Archive for Policy-Based Financial Planning

Policy-Based Financial Planning As Decision Architecture

Financial Planning, Policy-Based Financial Planning, Videos, Webinarson July 8th, 2015No Comments

Policy-based financial planning offers a framework and approach that allows practitioners to craft decision rules that can keep clients committed to a consistent course of action in a seemingly chaotic and unpredictable world.

Decision Architecture: Building Better Choices

Financial Planning, Policy-Based Financial Planningon December 4th, 2014No Comments

Decision ArchetictureElissa and Dave’s latest paper on policy-based financial planning was just published in the December issue of the Journal of Financial Planning (Policy-Based Financial Planning as Decision Architecture). Financial planning policies are compact decision rules that make it easier to stick with a consistent course of action in the midst of an ever-changing environment. Developing good policies can be thought of as a form of “decision architecture” in which we structure the policies in such a way as to leverage our natural human proclivities, like sticking with default options. As Elissa and Dave note in their paper, how decisions are structured can have an enormous impact on outcomes.

A compelling example of the power of the nudge can be found in an examination of the respective organ donation rates of Germany and Austria (Thaler 2009). According to the European Social Survey, these two countries have a cultural similarity index of 0.846, which would suggest that they are very nearly identical from a social and cultural perspective. However, the organ donation rate in Germany is only 12 percent compared to an Austrian donor rate of 99 percent. The explanation for this difference can be found in the structure of the choices faced by each country’s citizens. The system for electing to be an organ donor in Austria requires individuals to opt out, while Germany requires donors to opt in. This is an example of one of the findings from behavioral finance; namely, that default options and inertia are incredibly powerful forces when it comes to making and acting on decisions.

A well structured policy can take one’s beliefs and the goals that arise from those beliefs and provide simple decision rules that can take the stress out of daily decision making. One area where this can be useful is in the area of charitable giving. As anyone who has become active in charitable giving knows, the check you write is the first of two gifts, the second one being generated when the charity sells your name to a mailing list. The growing number of appeals can become quite stressful unless you’ve adopted formal policies that guide your giving. Here’s an example:

  • Belief: Preschool enrichment programs greatly enhance lifetime educational success.
  • Goal: To devote a sustainable portion of my annual income to supporting preschool enrichment programs.
  • Policy: I will focus my charitable giving exclusively on preschool enrichment programs, and I will annually donate to such organizations an amount not to exceed 10 percent of the annual safe withdrawal spending target for my portfolio.

The person who has adopted these policies can now much more easily deal with the many appeals for support that come along by applying a straightforward, two-part filter: (1) does this organization support preschool enrichment programs; and (2) have I yet donated 10 percent of this year’s safe-spending target?

Policies can be particularly powerful for young people just starting their careers and who’s circumstances with respect to earnings, expenses, and living situation will typically go through many changes in a short period of time. Adopting the right saving polices early can be incredibly powerful. Just note that a young person earning $40,000 per year who starts saving 10% of their earnings at age 25 will accumulate $1,036,000 by age 65 (assuming an 8% rate of return), while waiting until age 30 to start saving results in an age 65 balance of $689,000. The one who started just five years sooner ended up with 50% more savings at 65, truly an example of the power of time (we like to say that young people have a super power – TIME- but it’s one that fades quickly!). Here’s a simple saving policy that we encourage all young people to adopt:

  • I will save 10 percent of every paycheck;
  • My savings will go first to my emergency fund until the account equals three months’ worth of living expenses;
  • Thereafter, my savings will go into my employer retirement plan to the contribution limit;
  • Any remaining savings will go into an after-tax opportunity fund;
  • Windfalls, such as bonuses, will be allocated 10 percent to a fun fund and 90 percent per the preceding policies.

With this policy, no matter how many changes might occur in the young person’s life with respect to earnings or expenses (and typically there will be many!), they always know exactly what to do. Such a policy can also be thought of and illustrated as a series of cascading buckets.

Cash Flow Buckets

Policies can also be a useful way to plan for “contingent” resources, those for which the value, timing, and probability of occurrence are highly uncertain (e.g. bonuses, gifts or inheritances, surprise tax refunds, etc.). Policies can be used to establish in advance the appropriate actions to take if the contingent resource materializes. Here’s an example of such a cascading policy that allows the contingent resource to be accounted for in the financial plan, even though it cannot be explicitly incorporated into the financial projections:

Any windfall from (named contingent resource) will be allocated as follows:

  • First, toward my nephew’s college fund up to one-half the then projected four-year cost;
  • Next, to the American Heart Association up to 10 percent of my then annual earned income;
  • Next, to a kitchen remodel up to 5 percent of the house’s then appraised value; and
  • Any remaining funds will be added to my after-tax retirement savings account.

The “decision architect” can also design policies to address risk management and the use of insurance, lifetime gifting, and the use of debt, to name a few.

At Yeske Buie, we also use “Safe-Spending Polices” to help us determine the highest, sustainable level of spending available to clients in retirement and to ensure that they remain on a safe and sustainable path.

In the end, well crafted policies can truly become a touchstone to help keep us committed to a consistent course of action as we pursue our life goals.

 

References

Thaler, Richard H. 2009. “Opting In vs. Opting Out.” The New York Times, September 26

Elissa and Dave Speaking in Korea

Firm News & Events, Policy-Based Financial Planningon November 20th, 2014No Comments
Elissa and Dave have been in Seoul, Korea this week, having been invited to speak at the Korea Financial Planning Association’s annual conference.
In his keynote presentation, Dave will be discussing the three phases of good retirement planning, from uncovering client goals, vision, and values, to designing effective strategies for accumulating retirement savings, to establishing a Safe-Spending path to ensure a sustainable lifestyle throughout retirement. One of the themes at the heart of this three-phase process is the use of Policy-Based Financial Planning, an approach that Elissa and Dave have been writing and presenting on for nearly a decade, including a discussion with the Wall Street Journal in 2010.  Elissa and Dave are in the process of writing a book on TheLiveBigWay Safe-Spending System.
Elissa’s presentation is titled, “Building Client Trust and Commitment Through a Strong Relationship Management Strategy.”  During this workshop, Elissa will review some of the research related to how financial planners can most effectively work with their clients in order to develop a full understanding of what matters most to clients, as well as communicate planning strategies in a way that motivates change and helps ensure successful achievement of client goals.

Namsan Park

At Namsam Park overlooking the city

Temple

Jogyesa Buddhist Temple

ChanDeokGung Palace

Changdeokgung, one of the five palaces of the Joseon Dynasty emperors

Traditional Neighborhood

The narrow streets and traditional homes of Jongno-gu district

Dave in Korea Korean Food Elissa in Korea
Elissa and Dave enjoy a meal at Namdaemun Market

 

Insights from FPA Far West Roundup

Financial Planning, Policy-Based Financial Planningon September 11th, 20141 Comment

Intro Session WL

The Yeske Buie Financial Planning Team (Elissa Buie, Dave Yeske, Yusuf Abugideiri, Jennifer Micieli, Jennifer Hicks, Lauren Stansell, and Sabina Smailhodzic) attended FPA Far West Roundup (FWR), an annual financial planning conference that was held on Thursday, August 14 to Sunday, August 17, 2014 on the UC Santa Cruz campus.

With fewer than 100 attendees, FWR offers a much more casual and intimate atmosphere than other financial planning conferences (a typical regional conference might draw 500 attendees or more). The collegial atmosphere has a significant impact on the vibe of the conference. For those four days, planners can focus solely on being students of the profession again. Attendees also have the opportunity to deepen personal relationships as everyone goes to the same sessions, eats meals together, and spends the free time together.

There is a clear devotion to learning, teaching, and growing as practitioners. Most of the planners own their own businesses yet willingly share their insights and experiences. It’s not a competition; in fact, the opposite is true as FWR is a great place to look into peer and mentorship opportunities. All share a common desire to improve the profession.

Speaker Sessions

St. Clair WLLiabilities-Side Gamma: The Next Frontier (Don St. Clair)
This session brought a new dimension to how we conceptualize the role of debt. If it has a beginning and an end, it’s a debt. So, for example, the cost of four years of college, even if it’s being paid from cash flow, can be thought of (and planned for) as if it were a formal debt obligation.  In treating the college education expense as a debt, you might choose to finance it over the 18 years leading up to college, or the 22 years including college, or you might put it on your home equity loan and pay it off over any time period you choose. Even though an expense may have no explicit interest rate, it can still be conceptualized as an interest free debt. This would be the case, for example, when you pay for four years of college directly out of current cash flow.

New Ideas in Retirement Income Planning (Wade Pfau)
One of the interesting questions raised in this session related to where we draw the line for having ‘good enough’ market information. What if the investment time period you have researched and built an investment philosophy around doesn’t reflect what actually happens within a reasonable variance band? Wade explored the interplay between economic theory and the day-to-day practice of financial planning. The former focusing more on theory, but the latter focusing more on what is realistic/practical. By the end of this presentation, it was affirming to realize that our investment philosophy was built with the best available information. It is not bullet-proof, but it’s the smartest way we’ve discovered to invest in the market.

Integrating a Client’s Money Mindset into Their Financial Plan (Michael Kay)Kay WL
This session  was a great reminder of the power of deep dialogue and discovery. We already incorporate worksheets such as the Financial Satisfaction Survey and the Life Transitions Survey into our annual update meetings. Even though these are simple checklists, they often trigger deeper discussions. At one point, planners were asked to share their most challenging or difficult client stories, which was truly fascinating. Those situations are very vulnerable moments, but sharing them allows others to better serve their clients when similarly challenging circumstances arise.

Captive Insurance Strategies (Timothy Barnthouse)
This is a complex strategy to take on insurance liability in order to maximize cashflow, tax, and a larger estate exemption, but was geared more towards households with very significant assets.  Having said that, among the interesting possibilities is that one could, for example, use a captive insurance company to transfer $1mm per year to the kids/grandkids utterly free of gift tax.

Sheffield WLPortability – No Brainer or Brain Surgery? (Ray Sheffield & Mark Prendergast)
This was the biggest gem of the conference. Ray Sheffield is an estate attorney and he provided enough clarity to inspire tangible solutions for the newly introduced concept of “portability,” an issue we’ve been exploring since it was introduced into law two years ago. For estates where the spouse died between 2011-2013, where portability was not elected, and the estate stood a reasonable chance of piercing the estate exemption threshold, it is generally optimal for the surviving spouse to file for portability, which involves “breaking” the bypass, or credit-shelter trust. The deadline is 12/31/2014, but the approval process takes a while and should be started ASAP. In addition, Ray presented a compelling comparison between funding a bypass trust or funding a marital trust, otherwise known as an AB or ACB setup. Going forward, we will be reviewing each client situation to determine whether it’s time for a visit to their estate planning attorney.

I’d Rather Die than Talk to My Heirs about My Estate (Peter Johnson, Nancy Ross, Maureen O’Connell)
Collaborative planning is a new area that combines the expertise of a financial planner, estate attorney, accountant, and/or therapist. The idea is that when faced with a controversial situation, collaborative planning can be the step before the need for court proceedings, which usually doesn’t provide a suitable outcome for both parties, whereas collaborative planning could. The catch is that your current professionals will likely not be the same ones you employ in collaborative planning. This is done to ensure that all parties involved feel they are being represented fairly without bias towards one party over another.

Decision Architecture 101 (Dave Yeske)Sheriff Crop WL
In his presentation, Dave discussed policy-based financial planning with examples that included financial planning policies and the safe-spending policies – sound familiar? It’s always fun to see how other planners react and value the concepts that are shared from Yeske Buie. The information wasn’t new for our group, but we had a greater appreciation for the things we already do!

All in all, we had a great time at Far West Roundup and left the conference equipped with ideas and solutions to incorporate in our work with clients moving forward.

 

Policy-Based Financial Planning

Financial Planning, Policy-Based Financial Planning, Yeske Buie in the Mediaon August 28th, 2014No Comments

Investor Behavior: The Psychology of Financial Planning and InvestingPolicy-based financial planning is a technique that Elissa and Dave have been developing since their first article on the topic appeared in The Journal of Financial Planning in 2006. The approach has received a lot of attention in the press lately, in no small part because of a book called Investor Behavior: The Psychology of Financial Planning and Investing to which Elissa and Dave contributed a chapter on the topic of financial planning policies.

Financial Planning Magazine
Carol J. Clouse from Financial Planning Magazine wrote an article about client behavior that discussed policy-based financial planning (free registration required) as a system for developing compact decision rules that make it easier to take appropriate actions in a rapidly changing environment. Carol did a great job of capturing the essence, notwithstanding the article’s unfortunate title, “When Clients Behave Badly: What to Do,” which would, of course, never apply to Yeske Buie clients!

Carol opens her article with a humorous example of how our natural propensities can be channeled by a simple policy:

You know that friend who always arrives 15 minutes late, so you tell him the movie starts at 7:15 when it really starts at 7:30?

Advisors who use a strategy they call policy-based financial planning do something like that. A good advisor knows that, while you cannot change human nature, you can use a client’s habits and behavioral biases to craft a financial plan that works for him.

POLICIES: CLEAR BUT FLEXIBLE

A good policy should return an unambiguous answer for clients even if circumstances change, so it should be structured around percentages and other adaptable targets. For example, a young client (or a client’s adult child) who needs a strategy for saving might have a four-part policy that sounds something like this:

  • I will save the first 10% of every paycheck.
  • All of that will go into my emergency fund until I amass three months’ wages.
  • After that, the savings will go into a retirement vehicle up to the maximum contribution.
  • Any remaining savings will go to a supplemental retirement account.

Yeske’s observations on policy-based financial planning are among the insights he has developed with his wife and business partner, Elissa Buie. They appear in a recent book, Investor Behavior: The Psychology of Financial Planning and Investing, by H. Kent Baker and Victor Ricciardi.

At more than 600 pages, the book has 30 chapters written by investment professionals and academics. “The majority of the content focuses on the decision-making process of the individual investor,” says Ricciardi, a finance professor at Goucher College in Baltimore.

The book tackles a wide array of subjects, including the effects of religion on investment decisions; the neuroscience of financial decision-making; post-crisis investor behavior; and the real world of trader psychology.

Investment Advisor Magazine 

Bob Clark wrote a review in Investment Advisor Magazine saying that while the 30 articles in the book were fascinating from an intellectual standpoint, he singled out the policy-based financial planning chapter as particularly useful for practitioners in their work with financial planning clients.

Finally, one of the dynamic duos of the financial planning world, veteran planners Yeske and Buie, wrote: “Practitioners not only need an understanding [of behavioral finance concepts] but also practical tools. Policy-based financial planning is one such tool, offering a framework and approach that allows practitioners to craft decision rules that can keep clients committed to a consistent course of action.”

Based on their 2011 paper, Yeske and Buie provided a six-step process for creating effective financial planning policies for each client:

  1. Engage in the discovery process in which the financial planner learns about the client’s personal history, values, beliefs, goals and resources.
  2. Identify planning areas and best practices required by this client.
  3. Combine goals with best practices to create a proposed policy.
  4. Test the policy: Is this a good policy?
  5. Test-drive the policy with the client and listen to their feedback.
  6. Conduct periodic reviews and updates checking for changing circumstances.

The couple concluded: “Financial planning policies are structured decision rules that can act as a touchstone for both clients and their advisors and allow for rapid decision making in the face of a changing environment.”

While Yeske Buie has found Policy-Based Financial Planning to be very helpful in developing policies for risk management & insurance, investments, charitable giving, and when and how to refinance, financial planning policies can also be extremely helpful in the work we do with the adult children of existing clients, some of whom are just launching themselves in their career. In most cases, these young people will experience many significant changes in a relatively short period of time, including multiple job changes, significant changes in pay or benefits, and multiple living arrangements, from shared apartments to buying homes. Policies can help them deal with all of these changes without requiring them to “reinvent the wheel” with every move.

In conclusion, policy-based financial offers a framework and approach that allows practitioners to craft decision rules that can keep clients committed to a consistent course of action in a seemingly chaotic and unpredictable world.

Meet The “NorCal” Team

Firm News & Events, Policy-Based Financial Planningon June 5th, 2014No Comments

Jen H., Jennifer M., Elissa, and Dave (order in photo below) attended the 2014 FPA NorCal Conference held at The Palace Hotel in San Francisco, CA on May 27-28. You can expect to see posts in the coming weeks summarizing some of what we learned at the conference.

The FPA NorCal Conference has been providing advanced educational sessions for members and affiliated financial professionals for over 40 years. It has earned a reputation as one of the country’s best conferences providing high quality, knowledgeable speakers and excellent networking opportunities.

This conference is planned by a volunteer committee of respected financial planners representing the five local Bay Area chapters. Attendees include members from these local chapters in addition to financial advisors from all over the U.S.

'14 NorCal YeBu WL
Jennifer M. was on the conference committee as a Program Co-Chair with Leigh Shimamoto (the chair for the 2015 FPA NorCal Conference) and also served as a Media/Press Liaison. Jennifer and Leigh worked with the committee to ensure the breakout workshop sessions contained a variety of topics relevant to financial planners given by robust and talented speakers.
'14 NorCal Program Co-Chairs WL
One of those speakers was Dave! He presented on the topic, “Policy-Based Financial Planning and Behavioral Finance: Decision Architecture for a Changing World.”
'14 NorCal Dave Pano WL
'14 NorCal Dave Presentation WLElissa represented the Foundation for Financial Planning by accepting a $10K pledge from FPA NorCal as a gift to the recently retired Executive Director of the conference, Brenda Harrington. Fidelity Investments has committed to matching pledges up to $500K to the Foundation, so the gift was worth double!
'14 NorCal EB FFP Pledge WLAs Chair of the Foundation, Elissa also participated on a panel, which consisted of the top leaders in the financial planning profession. The facilitator of the panel, Eric Flett, is to the left of Elissa, and on her right are Jim Johnson of FPA of California, Ray Ferrara of CFP Board, and Janet Stanzak, President of FPA National.
'14 NorCal Leader Panel WL

Investor Behavior: The Psychology of Financial Planning and Investing

Firm News & Events, Policy-Based Financial Planning, Yeske Buie in the Mediaon February 13th, 2014No Comments

investor_behavior_book_cover_pageWhy do investors behave as they do? That is the question posed and answered by the book “Investor Behavior: The Psychology of Financial Planning and Investing,” edited by H. Kent Baker and Victor Ricciardi and published by Wiley Finance.

This 30-chapter book (available from Amazon) covers the major principles of investor psychology and how personality, emotions, financial planning strategies, and the behavioral underpinnings of various trading and investment topics play into how clients make decisions.

Dr. Dave Yeske, CFP® and Elissa Buie, CFP® Managing Director and CEO of Yeske Buie, respectively, were part of the dynamic team of academics and experienced practitioners who contributed to the body of knowledge in “Investor Behavior.” Their contribution, “Policy-Based Financial Planning: Decision Rules for a Changing World,” places Policy-Based Financial Planning squarely within the context of behavioral finance and “choice architecture.” They describe the concept as follows:

“Although the field of behavioral finance helps to provide a deeper understanding of the cognitive biases present when individuals make financial decisions, practitioners need not only understanding but also practical tools. Policy-based financial planning is one such tool, offering a framework and approach that allows practitioners to craft decision rules that can keep clients committed to a consistent course of action in a seemingly chaotic and unpredictable world. . . . These comprehensive yet compact decision rules serve as a touchstone for both client and advisor, providing clear guidance in the face of rapidly changing external circumstances. In their ideal form, financial planning policies are both broad enough to encompass virtually any external change and specific enough to return clear answers as to appropriate action.”

Ms. Buie and Dr. Yeske have been writing and speaking on the topic of Policy-Based Financial Planning since 2006, when their article “Policy-Based Financial Planning Provides Touchstone in a Turbulent World,” was published in The Journal of Financial Planning. The Journal also published their most recent collaboration, “Evidence-Based Financial Planning: To Learn. . . Like a CFP®,” which appeared in the November 2011 issue.

15 Transformational Advisers: David Yeske and Elissa Buie

Articles of Interest, Policy-Based Financial Planning, Yeske Buie in the Mediaon June 20th, 2013No Comments

Elissa and Dave were featured in InvestmentNews‘ 15th anniversary edition special feature of the top 15 transformational advisers.  The feature, written by Andrew Osterland, highlights Elissa and Dave’s relationship and their extensive contributions to the financial planning profession, focusing especially on their work in the areas of “policy-based financial planning” and the introduction to greater scientific rigor to the profession’s body of knowledge.

 

Osterland notes Elissa and Dave’s longtime commitment to improving practice through research and teaching.

The two financial advisers, whose firm has offices in Vienna, Va., and San Francisco, are well-known in the financial planning profession for their work at the industry’s major trade group — the Financial Planning Association — as well as their roles as educators at Golden Gate University and their contributions to the academic literature of the financial advice field.

Also noted in the article was the work Elissa and Dave have done to develop the concept of “Policy-Based Financial Planning,” which involves the development of compact decision rules that can guide clients who must make decisions in the face of a rapidly changing environment.

Mr. Yeske’s and Ms. Buie’s most important contribution to the academic literature was a paper published in the Journal of Financial Planning that they co-authored in 2006 on policy-based planning. In it, they argued that just as advisers use investment policies in managing assets, they also should draft policies to guide their planning with clients.


“Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us. We ask ourselves, Who am I to be brilliant, gorgeous, talented, fabulous? Actually, who are you not to be? Your playing small does not serve the world. There is nothing enlightened about shrinking so that others won't feel insecure around you. We are all meant to shine. And as we let our own light shine, we unconsciously give others permission to do the same. As we are liberated from our own fear, our presence automatically liberates others.” ~Marianne Williamson