I like to listen to podcasts… Maybe a little too much? That’s why it’s a little strange that I’m writing a newsletter and not just releasing a weekly podcast. 🤷♂️ I guess I’ll meet in the middle and offer a voiceover for those folks like me who are too impatient to read an entire article (and you might get some riffing at the end).
I digress…
On Tuesday, December 6th I listened to the most recent episode of the Financial Advisor Success Podcast with Natalie Taylor. I’ve followed Natalie for some time and have been an admirer from afar, but this interview really influenced me. There were many things said in the interview that spoke deeply to me personally, but I want to dwell on something specific Natalie spoke about:
Impact-weighted work. Or, as I like to call it, the good enough principle.
During the interview Natalie reflected on her time serving a high volume of clients in the tech world and said the following:
you start from [the] mentality of, "How little data and little time and little money does the client have to pay for me to provide as much value as possible?" and it was a really fundamentally kind of flip on its head way to think about things [like], "What if we started from nothing? And what does impact-weighted work look like for these clients?”
Michael Kitces responded to Natalie with this statement which really summed up the whole discussion:
I'm intrigued with that label and conceptual framework of impact-weighted work. What's the smallest increment of stuff we can do that creates a meaningful impact for the client? I'm just thinking practically, do I need every single line item of their budget, or do I just need to be able to get to a quick slice that says, "Your outflows are more than your inflows, we probably need to have a conversation about that?”
In this article I will discuss what the good enough principle actually looks like and how financial advisors can build it into their client service models.
What is the good enough principle?
Many of you familiar with investing and economic decision making may have learned about the term “satisficing” at some point. According to Investopedia (which has been my best friend for years now) satisficing is…
a decision-making strategy that aims for a satisfactory or adequate result, rather than the optimal solution. Instead of putting maximum exertion toward attaining the ideal outcome, satisficing focuses on pragmatic effort when confronted with tasks. This is because aiming for the optimal solution may necessitate a needless expenditure of time, energy, and resources.”
With this in mind, the good enough principle is simply acknowledging that even though there may be an optimal path for something, we may need to accept an adequate solution given time, energy, and resources.
I will explore how advisors can use the good enough principle in the following two parts of their service models:
Data gathering. At some point a financial advisor must determine when the information on hand is good enough to move forward with the delivery of advice.
Our advice. Advisors deal with humans, and humans have constraints in what they can or want to do. Often we have to accept the most realistic solution rather than the optimal.
Getting good enough data
When considering how much information she actually needed in the data gathering process, Natalie Taylor asked herself these questions:
"Well, do I really need to know that piece of information? And do I really need to spend that much time doing that calculation, or is a quick back-of-the-napkin, all that we need in terms of fidelity to guide the client well in this moment?”
As advisors, we generally want to know as much as possible about a client, and for good reason! In an optimal situation we would be able to get everything we needed from clients including tax returns, investment statements, insurance documents, etc. Then we would have hours to comb over the documents and formulate detailed recommended actions.
The reality is that we are limited by constraints of time, data, and money. These constraints may necessitate that we prioritize and limit what we get from clients and how long we spend in the data gathering phase.
I know you’re probably thinking “but I’m a real financial advisor, and it’s my responsibility to not leave any rock unturned!” or “how can you expect me to give any meaningful advice with a limited set of data?”
Now, I’m not saying that we shouldn’t seek for a complete set of data. What I am saying is that we, the financial advisors, should consider when the information we have is “good enough” to engage your clients in a meaningful conversation about their financial health.
It’s by understanding the true needs and desires of our clients, (not just assuming them) and evaluating what information is absolutely necessary to do a sufficient job, that we can start to unlock new client segments and help more people.
Giving good enough advice
Many of my conversations with financial advisors center around the balance between “directional” advice and “prescriptive” advice. Let’s talk about the difference and where these fit best.
Prescriptive advice reflects the optimal solution and is very detailed in nature. In financial advice this is akin to running a cash flow projection for a client who wants to retire at 65 with $XXX in 20 years. The advisor would run a model and determine how much that client would need to save each month to reach that objective given certain assumptions.
Directional advice reflects a more realistic solution and is often generic in nature. Some may call these “rules of thumb.” This is akin to a client who wants to retire at some point in the next 20 years. The advisor may find that the client only has a 7% savings rate and their investment allocation seems pretty conservative given their phase of life. The directionally appropriate advice in this situation may be “I see you have a low savings rate and your investments are pretty conservative. I think we should focus on increasing your savings contributions”
With prescriptive advice we focus on optimal solutions.
With directional advice we focus on realistic behaviors
How should advisors find the right balance between these two? It starts by truly understanding our clients and what they actually want from an advisor - not what we assume they want.
We often assume that every client, no matter their phase of life or level of complexity, needs a detailed financial plan with clear recommendations and next steps. But do they really?
What if we were to ask our clients what they actually want from us? I think we’d be shocked at how many of our new and existing clients want more simple, directionally-focused advice.
Natalie Taylor put it perfectly when talking about the effect of directionally-focused advice:
it wasn't just that it was good enough. It was as good as matters for the set of decisions in front of the client. It gave them everything they needed to be able to make the decisions that were in front of them and that there wasn't any greater level of fidelity or exact calculations that would have ultimately changed the piece of advice that I gave them … And so I think just sort of that realization of, "What do I really need to know to be able to inform the set of decisions that are right in front of the client right now?”
Now, let’s finish up with one clarification:
If a client is paying for and wants precision and optimization then that is what should be delivered. But there are so many clients out there that just need good enough and directionally appropriate advice (Carl Richards calls this “right-sized planning”). Some of those could even be our clients.
I hope advisors can spend some time really trying to understand what our clients actually want. What information do we actually need to make good decisions and help the client take a step forward in the right direction?
If you liked this newsletter (or the voiceover 😁) please subscribe and tell your financial advisor friends about this. If you have any questions please feel free to comment on this article.
Great article! This reminds me of the MVP principle--- Minimum Viable Product. Focus energy on the product or deliverable so that it gets the job done. Nothing fancier.