by Jim Pasztor, CFP®
The agricultural revolution goes as far back as 10,000 years. The industrial revolution of the 18th and 19th centuries generated more change in 200 years than occurred during those 10,000 years. The pace of change during the last 20 years has continued to accelerate, with the Internet and advances in ways to communicate and share information being nothing short of breathtaking. Who of us envisioned what 2010 would look like all the way back in 1990? What does the next 10 or 20 years hold for us? Ever-increasing, rapidly accelerating change is with us, and this has enormous implications for financial planners.
Linear thinking and financial planning don't work well together and may actually cause harm. Just ask anyone who retired and invested in large-cap U.S. stocks in 2000, only to have a negative return 10 years later, or someone who was counting on tapping into home equity for a special goal.
As financial planners, we cannot be complacent. We don't have all the answers, so it is our job to be constantly asking questions and not merely accepting the status quo. Chances are there will be quite a few surprises down the road. Planners cannot predict all these changes, but they can help clients be as prepared and flexible as they can be, while enjoying the journey along the way. For example, the classic approach for an emergency fund is three to six months of expenses, but is this enough? Given the increased uncertainty of employment and the need for individuals to be constantly evolving and retraining, should there be more held in reserve?
Just as planners should be working on both quantitative and qualitative goals with their clients, financial planning itself is both an art and a science. We can't quantify everything-look at the major mess that the quants got themselves into with credit default swaps and the ensuing global market meltdown. These individuals thought they had it all figured out, but they were in the trees. Here are some questions planners should be considering:
- What impact will ever-accelerating change have on the advice I give?
- How can I keep up with change without becoming overwhelmed or paralyzed by it?
- What questions should I be asking clients that I currently am not asking?
- There should be a litany of other questions, such as:
- How do I picture what retirement will look like in the future?
- Should I entrust as much money as I do to Wall Street, or are there other alternatives?
- Will homes ever appreciate again as they did in the past?
Leaders in the financial planning profession have been pounding the table for a while now, saying as loudly and clearly as they can, "Financial planning is not investment planning, or tax planning, or insurance planning; it is all of them and more." And it needs to be evolving with the pace of change that is ahead of us. For those of us who are older, the rise of the Internet and technology is just a part of our lives, but for the latest generation that has grown up with it, they will expand this technology far beyond what we know, innovating and creating in ways we cannot even imagine.
The good news is that financial planning (real financial planning and not just product sales) is perfectly suited for the challenges and opportunities that lie ahead. But it requires planners to think critically and ask questions. Do you see the forest? Or are you stuck in the trees?
Jim Pasztor, CFP®, is an associate professor of financial planning and investments with the College for Financial Planning. He is also a fee-only, independent registered investment adviser.
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