Cus­tomized Plans? For­get It

To give great guid­ance to clients, fo­cus on re­mov­ing noise and bias rather than try­ing to find an in­di­vid­ual so­lu­tion for each client, Glenn G. Kautt says.

Financial Planning - - CONTENT - By Glenn G. Kautt

To give great guid­ance, fo­cus on re­mov­ing noise and bias, not seek­ing an in­di­vid­ual so­lu­tion for each client.

AS YOU ADD PLAN­NERS TO YOUR TEAM, how do you know that they are ad­vis­ing clients cor­rectly?

As a firm grows, in­con­sis­tent de­ci­sion mak­ing also in­creases. That ham­pers ef­fi­ciency, ef­fec­tive client ser­vice and scal­a­bil­ity. This is the prod­uct of two fac­tors: vari­ances in judg­ment, or what ex­perts call noise, and in­ac­cu­rate or in­ad­e­quate in­for­ma­tion, pro­cesses or tech­nol­ogy, which are la­beled bias.

To safe­guard an ad­vi­sory or­ga­ni­za­tion, own­ers and man­agers need to know how to rec­og­nize and over­come noise and bias.


As a young­ster, I got into tar­get shoot­ing. I spent nights and week­ends learn­ing to fire a sin­gle-shot .22-cal­iber ri­fle at a pa­per tar­get 50 feet away and con­sis­tently hit a bull’s-eye less than a quar­ter-inch across. Poor sight con­trol, known as noise, re­sulted in Tar­get 1, shown in the “Noise and Bias” di­a­gram.

If I had good sight con­trol but an in­ac­cu­rate sight on the ri­fle, the re­sult would re­veal bias, like that il­lus­trated in Tar­get 2. At the start of my train­ing, poor sight con­trol com­bined with an in­ac­cu­rate sight re­sulted in Tar­get 3, com­bin­ing noise and bias. Good sight con­trol and an ac­cu­rate sight re­sulted in Tar­get 4.

For ad­vi­sors to make com­plex de­ci­sions, they need ad­e­quate in­for­ma­tion, for­mal ex­pe­ri­ence and guid­ing prin­ci­ples. That makes their sit­u­a­tion dif­fer­ent from that of a port­fo­lio trader who fol­lows a strict set of rules de­signed to limit sub­jec­tive in­ter­pre­ta­tion. Or­ga­ni­za­tions ex­pect con­sis­tent out­comes over time from traders fol­low­ing con­sis­tent rules, with no bias or noise.

Re­cent re­search, how­ever, has shown a prob­lem with this ex­pec­ta­tion.

Daniel Kah­ne­man, a No­bel Me­mo­rial Prize win­ner in eco­nomic sci­ences, and three as­so­ci­ates pub­lished a re­port on noise in or­ga­ni­za­tions in the Oc­to­ber 2016 Har­vard Busi­ness Re­view. This re­search found that noise, as mea­sured by the vari­ance in ex­pected out­comes be­tween dif­fer­ent pro­fes­sion­als mak­ing de­ci­sions based on the same data in­puts, was three to four times as large as man­agers ex­pected. Stated dif­fer­ently, the in­tro­duc­tion of sub­jec­tive judg­ment by pro­fes­sion­als var­ied by a very large un­ex­pected and un­wanted amount.

This can spell trou­ble for ad­vi­sory firms.

Fast-grow­ing firms em­ploy stan­dard­ized pro­ce­dures and ser­vice of­fer­ings to re­main cost­com­pet­i­tive while as­sur­ing su­pe­rior lev­els of qual­ity.


Does your web­site of­fer a “cus­tom” or “in­di­vid­ual” so­lu­tion to clients? If so, you’re telling po­ten­tial clients that your firm can de­sign and de­liver ex­actly what they want. Maybe you can, but can all your ad­vi­sors do as good a job as you? Be­fore you an­swer, con­sider Kah­ne­man’s dis­cov­ery of the large hu­man vari­a­tion in judg­ment-based out­put that may oc­cur as your ad­vi­sors pro­vide cus-

tom ser­vices.

You might still be tempted to an­swer that you cre­ate to­tally cus­tomized prod­ucts and ser­vices for every client. I’m un­aware of any multi-ad­vi­sor firm with a com­pet­i­tive fee struc­ture that has re­mained in busi­ness giv­ing every client a to­tally cus­tomized, per­son­ally crafted fi­nan­cial plan and in­vest­ment man­age­ment so­lu­tion. A high level of cus­tomiza­tion by it­self does not spell suc­cess.

In­stead, fast-grow­ing firms em­ploy stan­dard­ized pro­ce­dures and ser­vices of­fer­ings to re­main cost-com­pet­i­tive while as­sur­ing su­pe­rior lev­els of qual­ity. When mar­ket de­mands and busi­ness cir­cum­stances force ad­just­ments in ser­vice, th­ese changes need to be firmwide.

Even though cus­tomiza­tion in­tro­duces hu­man bias and noise, a to­tal robo plan­ning so­lu­tion isn’t the an­swer, ei­ther.

Sim­u­la­tion plan­ning mod­els show that the most in­flu­en­tial fac­tor in fi­nan­cial se­cu­rity comes from the least pre­dictable but most con­trol­lable (at least by the client) vari­able: client be­hav­ior, in the form of spend­ing and per­sonal in­vest­ing. It’s not the vari­abil­ity of in­vest­ment re­turns or any other ex­oge­nous vari­able. Put another way, clients can in­tro­duce sig­nif­i­cant bias and noise with their fi­nan­cial ac­tions, cre­at­ing large vari­ances in oth­er­wise pre­dictable out­comes.


What can you do to re­duce bias and noise while in­creas­ing value and ef­fi­ciency in your firm? The most sig­nif­i­cant value any ad­vi­sor can pro­vide is pro­fes­sional, con­sis­tent, re­peated ad­vice to re­duce the im­pact of bias and noise from clients’ fi­nan­cial be­hav­ior. To as­sure that this hap­pens, every ad­vi­sor needs to have a high level of in­ter­per­sonal and com­mu­ni­ca­tion skills.

To help de­velop th­ese qual­i­ties at my firm, Sa­vant, we en­cour­age every ad­vi­sor to reg­u­larly write, or to speak with lo­cal me­dia or at pub­lic events. As pos­si­ble, ad­vi­sory firms should pro­vide men­tor­ing and train­ing in in­ter­per­sonal skills and com­mu­ni­ca­tion.

At Sa­vant, we in­ter­nally pub­lish our ad­vi­sors’ me­dia and speak­ing events. This in­stills a sense of pride in our ad­vi­sors who rep­re­sent the firm and re­minds every staff mem­ber of the im­por­tance that the firm places on th­ese ac­tiv­i­ties. Recog­ni­tion en­cour­ages ad­vi­sors to do more.

Em­ploy­ees, re­gard­less of po­si­tion, should con­trib­ute to an in­ter­nal firm blog. This can pro­vide in­ter­est­ing and valu­able in­sights, and also ben­e­fit em­ploy­ees who take the time to craft clear and co­her­ent writ­ing. Ad­vi­sors and staff can learn to com­mu­ni­cate in a con­cise and straight­for­ward man­ner, with min­i­mum noise and very lit­tle bias.

Writ­ten re­ports to clients, cov­er­ing per­for­mance, anal­y­ses and rec­om­men­da­tions, should be equally com­pre­hen­si­ble. As clearly and sim­ply as pos­si­ble, the writer should state is­sues, ob­jec­tives, risk fac­tors and out­comes.

Just as op­ti­mum in­vest­ment man­age­ment has be­come harder and harder to cus­tom­ize, so has fi­nan­cial plan­ning ad­vice. If you think there is only one op­ti­mum so­lu­tion for each client, I dis­agree.

As Pres­i­dent Dwight D. Eisen­hower once said, “Plans are worth­less, but plan­ning is ev­ery­thing.” Ex­pe­ri­enced plan­ners rec­og­nize that things change and stuff hap­pens.

The big­gest value you bring to clients is not your cus­tom so­lu­tion. It’s your will­ing­ness and abil­ity to adapt to change and help clients face the un­ex­pected ad­ver­si­ties that will come their way. Plan on it.

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