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The Role of Projections in Giving Advice

When it comes to predicting the financial future, the accuracy of making forward-looking estimates has always been questioned. So why do planners still do it? And, would clients really lose much if planners stopped forecasting?

On this episode of the Elementality podcast, Reese Harper and Chad Jardine discuss whether projections still have value. Making decisions too focused on the future can take away from clients’ enjoyment of the present, while making incremental improvements in the present can motivate clients to actually change their behavior. Reese and Chad look at why forecasting may have been useful in the past but how today’s client wants more immediate help when making financial adjustments that are appropriate to their here and now.

 

 


Podcast Transcript

Reese Harper:
I think people wanna feel good about today, about where they’re at now. Sometimes, there’s a lot of philosophy in what we’re trying to do here and one of the things we’re trying to do is keep people from obsessing about the future or beating themselves up over the past. Try to be as present-minded as you can and being present to me is… It’s more difficult to be present when someone paints a picture of the future to you that’s super concrete. I see that a lot where someone says, “Well, this is gonna happen if you don’t do this.”

Matt Glazer: Yeah.

Reese Harper:
And I’m like, “There’s actually 100 different scenarios that could pan out between now and even the next 30 days so don’t project that yet.” My goal is to take it one day at a time.

Jordan Haines:
Welcome to Elementality. I’m Jordan Haines, Financial Planning Specialist at Elements. In this episode of Elementality, Reese and Chad talk about the role projections play in giving financial advice and the effect that modeling a potential future for a client can have on their current behavior. As you listen, consider how you can find balance in using projections to assist in decision-making and communicating those to clients and how you can help clients focus on improving behavior today. Enjoy the episode.

Reese Harper:
Welcome to Elementality, everybody. I’m your host, Reese Harper, here with my co-host, Chad Jardine, looking for another major breaking news story in advisor-land. What have you been sniffing up this week?

Matt Glazer:
Yeah, the stakes just feel so high now. I hope I can deliver. No, here’s what I have been thinking about. I’ve been thinking about projections, also known as our ability to predict the future. Mankind has been using many techniques for predicting the future throughout its history, and so I wanna talk about what’s the utility? If we’re… Where do projections… Really anything that’s attached to a financial goal is about the future.

Reese Harper:
Yeah.

Matt Glazer:
Financial planning is oriented towards the future. We don’t financial plan our past.

Reese Harper:
No.

Matt Glazer:
It’s about how do we want things to be in the future? But predicting the future has also been pretty hard for human beings for a long time.

Reese Harper:
Yeah.

Matt Glazer:
And so I tend to like the Peter Drucker quote about, “The best way to predict the future is to create it.” We have limited power though in terms of how completely we can do that. And so I’m kind of interested in your take, we have… There’s a lot of tools that are available to planners that emphasize heavily, their ability to calculate financial projections, calculate what cash flow could look like in the future. And I don’t think the utility of that is zero, but certainly the ability to predict the future… If I run a Monte Carlo simulation, how much closer is that than throwing dart on a dartboard or reading tea leaves or consulting my horoscope? Where is it useful? And then where is it not useful in terms of… Ultimately clients… Our whole premise as an industry is that client’s lives will be better with a plan.

Reese Harper:
Well, I think the projections thing is probably, it’s a both/and issue rather than either/or. We’re gonna need… I think the real question is, where did this pattern come from? Where did the pattern of my job as a financial counselor, a financial coach, financial advisor is… I have these incredibly detailed and precise projections of the future that I continue to reference as the primary source of our user interface and value communication. Where did that originate? Well, I think if I’m honest, I think it originated in a time where financial advisor’s value was, “I can make your money grow faster than someone else.” And, “Watch what I do, ’cause if you come over to me, then I’m gonna make this thing like take off and sing.

Matt Glazer:
Yeah.

Reese Harper:
Because I gotta get you to switch your account from this guy to me. See how you’re doing now? This is what you’re doing now.” Go find a historical rate of return on somebody else’s investment account, pop it into your system, show them what they would… What it looks like then. “But I gotta… Switching cost are high.” I gotta persuade people to come over. I gotta get them to pay me a planning fee, some kind of urgency. How am I gonna get people to switch? Well, I’m gonna show them if they come with me, they’re gonna be worth 10 million. Stay with the guy who they’re with, seven million.

Matt Glazer:
Yeah.

Reese Harper:
I think that’s the origin. It wasn’t like… I don’t think the customer was ever banging on the desk saying, with incredible fervor, “Please show me a precise cash flow analysis of all future possibilities… ”

Reese Harper:
With inflation, effective tax rates, investment assumptions that are specific to each asset. I think this originated from a need to sell intellectual superiority to another person. ‘Cause these tools weren’t built for clients. They’re really for planners, and they were built to sell plans, binders and projections and things that made people go, Yeah, we gotta switch. I think that’s the origin. Now, I could be wrong. But if I look back and just say, what were people doing in early 2000’s, the mid-2000’s when we started… These tools really were in vogue? That’s what we were doing. Well, now, what are we doing? What’s different? What’s different about today? What’s different about today’s consumer? Well, if we just start by just saying, what does the client want? What’s the client looking to experience? That’s very different than, what can I sell them? Or, can I get them to switch?

Matt Glazer:
Yeah, of course.

Reese Harper:
Can I get them to move to me? It’s like, what do they need? Let’s ask the question of what do they need? And I think what they really need is they need both some functional financial planning advice and some emotional piece of mind and encouragement, but what they’re really looking for is something that is completely different from what we’re delivering to them with our tools, through our projections. Now, I think what I’d like to see people focus on is the goal of your interaction with another person in financial planning should be to understand them deeply, to really understand what’s driving them, where their values are at. It’s… There’s a lot of life planning philosophy, George Kinder-esque, kind of roots in how we interact with other people, that I think is the fundamental way that they wanna be coached and guided is…

Matt Glazer:
Yeah.

Reese Harper:
Like, know me, help me feel good about my life, and help me make adjustments that are appropriate given my circumstances. A lot of times a projection is not that helpful in that endeavor, it isn’t… It’s a thing to use infrequently when high amounts of precision are necessary. But there are much more effective tools that we could create, just what we’re trying to do at Elements is to sort of start the conversation and have it feel less terminal or less final or less… Like precision goes against your goals with a lot of people because they don’t feel motivated, because the precision that you’re telling them…

Matt Glazer:
Like the clearer their picture is of the future, the less hope they have.

Reese Harper:
Yeah, it’s like, well… So then what advisors are doing is they just don’t show those projections to those clients anyway.

Matt Glazer:
If it’s a dismal outlook.

Reese Harper:
Yes, and rather than saying, “Look, the people that are gonna amass significant wealth… ” I have to be careful with that customer, that wealthy customer, because if I show them this projection, they will actually become less behaviorally-minded. They could spend more, they could save less, they could be less detail-oriented about keeping their financial health in order.

Matt Glazer:
Yeah.

Reese Harper:
If I paint too rosy of a future, it takes the focus away from their present behaviors and their present activities, and it places the future in this… That’s happened, I’ve seen that dozens of times in my life where I say… Where someone says, “Yeah, I invest in this company. It’s gonna do this and this is what’s gonna happen.” Next thing you know, three years later, it didn’t pan out quite the way they were hoping, and they have already essentially moved into that life of feeling like life was gonna be that way, they’ve switched everything, they’re spending more, their house has changed, they’ve already spent what that future life looked like, and now they’re realizing that they’ve gotta make some adjustments.

Matt Glazer:
Yeah. If any fluctuations happened in the projection, then you’re… Yeah.

Reese Harper:
Yeah. And then the alternative too, is if you’re working with a client with less resources or who is not as wealthy, they still need to be encouraged around these same behaviors that actually matter, like, “Hey, we’re gonna increase our savings slightly. We’re gonna increase our liquidity slightly. We’re gonna implement this adjustment to your investments, and look, it’s gonna make a huge difference.” They know it’s gonna make a difference, they don’t need you to quantify the difference that it’s going to make sometimes.

Matt Glazer:
Yeah.

Reese Harper:
They just know that they just made a really meaningful improvement, and that improvement lets them go, “Man, I feel great about the work I’m doing and I’m moving in the right direction.”

Jordan Haines:
“How am I doing?” It’s the number one question asked by most clients and it gets right at the heart of what we do as advisors. But how do you tell a client how they’re doing right now, when the tools you’re using project their financial status 30-plus years into the future? You want to be able to inform each unique client on exactly where they stand today. You want technology that resonates with clients, no matter their age. The Elements Financial Planning System provides you with the tools you need to measure, assess and ultimately improve a client’s financial health. And it does it both with a focus on the present and on the future. Contact us at getelements.com/meet to learn more.

Matt Glazer:
Say that you have a client there, and we’re at Elements, we will show them their savings rate or their spending rate, their burn rate. You’re saying for that person, maybe having a meaningful change in their savings rate is just as motivating, just as affirming, as saying, “Hey, the endpoint of your projection changed as a result of something that you did.” Like, that feels not proximate to what their behavior change is producing?

Reese Harper:
Yeah, yeah I think people wanna feel good about today, about where they’re at now. Sometimes there’s a lot of philosophy in what we’re trying to do here, and one of the things we’re trying to do is keep people from obsessing about the future or beating themselves up over the past, like, try to be as present-minded as you can. And being present to me is… It’s more difficult to be present when someone paints a picture of the future to you that’s super concrete. I see that a lot, where someone says, “Well, this is gonna happen if you don’t do this.”

Matt Glazer:
Yeah.

Reese Harper:
I’m like, “There’s actually a hundred different scenarios that could pan out between now and even the next 30 days, so don’t project that yet.” My goal is to take it one day at a time. That’s all I can do.

Matt Glazer:
That’s where you can change behavior, right?

Reese Harper:
Yeah.

Matt Glazer:
This is… Was it Shakespeare? Twin thieves, fear and regret, twin thieves who rob us of today?

Reese Harper:
Yeah, and Eckhart Tolle’s “The Power of Now”, Brother Lawrence’s “The Practice of the Presence”. This is like 16th century stuff. You can only do something today to make incremental improvements, and those changes that you make today feel great. And knowing exactly what the future looks like given those changes doesn’t actually increase your level of satisfaction. I’ve seen it. A projection will not… Like it’s the behavioral change that actually creates the satisfaction someone has. The behavioral change isn’t just one minor change to cash flow, though. It could be an increase to liquidity, it could be a reduction in an interest rate, it could be an improvement to cash flow this month. It could be…

Matt Glazer:
Growing balances or [0:13:00.4] ____…

Reese Harper:
Growing in a balance, shifting your asset allocation, those activities are what create people’s financial satisfaction and sense of progress. And we need to optimize our interactions for those because if we optimize for accomplishing more of those interactions, then the future is going to be optimized. And if we make decisions too heavily slanted based on our indexing of the future, it can either take away the focus of the present by causing people to relax a little bit more than they should, or it can increase their anxiety and make them feel like they’re in a stressful situation.

Matt Glazer:
Yeah, yeah.

Reese Harper:
So I think that’s the balance. They’re not bad, but I think that we can do better than just a projection, especially when the origin of those systems, I don’t think was for the benefit of the client, if that makes sense.

Matt Glazer:
Yeah, makes all the sense in the world.

Jordan Haines:
Next time on Elementality…

Reese Harper:
You challenge someone’s status quo thinking and they respect you on the other side of that, if they believe you, if they actually look at your way of seeing things, and go, “Yeah, I guess that is superior.” Then you have a deep, instant relationship with that person, deep trust is built immediately because they can see that you helped them frame a world that was different than what they thought before.

Jordan Haines:
You can learn more about the Elements Financial Planning System at getelements.com/meet and schedule a time to meet with me or one of our friendly Financial Planning Experts. Elementality’s executive creators are Reese Harper and Chad Jardine. Elementality is produced by Abby Morton and directed by Jordan Haynes.

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