In my thirty-five-year career, I have not witnessed such a rapid and tectonic shift in the world economy as I have in the first two quarters of 2020. It’s not that economists ignore events such as a worldwide pandemic, but it’s perhaps because their statistical probability seems small or the full economic impact difficult to discuss that we place it in the same likely-to-happen category as the earth being hit by an asteroid. Not anymore.
Now more than ever, we need to promote the value of dynamic financial planning. We have no idea the ultimate economic fallout resulting from the measures imposed by the current crisis. Further, planning based on past performance and static assumptions ignores the current context because we do not have enough history with pandemics to forecast their impacts effectively. Events are occurring so rapidly that conditions may be vastly different by the time this article is published.
Dynamic financial planning incorporates ancient thinking first espoused by the great warrior, Sun Tzu, whose seminal work, The Art of War is still used today in military training as well as business schools. Key to Sun Tzu’s thinking is his realization that all plans are temporary. He knew that a plan can become obsolete as soon as it is crafted. In this, Sun Tzu originates a view shared by elite strategic theorists down to the present: that the most brilliant plans are those that spring into being in the dynamic of action and response. Sun Tzu believed that strategy requires rapid responses to changing conditions based on sound judgment and principles.
When I started practicing financial planning in 1984, the PC (personal computer) had just been introduced three years earlier. The Certified Financial Planner CFP™ designation was only a few years old and it was hard to tell who was qualified to give financial advice and who was using financial planning as a ruse to sell insurance and tax-shelters. The October 1984 cover of Forbes Magazine played no small role in me questioning the wisdom of my career choice when it featured a chimpanzee in a 3-piece suit next to a chalkboard scribbled with an assortment of financial planning jargon with the caption, “These days, everyone’s a financial planner.”
The firm I worked for used a fancy financial planning analytical program with which I fell in love. Being an exacting person by nature, I loved the fact that I could enter some concrete assumptions about our clients’ assets, savings rates, inflation, retirement date and investment earnings; then produce pages of perfectly aligned columns that showed our 45-year-old clients that by age 65, they would have exactly $892,649.23 saved for retirement. I think back on those early years and hope than none of those clients kept those notebooks we mislabeled “financial plans” because I am quite certain that not a single one of those plans accurately predicted where those clients would be in twenty years. They were all wrong.
Thirty-six years later and not much has changed. I still use some rather sophisticated software to forecast a client’s financial position, and like the software I cut my teeth on, today’s financial planning tools can predict with amazing accuracy how much you should have saved up by the time you retire, and how long your money will last.
But just like those plans I produced thirty years ago, much of this new financial planning is still based on formulas and fixed input such that twenty years from now, once again, they will all be wrong.
The problem is not with the formulas but with the complexity of the INPUT. The course of an individual’s life, the plot twists and turns, the uncontrollable external forces, and the infinite what-if’s that—even though they can now be modeled thanks to greater computing capability—will ultimately frustrate the best algorithm’s ability to predict where anyone is likely to be financially over a time period of much more than three to five years. It’s not that we should throw away our computers or that an advisor should stop modeling what-if scenarios for his or her client, rather it’s understanding that financial planning has less to do with the concrete input used by financial planning technology and more to do with intuitive “best-guess” decisions on how to respond to ever-changing life.
Financial planning as it is practiced by Argent Trust, is a dynamic process of walking with our clients through their life transitions so that their quality of life is constantly supported by their available resources.
Sun Tzu might be impressed by today’s financial planning systems with their algorithms and probability analysis, but I also believe he would still want field generals (capable advisors) who understand the fluid nature of reality and are able to shift tactics based on the constantly changing battlefield. If artificial intelligence ever achieves empathy, discernment, or wisdom, I’ll know it’s time to quit. Until then, I believe my best value to my clients is as a faulted human being who walks through life’s uncertainties alongside them.
David Russell is Vice President and Trust Officer with Argent Trust in Ridgeland, Mississippi. He has over 35 years of experience advising individuals and families as a Certified Financial Planner. In 2017, David earned his Certified Senior Advisor designation in order to better serve families facing age transitions. In 2012, David authored his first book titled What You Need to Know: The Adult Child’s Guide to Being a Financial Caregiver. The book is aimed at the growing numbers of people in the “sandwich generation” who are providing emotional, physical, or financial support to aging parents, while balancing the demands of their own career and family.