Expert Interview with Michael Kitces About Financial Planning





Michael Kitces took a rather roundabout route toward his career in financial planning. As an undergrad he was a psychology major, a theater minor and a pre-med student, but by the time graduation rolled around, the only thing he'd figured out was that he didn't want to go into psychology, theater or medicine.

What was the logical next step? Starting a job with a life insurance company just a few days after graduating. But as it turned out, selling life insurance was lackluster to him, too. Fortunately, a certified financial planner mentored him on the job and sparked his interest in the field.

That spark ignited a successful career in financial planning, in which Kitces not only helps individuals and families get a handle on their money, but also offers insight and commentary for his colleagues in the industry.

We recently caught up with him to get advice on everything from wrangling out of control finances to getting over your fear of numbers and investing.

Here's what he had to say:

What have been the biggest lessons you've learned in your years working in personal finance?

The biggest lesson I've had in my years working in personal finance has been the ongoing recognition that while there is a lot of technical information to know and apply correctly, and that's important, ultimately success is about actually changing our behaviors for the better. From the financial planning perspective, I believe it's our obligation not only to know and help convey the technically correct solution (no one wants to implement something that's wrong!) but that it's also our responsibility to help our clients change their behavior and implement the solutions. As my friend and fellow financial planner Tim Maurer likes to say, "Personal finance is more personal than it is finance" and as an admitted and self-professed "Nerd" who likes to focus on the finance issues, it's always humbling to be reminded of the importance of bringing it down to a personal level with clients, too.

Do you think everyone should use a financial planner? Why?
I don't think that everyone necessarily needs an ongoing, comprehensive financial planner; many of us are pretty good at sorting out most of our financial issues. But I would encourage everyone to at least see a financial planner for an hour or two every year or two, just to get a second opinion about how they're pursuing their goals, whether they're on track, and whether there are any important gaps that should be filled (for planners who work on an hourly basis, check out the Garrett Planning Network).

The challenge is that it's virtually impossible for us to look at ourselves and our financial situation in a totally objective manner, and sometimes it takes an outsider to call us out or hold us accountable and make us realize a problematic path, whether it's that life insurance or will that's been put off far too long, some unhealthy spending that's gotten carried away, a portfolio where we're stuck holding onto some bad investments that need to be let go, or just some outside perspective on how to balance out some of the tough competing goals in life (Save for retirement or college? Invest in retirement or your career? How do we make the shift in lifestyle so that we're not always running out of money at the end of the month? Does it really make sense to be building a savings account while we still have all this debt?). At worst, you'll find after going through the process that everything is great and you're on track, which isn't a bad affirmation to get from time to time to help us sleep better at night!

Of course, for those who want a deeper or more ongoing relationship with a financial planner as well, there are a lot of options out there; the CFP Board has a nice resource to help you find a CFP professional at their Let's Make A Plan website.

Sometimes people avoid dealing with their finances or investing because they feel overwhelmed by numbers and have no understanding of stocks, bonds or mutual funds, etc. How do you help walk your clients through that process?

Unfortunately, this is a pretty common challenge. Our financial world has gotten very complex, and while it's nice in theory to have a lot of choices, we also see a growing base of research supporting the so-called "Paradox of Choice"; when we have too many choices, it can become overwhelming and we tend to revert back to our default, which is to do nothing instead. Even as financial planners, we have to be cognizant that if we don't manage the paradox of choice in our own practices, we may drive people into "analysis paralysis" as they feel so overwhelmed by the depth of choices and decisions that they can't make any.

What's the way through this? I think the starting point is to make things bite sized and easier. You don't have to conquer all of your financial challenges, issues and concerns all at once. Just make a goal to tackle one particular item, or try to educate yourself on one single issue in the next month. Decide what to do, make that decision, celebrate the success and move on to the next item. Don't put too much pressure on yourself to do everything at once; it might be "ideal" to get it all done together, but in reality it's likely to be so overwhelming that you'll just end out accomplishing nothing. By taking it step by step, over a period of time, you can get your financial house in better order.

What do you think are the biggest mistakes and/or most common mistakes individuals or families make when it comes to their personal finances?

They get themselves into financial distress by focusing too much on the "little stuff" and not enough on the big things that really matter. While it may be a fun exercise to see how much wealth you can accumulate by skipping that daily cup of premium coffee using David Bach's "Latte Factor Calculator" the truth for most households we see is that what makes or breaks the family finances is what they spend on two things: Their house (or apartment), and their car(s). According to the Department of Labor, for the average household those costs for housing and transportation alone are nearly two-thirds of our annual budget, while entertainment is only 5.5 percent, clothing is 3.5 percent, and food is 13 percent; there's only so much we can carve out (still gotta eat!).

Of course, it's hard to just wave the magic wand and change our housing or transportation situation immediately. But when there are decision points (it's time to move, it's time to replace the car, etc.) there's a good opportunity to make a decision at a moment where it really matters, whether it's buying a smaller house, renting a smaller apartment, living in a more economical part of town, buying a less expensive car, getting a used car instead of a new one, etc. In some cases, the situation is dire enough that a more immediate change (move now, sell the car or something else) may be prompted. But the bottom line is that when you save $15,000 over the next several years by choosing a less expensive used car, suddenly the pressure is off and there's no more guilt about the morning Starbucks routine and other small stuff, because there was a good decision made on something big when it really mattered.

What are the smartest things individuals or families can do to improve their financial security?

There are two starting steps I try to give most individuals and families that are trying to improve their financial security. The first is to simplify their financial lives; consolidate to the extent possible, and if not at least aggregate their financial information (and Mint is a great tool to do it, as we recommend to many clients!). This might include merging old bank accounts, rolling over old 401(k)s, combining investment accounts at multiple platforms with one provider, and getting rid of some extraneous credit cards (being cognizant to close them out in a manner that doesn't hurt your credit score if that's an issue for you).

The second step, which starts as an extension of the first, is again to recognize that you don't have to "fix" everything in your financial life at once. Don't try to bite off more than you can chew. Choose ONE THING that you will tackle in the coming weeks or month. Get that one thing done (roll over that old 401(k), merge that old bank account, whatever). Then move on to the next item. When you finish your consolidation/aggregation steps, you can move on to the next items for getting your financial household in better order, whether that's starting to pay down a credit card debt, opening up a college savings account, starting research for that next (less expensive!) car, or something else. Just worry about getting one thing done at a time, enjoy the feeling that comes with accomplishing something, and then move on to the next step. If you do it consistently, you'll find that a long series of "one things" adds up to a whole lot more financial security.


Michael Kitces is a Partner and the Director of Research for Pinnacle Advisory Group, and publisher of the financial planning industry blog Nerd's Eye View. You can follow him on Twitter at @MichaelKitces, or connect with him on Google+.