Boringly Powerful

In the financial planning world, we're all trying to get better at what we do, and so whenever we get together at conferences, we trade thoughts and ideas and insights.


One of the most informative stories you're likely to hear came from an advisor who told the audience that he hosts yearly client appreciation dinners. Lately, he's been grouping the guests according to how long they've worked with him. At one table, those who've retained his services for the past five years. Another, people he's been advising for ten years. There's a 15-year table, 20 years, 25 and, at the table in front, people who he's worked with for 30 years.


"As I looked over at the 30-year table," he said, "I saw people who, when we first started out, were not wealthy and never expected to be." Now they're worth millions and (more importantly) able to live their life on their own terms.


One woman in particular caught his eye, a school teacher who had come to him in the first year of her teaching career. She had gotten into the not-unusual habit of spending a little more than she made. She was in debt, and one of the first things they talked about was whether she could afford an expensive car that she'd talked to the local dealer about.


The advisor's advice, which she took, was to buy a much more affordable, serviceable vehicle. He worked with her to pay off the credit cards, and over the rest of her teaching career, he encouraged her put the maximum into her 403(b) plan and save ten percent of her income and managed her growing retirement portfolio. The change in lifestyle was not dramatic, but it had a huge impact on her life: the year of this particular dinner, she had accumulated enough that she could afford to retire and travel the world.


"What's interesting," the advisor told the audience, "is that when she told the other teachers that she was going to quit work, their first question was: how can you afford it? The other teachers," he continued, "were still in the habit of spending a little more than they made, living year-to-year, and couldn't afford to retire."


Looking at this one person at the 30-year table, sitting among other people with stories like hers, he was struck by the huge difference a small course correction and a little financial coaching can have on somebody's life over longer periods of time: the difference between squeaking by financially and retiring with millions.


His first insight (which made the audience laugh) was: "I don't charge nearly enough for my services."


His second was: even though he worked hard to manage the portfolio efficiently, her rate of return was just about equal to what the market offered. That, in itself, is surprisingly extraordinary; according to data compiled by the Morningstar fund tracking organization, mutual fund investors, on average seem to get about half of market returns--because people tend to buy hot funds right before they cool off, and sell out of underperforming funds right before they hit a hot streak. By staying consistent with the schoolteacher's investments, the advisor added far more value than you'll likely find in any kind of fancy investment strategy.


But the real point--the most important insight--is that the difference between a table full of millionaires and their peers who spent thirty years spinning their wheels is a boringly powerful formula: consistent savings habits, avoiding debt, and living within their means in a world that constantly tempts us to overspend. When you reduce all the spreadsheet analyses, forecasts and formulas down to their purest essence, this is what most financial planners are trying to help people achieve in their lives. For the people at some of those 20-30 year tables, the real challenge now is how to use their excess money to have fun, and who they want to leave the excess to at the end of their lives.


Andy Pulsfort