Opinion: The most crucial part of financial planning for retirement

Retirees and near-retirees often don’t know what they are looking for when looking for a financial advisor.

We know this because of the emptiness of the sales pitches consulting firms use to get our retirement planning business. Since these companies often employ some of Madison Avenue’s best public relations firms, we can assume their pitches are effective. But given how little they really tell us, that means retirees and near-retirees must be largely ignorant.

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Consider the following radio ad placements, each from one of the largest national consulting firms. Although these presentations may seem convincing, they do not differentiate one company from another. There is no financial planning company in the country that could not honestly agree with each of the following statements.

  • Tailor-made financial advice for a well-planned life

  • It’s not just what you earn, it’s what you keep

  • Allowing you to stop focusing on saving and focus on living instead

  • It’s never too early to think about retirement

  • If there’s one thing we all share, it’s that our lives are all unique.

  • So you can live your life

  • A life of dedication deserves an income for life

These locations remind me of Rudyard Kipling’s “Just So” stories, like the one about how the leopard got its spots. These stories sound superficially plausible and entertaining. But they don’t tell you anything about the real world.

The reason these companies’ arguments don’t say much is that they can’t. What’s really important when it comes to financial planning for retirement is the relationship with the advisor. And one-on-one relationships cannot be turned into a mass approach to retirement planning.

My wife, a clinical psychologist, tells me the situation is similar when it comes to therapy. There are dozens of different theories, modalities, and systems that therapists use to describe their approaches. But, ultimately, the research suggests that what is therapeutic in therapy is above all the relationship with the therapist.

What is your risk tolerance, really?

Consider perhaps the most important question every retiree or near-retiree has to answer: “What is your risk tolerance?” It’s actually nearly impossible for most of us to answer this deceptively simple question without thorough self-exploration and engagement with a good financial planner.

Many think this question can be answered scientifically via risk questionnaires, but they are wrong. These surveys, which vary slightly from company to company but are otherwise largely identical, ask questions like whether you care more about not losing money or not making a lot of money. The problem is that few of us know how to answer these questions with precision.

It’s not that we’re outright lying. We may sincerely think we have the gut courage and discipline to stick to a strategy in a bear market, for example, but when the going gets tough, we don’t.

Most financial planners realize that these questionnaires are worthless, by the way. A few years ago, Wade Pfau, professor of retirement income at the American College of Financial Services, surveyed planners about their attitudes toward risk questionnaires and found that 95% found them ineffective. Pfau found from surveys of individual investors that 82% shared the planners’ skepticism.

And yet, these questionnaires remain ubiquitous. Why, if planners and clients realize they are not useful? It’s like we’re sleepwalking through the retirement planning process, engaging in many activities that ultimately mean next to nothing.

What is Success?

If our true tolerance for risk is largely hidden even from ourselves, then financial planning in its initial stages is little more than shooting in the dark. It is only after a sometimes lengthy process of exploration, with guidance from a trusted and empathetic financial planner, that we discover our true tolerance for risk. And only then can we begin to develop an appropriate financial plan.

Notice I said “appropriate”. Success in designing our financial plan for retirement is not judged by rates of return. Instead, success comes with a plan that fits. It’s not something that can be completely quantified.

This idea helps us to understand an otherwise inscrutable comment that Benjamin Graham, the father of fundamental analysis, made in his famous book “The Intelligent Investor”.

He wrote: “The best way to measure your investment success is not whether you beat the market, but whether you have a financial plan and behavioral discipline in place that can get you where you want to go. want to go.”

Many found Graham’s comment surprising, as their only goal is to beat the market, and they assumed Graham shared that goal. But Graham realized that beating the market is only part of a successful overall financial plan.

What about robo-advisors? I’m not a big fan. It’s not that they are unable to give us access to a huge amount of valuable information that is relevant to retirement planning. But they cannot satisfy the crucial role played by personal relationships with a trusted advisor.

Ultimately, I believe there is no substitute.

Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected].