over “obtaining quantitative information and documents” in its practice standards–it requires little to no additional life planning training for one to be called a Certified Financial Planner™ practitioner.

And this is why Kinder argues that the process is fundamentally flawed, because, he says, “the client should come first in the curriculum, then the financial skills. As it stands now, the client doesn’t really exist except as narrowly defined financial problems requiring financial solutions.”

But beyond Kinder’s preference, is there evidence that life planning should be prioritized in the practice of financial planning? Yes, there absolutely is.

Consider, for example, the field of behavioral economics, as best articulated in Daniel Kahneman’s book, Thinking, Fast and Slow, although perhaps most approachably in Richard Thaler’s Misbehaving and most entertaining in Michael Lewis’ The Undoing Project.

Traditional economics presumes that we are rational beings, while Kahneman and his longtime research partner, Amos Tversky, proved what we knew all along–that we are actually human beings, quite prone to less rational, emotionally driven decisions. Indeed, most of our financial decisions are driven by our emotional processing center–the Elephant, if you will–not the rational Rider we might prefer to make those calls.

Similarly, traditional financial planning presumes that “the client already has a clear and objective understanding of all their goals and priorities and will readily communicate all necessary and relevant information when asked,” says Amy Mullen, the vice president of Money Quotient, a nonprofit helping financial advisors integrate their traditional financial planning knowledge with emotional intelligence.

But any of us who’ve been financial planners for any length of time know that clients don’t often have a clear and objective understanding of their goals and priorities. We know that personal finance is more personal than it is finance. Many of us, however, don’t have the training, experience or even the language to skillfully guide our clients down this path of self-awareness.

Instead, traditional financial planning presents a set of recommendations that in too many cases barely changes for each individual client. Worse yet, financial planners may even impose values and goals that are designed to lead clients to financial products and processes for which they are compensated rather than reflect the primary motivational drivers in their lives.

If we even mention emotions, we label them as the enemy, something to be avoided in financial decision-making. Unfortunately, as behavioral economics demonstrates, that’s impossible. And sadly, we may be missing out on an opportunity to help our clients process and enlist those emotions in support of a new resolve that would improve their probability of achieving goals of their own discernment.

After all, as George Kinder said, “You cannot solve a problem when someone is expressing an emotion.  Empathy is the only way forward.”

Or think about it this way: You can’t solve a qualitative problem with a quantitative solution.

(And oh, by the way, for those financial advisors concerned about the increasing commoditization of financial planning through automation, I have some good news: it’s also very hard–if not impossible–to automate the qualitative elements of our work.)

So, Kinder might be onto something: The financial planning process is jacked up. But how do we fix it?

First, let’s recognize what is working in financial planning curricula. All of the experts mentioned in this article are Certified Financial Planner™ designees and supporters of the vital role the CFP® Board plays in the profession. (As am I.) And the CFP® Board’s traditional financial planning curriculum is excellent.

But second, we must recognize that life planning is an essential part of financial planning. It’s not a niche or a club. It’s “the essential process that must be done before a financial plan can begin,” says George Kinder. Or, more simply, it’s  financial planning done right. “Either incorporate it or acknowledge it as an essential prerequisite,” he argues.

University of Chicago behavioral economics professor Richard Thaler told me plainly that we’re not doing our job if we don’t know this stuff, and I believe the CFP® Board can do a lot to enhance their requisite training in this arena.

Fortunately, until we get there, financial advisors aren’t left out in the cold. There are several pockets of life planning expertise throughout the country you can tap, but I’ll only highlight those with which I’ve had direct experience:

• My personal path began with a study group led by financial planner Rick Kahler and psychologist Ted Klontz. I recommend their books The Financial Wisdom of Ebeneezer Scrooge (for newbies and clients) and Facilitating Financial Health (a literal textbook for financial advisors, coaches and therapists).
• Then, I’ve had the ongoing privilege of studying with Carol Anderson and Amy Mullen at Money Quotient, whose Fundamentals of Financial Life Planning course I’ve now taken three times–and learned something new every time!
• While I’ve been a student of George Kinder’s writing for years (especially his books, The Seven Stages of Money Maturity and Lighting the Torch),  I’ve more recently benefited from his direct trainings that culminate in his Registered Life Planner designation.
• And at the moment, I’m enjoying Michael Kay’s book for advisors, The Business of Life, which aggregates much of the wisdom he’s gleaned from folks like Anderson, Mullen and Kinder.

“We need excellence in our standards, not mediocrity, not dabbling. Life Planning is the essence of great financial planning,” George Kinder told me. I agree, but I also wanted to know what he, Amy Mullen and Michael Kay would recommend for the financial planner who’s inspired to do something to improve the qualitative element in his or her practice today.

Interestingly, the recommendation each of them mentioned as a primary skill was as much something not to do as it was a directive:

Listen. Stop talking. And listen.

This commentary originally appeared July 28 on Forbes.com

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