Opinion: The most crucial part of retirement financial planning

Retirees and near-retirees often don’t know what they’re looking for when searching for a financial adviser.

We know this because of the vacuity of the sales pitches used by advisory firms to get our retirement planning business. Because these firms often employ some of the top PR agencies on Madison Avenue, we can presume their pitches are effective. But given how little they really tell us, this means that retirees and near-retirees must be largely clueless.

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Consider the following radio ad pitches, each of which came from one of the biggest national advisory firms. While these pitches may sound compelling, they don’t differentiate one firm from another. There is no financial planning company in the country that couldn’t honestly embrace each of the following statements.

  • Tailored financial advice for a life well planned

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

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

  • 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 lifetime of dedication deserves income for life

These pitches remind me of Rudyard Kipling’s “Just So” stories, such as the one about how the leopard got his spots. These stories sound superficially plausible and are entertaining. But they tell you nothing about the real world.

The reason these firms’ pitches don’t say much of importance is that they can’t. What is truly important when it comes to retirement financial planning is the relationship with the adviser. And individual relationships can’t be scaled into a mass approach to retirement planning.

My wife, a clinical psychologist, tells me that 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, in the end, the research suggests, what is therapeutic about therapy is, above all else, the relationship with the therapist.

What is your risk tolerance, really?

Consider perhaps the most important question every retiree or near-retiree needs to answer: “What is your risk tolerance?” This deceptively simple question is actually almost impossible for most of us to answer without extensive self-exploration and engagement with a good financial planner.

Many think this question can be answered scientifically via risk questionnaires, but they’re mistaken. These surveys, which vary slightly from firm to firm but are otherwise largely identical, ask questions like whether you worry more about not losing money or not making lots of money. The problem is that few of us know how to answer these questions accurately.

It’s not that we outright lie. We may genuinely think we have the intestinal fortitude and discipline to stick with a strategy through a bear market, for example, but when push comes to shove we don’t.

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

And, yet, these questionnaires remain ubiquitous. Why, if both planners and clients realize they’re not helpful? It’s as though we are sleepwalking through the retirement planning process, engaging in lots of activity that in the end signify next to nothing.

What is success?

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

Notice I said “appropriate.” Success when it comes to devising our retirement financial plan is not judged according to rates of return. Instead, success is coming up with a plan that is suitable. That is not something that can be completely quantified.

This insight helps us 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 investing success is not by whether you’re beating the market, but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

Many have found Graham’s comment surprising, since their single-minded focus is on beating the market, and they assumed that Graham shared that focus. But Graham realized that beating the market is only one part of an overall successful financial plan.

What about robo advisers? I am not a big fan. It’s not that they are unable to provide us access to an enormous amount of valuable information that’s relevant to retirement planning. But they can’t satisfy the crucial role played by personal relationships with a trusted adviser.

In the end, I believe there is no substitute.

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