Joe Duran

Duran Duranblog

Joe Duran

Flash crash: The value of advisers in coping with uncertainty

The key isn't building a financial plan for clients but amending the plan as life unfolds.

Feb 14, 2018 @ 11:58 am

By Joe Duran

A week ago Monday, the Dow fell 1,175 points. Although that was not anywhere near a record percentage decline, it turned out to be the biggest point decline in history.

After 19 months without a 5% decline from the peaks (a record in itself), volatility came roaring back, with wild swings on a daily basis. Most professionals have been waiting for the return to "normal" levels of volatility for years. However, no matter how knowledgeable anyone is, nobody really knows exactly when or how extreme declines will come, or when they will be over.

We use mathematics and accuracy when reviewing the past, but there is a blend of art, science and experience involved in looking into the future. It is impossible to have an exact or accurate answer when looking forward. No one knows what the market will do tomorrow, much less what might happen years from now. Yet entire financial lives are counting on our ability to anticipate the future.

As I speak with advisers around the world, I typically ask two questions about planning and its role in their client relationships.

Question 1: How many of you provide clients with a financial plan? At the beautiful new conference center in Sydney this January, around 2,000 advisers raised their hands. A couple of weeks later at the TD National LINC conference in Orlando, Fla., I couldn't find a hand in the packed auditorium that wasn't lifted.

The financial plan has become as ubiquitous as a performance report. What was once a competitive advantage has become a commodity. Our industry has made planning easier, more visually engaging and easier to update. Plans are more readily accessible to clients than ever before. Unfortunately, most are using similar tools that clients cannot differentiate between. Millions of people are now counting on their financial plans for their future.

Question 2: How many of you believe your financial plans will turn out to be accurate? After some reflection, about 75% of the audience raised their hands. Of course, it depends on how you interpret the question. I am sure the vast majority of advisers have completed the plan accurately and done the math right, but it's highly unlikely that any of their plans will turn out to be accurate in the fullness of time.

Illusion of false precision

No matter how advanced the planning software or how detailed our inputs are, the reality is that every plan is simply our best estimate of how things could turn out for our clients. At its core, all software assumes a person will be average, even though every human has a once-in-a-lifetime experience.

We have no idea how peoples' aspirations might change, nor what surprises they will encounter throughout the remainder of their lives. Yet many of us engage in a level of detail that gives people an inflated sense of accuracy. We don't spend enough time talking about the "what ifs."

Paradoxically, the more specific we become, the more confident our clients are that our projections are right, but the less likely it is they will turn out to be accurate.

It's the uncomfortable reality of attempting to predict the future, but we should all be very grateful it exists. That very inaccuracy is what allows human advisers to be truly valuable.

The real value of a financial plan

Very few advisers would consider telling their clients that the plan they just built is wrong, that it's at best a current mathematical analysis of our current aspirations and expectations. Truthfully, our value is not in building a plan, but in fixing and amending the plan as life unfolds. Understanding people and helping them optimize their choices objectively as life happens in unpredictable ways is what a client needs more than anything from an adviser. It is the single biggest value any adviser can provide to the people they help: to bring a disciplined process to financial life choices.

Charge for your value

We all know people won't fail in their financial lives because they underperformed the market by a few percent; they will fail because they had a plan that turned out to be wrong and they didn't adjust appropriately along the way. Yet the overwhelming majority of advisers build a one-time plan that only occasionally gets reviewed. It's not the ongoing centerpiece of the relationship.

This is true because most advisers continue to give away planning and advice in order to have an investment relationship, when in fact in a relative value sense, the investing should be given away as part of a planning and advice relationship. If you want to be indispensable to your clients, charge for your value and deliver on it consistently.

No one really knows what the market will do next, nor what unexpected things might happen in our lifetimes. But we can be indispensable by truly understanding people and helping them adjust in the best way to whatever their financial life brings them, expected or not.

(More: How bitcoin and blockchain will change the world)

Joe Duran is founder and CEO of United Capital. Follow him at @DuranMoney.

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