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Financial Planner Bias


It's probably time we talk about financial planner bias. Perhaps surprisingly, a fair amount of ink has been spilled in financial planning journals that examines the biases financial planners may have as they do their jobs. Unfortunately, this same information is probably not so readily available to our clients. Website financialpoise.com lists six types of biases that may impact advisors - overconfidence bias, herd mentality, loss aversion, confirmation bias, familiarity bias, and heuristics. Charles Schwab added recency bias in a report they issued.

While we don't have time to dive into each of these issues I want to take a look at one specific question that recently came up on a financial planner message board, and the responses it garnered, because I believe it's quite telling. An advisor in Michigan wondered what, if any, changes other advisors were making to younger clients' social security projections given the program's underfunding issue. Answers ranged from a complete 100% elimination, to a 50% reduction, to a 25% reduction, to a 15% one, to no reduction at all. Some advisors did whatever the client wanted them to do, without any coaching or feedback.

When considering we are talking about a roughly $3000/month payment for ~30 years the ramifications are ENORMOUS - roughly $1 million over a client's lifetime. Keep in mind for the advisor who eliminates any social security income from a client's retirement planning they will then have to suggest to the client a DRAMATICALLY higher rate of savings. Good news for the advisor if he or she is getting paid based on the client's assets as many, including me, are. Think about how having to save an extra million dollars would impact your monthly budget. To replace that lost $1 million in social security payments you'd have to save an extra $600/month for 35 years. That would put a definite crimp in the "fun" line in anyone's budget! But it's not just social security that an advisor's bias might impact. Consider rates of return. Shall we project 7%/year? 8%? 5%? Is your advisor assuming you pass away at age 80? 90? 110? Do they assume you get raises at your work? Without question, the many assumptions an advisor makes in a client's financial plan can dramatically impact the results.

After doing this job for 11 years, I can definitively say I find most financial planners to be overly conservative in nature and that they value security and certainty. This makes sense. And, to be sure, there's nothing wrong with that. We need financially conservative people sometimes. Just like we need aggressive risk-takers at other times. But clients need to recognize when an advisor's own value judgements and biases may be overly impacting a retirement (or other financial goal) projection. Be assured it's okay to ask questions of your advisor and the assumptions he or she is using. Recognize that while nobody knows for sure what the future holds, if the assumptions being used are repeatedly overly conservative (or aggressive), that financial plan you're holding tight to may not be so useful after all.

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