The Smart Money Philosophy of Doug Lennick

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Roulette Wheel

Carly Schulaka asked 10 Questions of Doug Lennick on Moral Intelligence and the Value of Behavioral Advice for the Journal of Financial Planning. I found Question #4 especially interesting:

4. How can planners help their clients make better financial decisions?

Well, there are many strategies, but one is just to help the client deal with the truth of uncertainty. Too many financial professionals try to predict the future. It’s a fool’s game. I can’t predict when you’re going to die. I can’t predict if you’ll become disabled. I can’t predict if you’re going to need some kind of care after you retire. But I can guess. And the thing is, when I guess right it will actually fuel my confirmation bias and make me believe that I actually have this great skill to predict, but there’s just nobody who can do that consistently well over time. By the way, I don’t suggest to advisers that they shouldn’t make educated  guesses—but even an educated guess remains a guess.

So, the best thing advisers can do for clients is prepare them financially for virtually anything that can happen.

To do that, we encourage advisers to employ a strategy we call the smart money philosophy, which basically says if you follow the philosophy, whenever you need money, there’s going to be a smart place to get it.

We have to deal with the uncertainty of the length of life, and we have to deal with the uncertainty of our health status, and we still have to deal with the uncertainties of the market.

The best strategy is to prepare. We need people to genuinely see themselves not as money managers, but as financial advisers. You’re not here to manage the money, you’re here to provide financial advice, and you’re here to help people prepare for the truth. The truth is uncertainty, and the sooner you buy into the fact that that’s why you’re here, the sooner you will be able to employ a strategy that prepares people for uncertainty. You’ll be doing your clients a great service, and you’ll feel a lot better about how you make your living.

There are at least 3 important truths packed into this answer:

1. Predicting the future is a fool’s game. Statistically, timing the markets works as often as you’d expect random guessing to succeed. The difference is that those who guess right assume it is because of their brilliance and try to build a wealth management philosophy around it. See: “Timing the Market Isn’t All Fun and Games” and “How to Maximize Long-Term Returns

2. Be prepared for virtually anything that can happen. This means doing what my father, George Marotta, calls “making half a mistake.” Being prepared for virtually anything means being diversified. And being diversified means always having something to complain about. It is like consistently coming in 4th in the Olympics. It means avoiding the pride that tries to beat everyone else over any short period of time.

3. Follow a philosophy so that there is always a smart place to get money. This means keeping some amount of money in stable investments (fixed income). We recommend keeping 5-7 years of safe spending on the stability side and putting the remainder in appreciating assets. This means abiding by maximum safe withdrawal rates in retirement, having an appropriate asset allocation, and rebalancing accounts regularly.

Photo by SalFalko used here under Flickr Creative Commons.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)