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The Cost and Complexity Problem With Planning

The job we do as advisors is complex … and costly. We gather information, analyze it—making various decisions as we go through the process—and then we help clients act on our recommendations. This system actually works well for the wealthiest Americans whose money issues are complicated and who can afford it. But when a prospect has a simple question, this cost/complexity issue becomes apparent and usually results in the client not receiving the help they truly need.

On this episode of Elementality, Reese and Carl talk about the industry’s cost/complexity problem and what can be done to reengineer traditional planning so we reach more people with purpose-built financial planning.

 


Podcast Transcript

Reese Harper:
Their ability to pay for me through either AUM fees or planning fees, it was very different than some of my high-end clients, and I didn’t have the heart to say no. And I was just like, “Okay, what do we have to do to re-engineer?” Instead of just being like, “Sorry, come back when you’ve more AUM or come back to me in 10 years when you’re… When you got some money,” ’cause I had…

Carl Richards:
Yeah. Either you have minimum or I can’t serve you, but I know somebody that…

Reese Harper:
I had seen all… I was meeting with these people that were late stage in their careers and they had made so many mistakes. And I was heartbroken.

Carl Richards:
I wish I’d met you. Where were you 10 years ago?

Reese Harper:
Yeah. And I was like, oh my gosh, so I’m gonna turn away these people so that they can go get broken and then I’ll fix them, aged 50 [chuckle] when they have resources, so that’s where Elements was born, from that problem.

Jordan Haines:
Welcome to Elementality. I’m Jordan Haines, financial planning specialist of elements. Each episode, Reese Harper and Carl Richards will explore the major challenges faced by financial advisors and the things they can do to manage the functional, emotional and social jobs of delivering real financial advice to real clients. We hope you enjoy this episode.

Reese Harper:
Welcome to another episode of Elementality everybody. Excited to be with you. Your co-host, Carl Richards is here in studio. Host, Reese Harper, just after a tasty lunch, I’m gonna kinda keep the energy high, for sure [chuckle] So if you haven’t listened to this, the first episode of the series yet, you might wanna go back to the last one, where we talked about a new future for a new business model for what we’re currently calling the 99%. Is that…

Carl Richards:
Yeah.

Reese Harper:
And I think what we wanted to cover today is, we’re gonna start a series of main problems that we see with the traditional financial planning service and traditional tool set that has really caused the cost to serve and the cost to acquire customers to just be far too high, in order to really reach the masses, our industry is still kind of struggling to really scale our influence into the 100 million households that are really being either under-served or completely left out of the picture. Could even be more than that.

Carl Richards:
Yeah. And so this episode is about a very specific problem and by problem, we just mean a thing that we need to solve, something that we like to think about, a puzzle that we need a solution to, and what’s this problem? We’re gonna talk about this problem, and we’re gonna talk a little bit about the solution.

Reese Harper:
Yeah, I think the way we would say the problem is that the traditional financial planning service and the software we use to support that service is too time-consuming to set up and it’s too time-consuming to maintain.

Carl Richards:
So bringing on a new client to get them set up costs us too much time.

Reese Harper:
Yeah, Michael Kitces’ estimates, it’s somewhere around 15 hours on average. If you’re doing a comprehensive financial plan and you’re truly trying to serve someone in a comprehensive way.

Carl Richards:
Yeah, and that’s normally like nobody comes in, which is interesting to me, nobody comes in and says, “Hey, I need a comprehensive financial plan.” They come with a question, maybe asset allocation or investment performance or insurance or whatever, a question. And in order to answer that question, we’ve gotta do this 15 hours worth of set up and then 35 hours worth of maintenance.

Reese Harper:
Well, that’s the second part that we didn’t say, which is, there’s about 34 hours of maintenance time in that first year, so if we’re looking at 15 hours to set up the Kitces’ estimates and another 34 hours in that first year, or a total of 34 hours in the first year is what he’s estimating, and there hasn’t been a lot of research into second, third, fourth, fifth year, it does go down slightly. I think we can all attest to that anecdotally, once you’ve got a client for a long time, it becomes a little easier, but if you just think about the cost of that, it’s just gonna price out. That cost forces advisors to have to go up market, if it really cost that much, there’s no way to get the majority of people to subsidize that cost, and so what we try to do is we try to just make it simpler, but use the same tools and the same service, but I do it light, like a light way. It’s like planning light, and it’s just like cutting corners.

Carl Richards:
Right. What is most of that time made up of?

Reese Harper:
If we had to kind of extract it, it’s gonna be data entry.

Reese Harper:
From experience, yeah.

Reese Harper:
It’s gonna be data entry, data maintenance, a lot of it is interactions between… It’s the time spent between the advisor and client trying to agree on the numbers and make sure the numbers are accurate, am I looking at an accurate picture here because there’s just real inefficient… Are we on the same page? That’s a really hard… With your data, do we agree that this is right? That’s a hard thing to do, especially when you get at scale, and that problem, I just don’t think we can solve that problem, using the traditional means of service where we’re gonna take on that problem.

Carl Richards:
What else is in that time? So, getting the data, agreeing with the client, what else is in that time?

Reese Harper:
We have a lot of assumptions that we have to make and think an analysis time…

Carl Richards:
Well, let’s think about that just real quickly, we’ve gotta decide what something like, oh, it used to be really simple to decide what inflation number we’re gonna put in, turns out that you gotta think about that now. You gotta think about rates of return, standard deviation correlations for every asset class, just to build the Monte Carlo. You got all of that stuff.

Reese Harper:
You also have to… If you think about a traditional job map, if you use Anthony Ulwick’s definition of a functional job, you always have the gathering of information kind of upfront, which we talked about. You also have this analysis of information stage. And advisors spending a lot of time looking at different screens, comparing different documents, thinking about whether a piece of data they’re looking at is the right thing, or they need to ask a follow-up question to the client to clarify what they’re looking at. There’s just a lot of analysis. And because it’s not all in one place, and it’s not in one easy-to-view location, then it’s a lot of time is spent inefficiently analyzing information.

Carl Richards:
So that’s where a big chunk at least…

Reese Harper:
That’s where a lot of the 15 hours come from, and the 34.

Carl Richards:
And what’s the reason where even… I would think it’s interesting to think about if… For what purpose?

Reese Harper:
Well, one or more place where the time cost is that is between the Advisor and the Associate Advisor and the Para-planner sort of agreeing on whether this plan looks good. It’s like there’s not… Because it’s a presentation, it’s like a deck. You’re trying to get something ready to show people. And it’s gotta be pretty, and it’s gotta feel good, and it’s gotta have the right wording, and it’s gotta be not just what the software is putting out, but whatever custom documents you’re gonna create to supplement that, that then becomes like a whole presentation and visual aesthetic thing and design aesthetic thing. And now I’ve gotta make it look good and make sure that the copy and that the font and everything just fits right on the page. It can be, depending on the level of complexity you’re going for, you might… Some people can choose to do that all within software and just say, “I’m not gonna do anything else.” And so that’s why it’s an average of time: Some people are gonna be less, some are gonna be more.

Carl Richards:
Yeah. So that’s the problem. And that’s what… The problem is it takes a lot of time. I understand a little bit about… We’ve all experienced this, how much time it takes to do all these things. We didn’t even talk about the idea, like deciding who’s gonna be the assumer, we pointed to it.

Reese Harper:
I wanna just go back to Anthony Ulwick job map: We have gather and collect, we have analyze the data, analyze stuff. This is like the CAP Planning Process almost. Making decisions is that third step. Making decisions happens before the client meeting, in the client meeting, and then again, after the client meeting. Decision-making’s challenging. And then you also have this kind of action implementation, kind of stage two, it’s a whole thing. I have implement an act, I have decide, I’ve got analyze, and I’ve got gather data. And all of that complexity is where the problem… Where the cost problem comes in.

Carl Richards:
And it largely almost feels like I… When we say customize and comprehensive, sometimes we mean that. It almost feels like a new…

Reese Harper:
It is.

Carl Richards:
Process each time.

Reese Harper:
Even if someone’s worth a lot of money, and they’re hiring you for this in-depth customization, it’s actually a great process for that. I mean, it’s…

Carl Richards:
And works well.

Reese Harper:
It’s purpose-built for that top 1%.

Jordan Haines:
Hey, Elementality listeners, it’s Jordan. The Element’s Financial Monitoring System is revolutionizing how you attract, on-board, and deliver ongoing advice to clients so you can scale your business far beyond traditional limits. If you want to profitably help more people make smart financial decisions, head over to getelements.com/demo and schedule a time to see it in action today.

Carl Richards:
Okay. So that’s the problem, that’s where the time is spent. What problem does that introduce in terms of the business model? For an advisor trying to serve people, why is that a problem? It sounds like an interesting model, I…

Reese Harper:
I’m curious of what you think, you answer that question.

Carl Richards:
Well, yeah. I’m generally only interested in questions that I don’t know the answer to, but I do know the answer to this one. It feels to me like that present… The reason that’s a problem… That’s how it’s done now. We’ve got a problem, here’s how it’s done now, here’s the outcome of those… Of how it’s done now. Which is: A, I just simply can’t serve very many people.

Reese Harper:
Yeah.

Carl Richards:
That’s the reason many of us got into this business, speaking broadly, was to serve people. And I can’t even serve… I specifically can’t serve the type of people I want… I wanted to serve. I can answer questions about the tax breaks for the private jet, but I can’t help somebody to decide how much they should put down on their car.

Reese Harper:
And then sadly, it even starts with your immediate family. You can’t even really service your immediate family.

Carl Richards:
This has been such a problem for me for so long. The number of times I’ve thought about…

Reese Harper:
Totally.

Carl Richards:
“Gosh, I really wanna help that person.” At church, it would happen. “Hey, can you help me?” And I’ll be like, “I can’t.” I remember talking to my friend who was at a big firm that will go nameless, but its initials are GNS. And he was in the same… He went to the same congregation as I did, and I remember asking him like, “How come you never help these people.” He’s like, “Well, because I’m at GNS. I can’t help those people.” But we’re all trying to get there, so that’s the problem. To me, that’s the problem from an industry perspective. It takes a lot of time, therefore, I’ve gotta move up-market. And if I don’t move up-market, then I will die. I think that’s why we see this attrition rate.

Reese Harper:
Yeah. And so it’s been really hard for us to come up with a solution to this. But I think we have one that…

Reese Harper:
Let’s talk about the solution.

Reese Harper:
Is gonna work.

Carl Richards:
So there’s the problem, it takes a lot of time. What’s the solution?

Reese Harper:
Now, I had this problem working with dentists when I started my practice. When I’m working with these really successful Orthodontist that have millions of dollars of income, my traditional model was fine.

Carl Richards:
And still is.

Reese Harper:
And still is amazing. But then I would get… Because I positioned myself as Dentist Advisors, I wasn’t getting exclusively Orthodontist, right? And I was getting General Dentists that came out of school with half a million dollars in debt and a reasonably high income, like $150, $180,000, some of them were over 200. But their ability to pay for planning and maybe their ability to pay for me through either AUM fees or planning fees, it was very different than some of my high-end clients and I didn’t have the heart to say no. And I was just like [chuckle], “Okay, what do we have to do to re-engineer?” Instead of just being like, “Sorry, come back when you have more AUM or come back to me in 10 years when you got some money.” ‘Cause I had…

Carl Richards:
Yeah, either you have a minimum or I can’t serve you, but I know somebody that…

Reese Harper:
I had seen all… I was meeting with these people that were late-stage in their careers and they had made so many mistakes. And I was like heartbroken.

Carl Richards:
Right, I wish I had known you, “Where were you 10 years ago?”

Reese Harper:
Yeah, and I was like, “Oh, my gosh, so I’m gonna turn away these people so that they can go get broken and then I’ll fix them at 50 [chuckle] when they have resources.” So that’s where Elements was born from that problem and I was like, “Okay, we’ve got a re-engineer this entire thing.”

Carl Richards:
Why? Let’s just get really specific. Why do you have to re-engineer it?

Reese Harper:
The time to set this thing up in the software and the time to maintain this thing. Number one, the whole thing wasn’t what they even were asking for. This other customer…

Carl Richards:
This is overkill.

Reese Harper:
Was just saying, “Dude, how do I refinance my loans?” Well, I’m like, “Oh… ”

Carl Richards:
Sorry, it depends. I have to build you a whole [0:13:35.5] ____ Yep.

Reese Harper:
Sorry, it depends. I need to see all of your information. He’s like, “I literally have like… I could pay you $400.” I’m like, “I don’t wanna do that. I can’t make a living.”

Carl Richards:
Right, so it’s gonna be 15 hours.

Reese Harper:
It’s gonna take me like 15 hours and 34 hours to maintain it. And so I started by just saying, “Okay, I can’t just collect data,” ’cause I told… Me and Ryan did this experiment, Ryan Isaac. First employee that was working with clients with me. Now, he was at the time only had a year’s worth of experience. And so it wasn’t… He would go. I would put him in front of a client. I’d be like, “Ryan’s cheaper than me, so Ryan can meet with them.” And then what would happen is Ryan would then gather all their paperwork up and bring me all this stuff and be like, “Here’s all their stuff. Do you want me to put it inside of the software and start building a plan?” And I’m like, “I already am losing money right now.” And like, “I’m trying to just do this at the lowest cost possible, cost way.” And Ryan would put this big stack of papers on my desk and be like, “What do you think we should do?” And I’d be like, “Dude, I need you to show me something else that’s faster for me to answer the questions.” ‘Cause he’s like, “They just wanna know this question and this question.” And I’m like, “I have a stack of papers in front of me. What am I gonna do with this? It’s gonna take me three hours to analyze it all.” Again, the analysis problem.

Reese Harper:
So we started developing some… A little cheap scorecard of some basic analytics. Like, “Okay, Ryan, take their income, and I want you to first take their income and tell me what they’re spending, and then give me a ratio of their gross income to spending, so I could just see a ratio, 82%. Start there, ’cause I at least need to know how upside down is this person on their cash flow. And then are they saving any money? Just show me that ratio. Are they saving anything right now? What’s their debt-to-income ratio? I need to know that. What’s their effective tax rate? I need to know that. What marginal bracket are they in? [chuckle] How much insurance do they have? I just need to know all of that stuff. Can you go and collect it and then from all this stuff, get it down to just one sheet for me of analysis once… ” Which we started calling financial vital signs. And that was the beginning of when I started to see in my head, if the expensive person, me, the advisor, could just sit in front of a screen and see the financial vitals and the question.

Carl Richards:
Which is just a set of ratios, really…

Reese Harper:
Just a set of ratios.

Carl Richards:
Really important ratios.

Reese Harper:
Important ratios. Holistic ratios. I can’t just get one. I need like the whole enchilada, ’cause I don’t want this to be planning light. This is gonna be comprehensive, holistic answers.

Carl Richards:
Purpose-built for the problem.

Reese Harper:
Purpose-built for this younger accumulator, 99% of the world.

Carl Richards:
[chuckle] You got to keep in mind, this is not purpose-built for the low market.

Reese Harper:
No.

Carl Richards:
We’re talking about a dentist making… But it’s perfect-built for 99% of the population.

Reese Harper:
Yes, and this isn’t poverty customer. This is I couldn’t even work with someone making 150,000 without this. First it was built in Excel and then it was built in… Like we just tried to advance it and now we call it the Element Scorecard.

Carl Richards:
So the vitals, which are the set of ratios wrapped up beautifully in this thing that we call the Scorecard, is what you’re proposing is the solution, is what you’ve developed as the solution to this idea that it takes too much time.

Reese Harper:
Yes, because it already… Think about if you’re lucky enough to be able to get your clients to engage, if you teach them about a scorecard, they’re more likely to engage. And Elements is doing all kinds of creative stuff right now that is gonna be coming out for the next six months to improve our onboarding flows with really motivating gamification. And so we’re gonna gamify this engagement with the end client, so that they take a little bit more responsibility under the data collection and data gathering and data maintenance. I’m thinking of a world where there’s a badge and you’re the complete client badge, you’re like you got the gold star badge you’ve completed your data. [chuckle] Now, if that client can maintain their data, I have eliminated like 30 hours a year of cost.

Carl Richards:
And there’s all these other side benefits that it helps the client, but…

Reese Harper:
Yes. I’ve eliminated analysis time.

Carl Richards:
So then we’ll talk about it another time, but the idea that it takes a bunch of time. I can get a set of financial vitals that will interactively allow me to make critical decisions and answer a question. I can wrap that up in a beautiful package called a Scorecard, that’s the solution to the problem.

Reese Harper:
Yes, and I think that if we go back to the costs, we’re removing costs, we’re lowering cost in data maintenance and collection, we’re lowering analysis cost.

Carl Richards:
Yeah, analysis cost is important, you just don’t think much about that, ’cause it’s the thing that you almost like to do.

Reese Harper:
The cost you really can’t reduce… We’re also eliminating… We’re creating the opportunity to eliminate the implement cost. I actually don’t think… If you’re trying to drive costs down, you implementing someone else’s stuff is a pretty big cost. And there’s a customer out there who just wants their question answered. They want you to do the third step in that four-step flow, which is decide for me. You decide, you tell me what to do. And each question has those four steps, gather it, analyze it, decide it, and then go act on it. And most people are willing to gather the data. Element Scorecard analyzes it for you. [chuckle] You just have to make a decision and the client can go take care of it. That’s a way to finally get to the place where you’re like, “Hey, dentist, I can’t give you a comprehensive financial plan the way I do for my most wealthy customers or complex clients.”

Carl Richards:
Well, look I have to…

Reese Harper:
Okay, pause me on this.

Carl Richards:
Just real quickly, just because I wanna keep this really tight and clean, but this financial planning thing is really interesting. We were all doing a job that cost us a lot of money, made us unprofitable, and the client didn’t even need, ask for, or want.

Reese Harper:
No. We just didn’t have anything else to sell.

Carl Richards:
Because this tool was built, it was the only set of tools we had, this comprehensive financial plan set of tools, there’s nothing wrong with it. If I can quickly help people answer questions using an objective set of financial measures, financial ratios called vitals, wrapped up in a beautiful sort of output called a Scorecard, then I’m solving the problem, right? And I’m doing it in a lot less time. So it’s not financial light, it’s not dumbed down, it’s actually… If we were to scrap… If we were to say, we have no tools, start from the beginning, but I only want you to build tools to serve the 99% of the population, and if we didn’t have this sunk cost problem and this legacy problem, we would build a tool like that. We may not even go out and use a tool that was built for the atomic bomb, you know what I mean? So that to me is why it gets beautiful. So, the problem, just to repeat, the problem, it takes a lot of time to…

Reese Harper:
Set up and maintain.

Carl Richards:
Set up and maintain a client. The solution is an objective set of financial measurements, which we’re calling Financial Vitals, wrapped up in a beautiful presentation called The Scorecard.

Reese Harper:
Yeah, love it, man. Carry on.

Jordan Haines:
Next time on Elementality.

Carl Richards:
These overly complex tools to model certainty really don’t deliver that anyway. So we’ve got complex. The other thing we have is oriented around retirement. Let’s just briefly talk about, how did we get to the spot where it feels like we don’t have a financial planning industry, we have a retirement planning industry? Why is retirement the central point of every single discussion?

Reese Harper:
I mean, this was where the industry made its money for 20, 30 years.

Carl Richards:
It’s the story…

Reese Harper:
It’s about the boomers, it’s about the IRA rollovers, it’s just asset management fees in AUM, and now we’re in a world where that generation that’s comfortable with that model is transferring wealth to the next generation who’s uncomfortable with that model.

Abby Morton:
You can learn more about the Elements Financial Monitoring System at getelements.com/demo, and schedule a time to talk with one of our friendly financial planning experts. Elementality’s executive creators are Reese Harper and Carl Richards. Elementality is produced by Abby Morton and directed by Jordan Haines. Have a good one.

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