'Fessing Up

'Fessing Up

Dealing with Uncertainty is Necessary to Provide Clients Honest and Appropriate Recommendations

By Frank C. Bearden

Jon and Melissa Sanders were referred to Jim Clark, a financial advisor, for retirement-planning services. When setting the appointment, their pressing question to Jim was finding out how much income they will need for their retirement, which they planned in five years.

Jon and Melissa have read that they should count on having a high percentage of their current income available since their living expenses will not be much less than they are presently. In addition, they are concerned about inflation, as Jon's pension plan does not have an inflation adjustment.

In preparing for his upcoming meeting with his two prospects, Jim researched some methods for planning for retirement expense. His initial conclusion was to recommend that the Sanders plan on 80 percent of their current expenses, plus adjustments for the current cost of living index (CPI).

This was a benchmark he had seen frequently referenced and was an easy recommendation to understand and use. However, reading through some financial advisory publications, he learned that the percentage of current expenses method for retirement-income planning was not as reliable as once thought. The percentages of expenses for categories such as health care, travel, and other items could change significantly in retirement, and inflation often varied by category of expense. So Jim was left with new information and a lot of questions.

The Challenge
His biggest problem was admitting to himself that he did not know a reliable way to project retirement expenses throughout retirement and was uneasy when thinking of discussing this with his new referrals. He was tempted to use the percentage-of-income method because he thought he would still appear confident and in possession of helpful professional information. On the other hand, he believed the prior information was no longer adequate and felt uneasy recommending it to a client.

The Remedy
On final reflection, he concluded he had to build his recommendations for retirement expenses on what he believed was the most current information, even if the information did bring several new questions that neither he nor his clients could answer precisely at the present.

He decided that the best approach was to admit that changes in needed expense percentages could occur throughout retirement, which would bring unknown factors into the planning process. He decided that these unknown factors should not be denied or feared, but recognized so that they could be incorporated into estimates of needed retirement income.

For the present, changes in the amount of expenses for the Sanders’ retirement could be estimated from the experiences of prior retirees, and adjustments to these estimates could be made as soon as his clients or Jim obtained new information. Jim already incorporated this type of process in his practice with extensive annual reviews, and more frequent consultations as needed. Consequently, dealing with changes in client financial requirements was not new to him.

The Moral
Professionals always want to appear in possession of information pertinent to their area of expertise. Clients rely on financial advisors for information to construct remedies for their financial problems. All too often, an advisor will assume that the best information for a client is information that has a high degree of certainty toward fulfilling that client's objectives.

Unfortunately, advisors, like all professionals, have to deal with uncertainty as well, if they are to provide honest and appropriate recommendations to their clients. Admitting uncertainty is not a sign of weakness in an advisor's capabilities, but rather a testimony to the advisor's honesty in considering the client's financial and personal circumstances.

Honesty builds trust and provides the bridge to additional information that an advisor can then use to provide more thorough financial service. 

 Frank C. Bearden, Ph.D., CLU, ChFC, is an expert witness, Financial Planning/Services, Doctoral Faculty, University of Phoenix, and adjunct professor,Graduate Degree Programs, College for Financial Planning. Contact him at fcbearden@yahoo.com or at 210-724-1958.