Providing Financial Advice in an Unknowable Future

We often discuss developing emotional intelligence on this blog, as it is less structured than developing technical intelligence. It’s the skill set you develop through hundreds of interactions with a variety of human temperaments and personalities. Knowing when to listen and when to speak, when to be forward and when to be subtle, when to laugh and when to be serious. There’s no crash course in emotional intelligence. Like getting fit, the goal is reached through unbroken repetition, and can thus never be fully attained. No matter how many client meetings you conduct you’ll still come across people that fall on unfamiliar parts of the spectrum.

Observation of my more experienced 35-70+ year old counterparts has been my primary source material for developing this sort of intelligence. The best golden nuggets I’ve gleaned from my most senior coworker are these: 1) Always be curious, 2) Nobody was born boring, and 3) You can’t understand someone without understanding his motivations. These things resonated with me, and I don’t see a future where their meaning isn’t relevant to my career and life. It doesn’t matter that for decades this coworker’s career didn’t involve him utilizing the internet, the advice still fits. In pondering that very thought, I considered the looming certainty that some of the recommendations and mantras of these older counterparts might be outdated. The more I thought about it, the more obvious it seemed. At 25, I’m right around the youngest age of people who remember what it was like to yell at your big sister to get off the phone while you were trying to friggin’ log on to AOL Instant Messenger. I grew up with the internet, so I’ve always understood technology better than most of my older coworkers.

Whenever we purchased a new technology at my previous firm I would be the beta tester, learning the system so I could be a resource when my coworkers were forced to switch from the outdated program. Learning new commercialized products and platforms is easy for me, which makes sense given the platform designer’s primary goal for a widespread audience is usually intuitive functionality.  Growing up with the internet has made it hard for me to see from the perspective of someone who just doesn’t get how to learn new platforms, but a conversation with my roommates at dinner last night provided me with a healthy dose of empathy. My roommates work for two of the most notable “disrupter” companies in the Bay Area, constantly trying to push the limits of technological development, so I like to think they have some authority on the matters of automation and the imminent transformation of our workforce as we know it. One of my roommates postulated, “We’re probably the last generation that won’t grow up coding as a necessity. It will be a required high school class for our kids, because it’ll be crucial to function in the workforce.” I had always thought it would be cool that when I’m 90 people will be baffled that I once lived without the internet, that is until I realized how far behind I could be not knowing a lick of coding. If you enjoy this kind of thinking, I recommend reading Chuck Klosterman’s “But What If We’re Wrong?: Thinking about the Present as If It Were the Past,” which will challenge your perception and thought processes about the present day and our unknowable future. Computers have become ever-present in our lives (you probably have one in your pocket right now), so theorizing that the human workforce will need to know coding more intimately seems like a reasonable prediction. Klosterman’s book points out though, that we’re often incredibly wrong about predicting the future:

“Irrational trajectories happen all the time. Here’s an excerpt from a 1948 issues of Science Digest: “Landing and moving around the moon offers so many serious problems for human beings that it may take science another 200 years to lick them.” The prediction was off by only 179 years. But the reason Science Digest was so wrong was not technological; it was motivational… when the Soviets launched the Sputnik satellite in 1957, the meaning of the enterprise changed… By the summer of ’69 we were planting flags and collecting moon rocks.”

Our biases prevent us from accurately projecting the future because we see the possibilities through the lens of what we value today. Using Klosterman’s framework in regards to providing financial advice, it’s not whether coding will be essential to function in the workforce, but how will a future with different values affect the “old” way of doing things. We may assume that technology will replace the traditional model of providing financial advice, but it’s likely emotional intelligence will be an even more highly desired skill in such a high-tech world. When 3D printing and coding begin to show up as elementary school classes, the skills children develop in English and at recess will become more scarce, and consequently more valuable. After all, a person’s repertoire of skills is limited by the things they have time to experience. When dealing with money, the gatekeeper to so many of our life goals, emotional intelligence and communication skills will be even more crucial.

Although I believe emotional intelligence will always be valued in providing financial advice, we must recognize the likelihood of a period where no one has authority on the best way to provide said advice, and we must always critically analyze anyone who claims such authority. Much of a financial advisor’s career involves providing answers, which requires a certain level of confidence in the way you operate. Regardless of how sound your advice is, if you don’t deliver it with conviction then clients may begin to second guess your judgement. As such, it's important that we consider the advice and critiques our mentors provide through the lens of someone who's been successful advising to a particular generation, and that the values of future generations are subject to change. In other words, just because advisors have been successful with certain methods doesn't mean those methods will bring continued success in dealing with delivering financial advice in a world that’s sprinting in terms of technological development. As we improve upon our emotional intelligence, we may need to resist certain techniques our mentors implore us to use. This post is a call to attention, we need to consider that many people who have had success with their methods will be hesitant to change. Although Mark Manson was not writing in this context, an excerpt from his book “The Subtle Art of Not Giving a F*ck: A Counterintuitive Approach to Living a Good Life” can be applied to this situation:

“Our mind’s biggest priority when processing experiences is to interpret them in such a way that they will cohere with all of our previous experiences, feelings, and beliefs.”

All you have to do is compare our collective technological strides year over year since the turn of the century and there should be little doubt we’re heading into the future with our foot on the accelerator. Given this exponential growth, we need to take particular care during the inevitable development of the delivery of financial advice. You may have been hoping for specific examples to glean from this post, but I don’t have them. It’s not exactly the smartest career move to publicize the specific ways you disagree with your superiors! Also, I consider myself fortunate to be a part of a firm that is driven to provide the best solutions for our clients. That drive is embedded in our work culture and there’s a conscious resistance to bending to pride or seniority. You should be critically reevaluating your company if superiors respond to your inquiries with “because we’ve always done it that way.”

I welcome you to comment if you have a specific examples where you disagreed with your superiors on these types of matters (perhaps anonymously would be best). Since we’re all subject to present-moment biases, sharing your experience could help other readers to realize their own environments aren’t ideal for adapting to the times.

The Left Hand of Financial Planning

Science fiction is often described, and even defined, as extrapolative. The science fiction writer is supposed to take a trend or phenomenon of the here-and-now, purify and intensify it for dramatic effect, and extend it into the future. "If this goes on, this is what will happen." A prediction is made. 

Fortunately, though extrapolation is an element in science fiction, it isn't the name of the game by any means. It is far too rationalist and simplistic to satisfy the imaginative mind, whether the writer's or the reader's. Variables are the spice of life. 

                        -Ursula K. Le Guin

Though extrapolation is an element in Financial Planning, it isn’t the name of the game by any means. It is far too rationalist and simplistic to satisfy the imaginative mind, whether the planner’s or the client’s. Variables are the spice of life.

I joined the ranks of financial planners because of my passion for decision making. My greatest enjoyment is derived from weaving between the complexities of life while balancing living in the moment and delaying gratification. This is paired with a tremendous amount of desire to understand the incentives and hopes that drive each of us to do the things we do. We see that this is true in finance and health, two things that affect everyone. These elements meet in a quote by Atul Gawande from his book Being Mortal:

“In the end, people don't view their life as merely the average of all its moments—which, after all, is mostly nothing much plus some sleep. For human beings, life is meaningful because it is a story.”

“A story” is not an extrapolation, a plan, or a Monte Carlo. These are simply tools used to identify how certain emotions and experiences are to be manufactured. There is no objective “successful plan” or widely agreed upon default assumption for how people desire to live their lives; “variables are the spice of life.” 

Money is merely a single variable that can be emphasized or deemphasized. Our goal should be to work towards an understanding of all variables and inputs – this is how we can help others make the most quality decisions.  

I am letting this post serve as a reminder to myself – to practice humility in my relationships and to understand that quality decisions do not come from spreadsheets, financial models, or a CRM. Quality decisions comes from intimate, empathetic relationships.

Pursuing and Studying for the EA Exam (#2): A Financial Planner's Experience

Getting Introduced to the EA Exams

I'm no stranger to hard exams.  I remember preparing for the CFP® exam and swearing that it was the last, formal exam I'd ever pursue.  Yet, here I am knee-deep into earning the IRS Enrolled Agent (EA) designation.  I'm starting to think I've been lying to my friends all these years when I tell them, "I'm not a school person."

For those who may not know what the EA designation is, the EA is a designation awarded to those who are able to show fundamental competency around common tax topics.  Specifically, it's broken down into 3 core segments (and exams) - #1: Individuals, #2: Businesses, and #3: Practice and Procedures.

Last year, I decided I would pursue the designation in an attempt to gain a deeper understanding of the tax code, hoping that I'd be able to apply that knowledge directly for our financial planning clients.

So far, the process has been everything I wanted.  A few months ago, I passed Exam #1: Individuals.  It was hard, but fairly manageable for the average test-taker.  Fast forwarding to earlier this week, I passed Exam #2: Businesses.  Without a doubt, the second EA exam is significantly more difficult the first.  For that reason, it's worth sharing some of my personal experience and guidance for those who are brave enough to take the plunge and sign up for the challenge.

On the surface level alone, the Businesses exam is much more robust than the Individuals exam.  The study material alone is around twice the size of the first exam’s materials; my study booklet doubled from around 200 pages of material to around 400 pages.  To add to that, at this point in my career, I have completed a grand total of zero Business tax returns.  This is an important point to make, as most financial planners have dealt with most of the topics regarding Individual taxation.  Personally, I've prepared plenty of basic Individual tax returns for myself, family members, and others when I volunteer (through Orgs like VITA and Tax-Aid).  Basically, the Businesses exam was completely foreign territory and studying new material felt like walking into the abyss.

Google Searching for EA Exam Tips Online

I'd like to think I'm an above-average Googler when I need information, but finding study tips for the EA felt impossible!  When you're dealing with exams as robust as the EA, anything that can help calm your nerves is worth its weight in gold.  So hopefully I can help ease some tension and share some of my takeaways with you.

In this post, I'll share some of my thoughts and takeaways on the experience, which might be helpful for anyone going through (or thinking about going through) the IRS Enrolled Agent process.  While there are 3 exams in total, I believe Exam #2 causes the most anxiety out of the three, so it's worth diving in and de-constructing the process of that exam in particular.

Whether you're doing initial research into the designation or you're a few days away from taking the actual exam, somewhere along the way, you'll probably find yourself asking or wondering about questions like this:

• Who should pursue the EA designation?

• How hard is the EA exam #2?

• What EA exam #2 Pass Rates?

• What is the most efficient way to study?

• What study materials should I use?

• How many hours does it take to study for EA exam #2?

• What are some other great tips to know before for the exam?

Who Should Pursue the Enrolled Agent Designation?

As a comprehensive financial planner, client meeting topics are far and wide.  Sometimes we spend an hour discussing cash flow and investments, while other meetings are spent as counselors and coaches to help people achieve their goals.  Invariably, in all of those meetings, there always seems to be a few, interesting tax questions asked by our clients, whether directly or indirectly.  Tax just seems to touch everything! 

Since we don't hold ourselves as 'tax professionals,' it's always (a little too) easy for us to say 'It's probably a good idea to check with your accountant on that one." 

I know I'm not supposed to know everything, but I had finally hit the point where I was tired of not knowing certain answers to our clients' tax questions.  That is frankly why I decided to pursue the EA designation.

It's important to note that although the exams do not teach you to be an all-knowing tax professional, I can honestly say that I feel significantly more confident in my tax knowledge than before my EA studies.  I understand the fundamentals of taxation and all of the major components to look out for, but I'm probably a few years away from reaching 'expert' level. 

How Hard is the EA Exam #2?

For me, I'd rank the exam as 'really hard.'  But it's important to understand that when you say something is 'hard' or 'not hard,' it is purely relative to whatever you're comparing it to; this is otherwise known as benchmarking. 

Firstly, it was hard for me; I began the process with elementary school knowledge on many of the tested subjects.  Conversely, the EA material might come easier to some folks who have already been exposed to the subjects in the past.  Next, I'm comparing this exam to other exams I've taken.  Since I have the most experience with the CFP® exam process, that's what I use as my benchmark for basically everything now. 

If the CFP® exam was a 9 on the difficulty scale, then the EA Exam #2 is a 7 or an 8, depending on your prior experience.  The questions aren’t as difficult as the CFP's are (as they seemingly find pleasure in tricking you), but the material does go much deeper into taxation.  While the CFP® exam is a mile wide and an inch deep, the EA exam is probably a little less than ¾ of a mile wide and around 1.5 inches deep.  It's also important to note that the actual EA exam takes around 2 hours or more to complete, while the CFP takes most people around 5 hours to complete. 

So, while it's less material than the CFP, it is roughly twice the amount of material as exam #1.  When people refer to the EA exam being difficult, they are usually talking about exam #2 in particular. 

What are EA Exam #2 Pass Rates?

For reference, exam #1's pass rates are above 75%, while exam #2's pass rates are typically around 60%.  Those numbers alone should tell you about the stark difference between #1 and #2.

About a week before the exam, I found myself searching to know what my odds were for passing (and failing).  Looking back, learning this information did not help my anxiety or my attitudes whatsoever.  Knowing the stats beforehand is great, but if you want to increase your odds of passing the exam, don't worry about the stats and focus on efficient preparation.

What's the most Efficient Way to Study?

I learned a hard lesson during my CFP studies after I failed the exam on my first try.  Essentially, I was studying incorrectly. 

Firstly, if the exam is a multiple-choice test held on a computer, then you should prepare by taking multiple-choice quizzes on a computer regularly.  Similar to training for a race, if you are signed up to run the 100M dash, you should prepare by running set sprints regularly, not long distance jogs.

Next, you'll also want to focus on the topics that are most likely to be tested over.  Said differently, there are a ton of topics that you can study, but the reality is that not all of the topics will be in equilibrium.  You need to focus on the particular subjects that will be covered, and breeze past the topics that have low probability of showing up on the exam. So how will you know what to focus on?  Obviously there is no way to know which exact questions will be on the exam, but I did discover a way to direct my extra efforts.

Here's how you can learn what to focus on: 

Firstly, you should have access to a large question bank that you're using for practice quizzes.  As you are creating a quiz, you should be able to see how many questions are available for each particular topic.  For example, in my Gleim account, I can go to 'Create a Practice Exam' (which I used just about every day).  From there, I can choose which section(s) I want to be quizzed over at that time, along with the number of questions I want to be on this quiz.  As an example, if I wanted to be quizzed over 'Corporate Formation: Recognize Gain and Loss,' I can see that there are 74 available practice questions.  Compared to a random section, like 'Other Deductions: Business Use of Home,' you'll see that there are only 2 questions for that entire section. 

So if there are 74 practice questions available for one section and only 2 questions available for another, that is Gleim's way of telling me that I should really know the in's and out's of Gains and Losses in Corporations.  Now that I'm on the other side of the exam, there were indeed several questions over this subject (and none over the other subject with only 2 practice questions).

This is obviously not an exact science, but if you're like me and you like to focus on the 20% that will yield you 80% of your results (ie. the 80/20 principle), then this could be a tactic for you to use.

What Study Materials should I use?

This is probably the most common question for anyone wanting to get started preparing for a large exam. 

Personally, I used Gleim to prepare for my exams.  I can't speak to any other preparation materials, as I have no experience with any of them.  That said, Gleim was recommended to me by a trusted colleague and it had everything I needed.

I will add that Gleim is a business and they will always try to up-sell you into 'premium' services.  The package I purchased had access to some of the extra bells and whistles and, being frank, I didn't really use any of them.

All you need is access to as many practice questions as possible, along with a reference book that you can use whenever you don't fully understand the answers to your practice questions.

How Many Hours does it take to study for the EA Exam #2?

This another question that caused me a little bit of anxiety before the exam.  Everything I had read online told me I needed to spend 80 hours or more studying for exam #2.  I didn't tally up my study hours for this exam, but 80 hours sounded like a lot and I don't think I reached that amount.

The key to passing any large exams is to put in the hours and practice, which requires practicing each and every day for several weeks.  That said, I think that studying efficiently goes much further than simply putting in 'more hours' than the next person.  As long as you go into each and every study session with good intentions and focus on leaving the session with 2-3 nuggets of wisdom after each one, you'll be well on your way to passing exam #2.

In total, I did practice quizzes every morning before work, along with quizzes and additional reading and review every weekend.  The final two weeks leading to the exam, I pulled 'two-a-days' and studied in the evenings as well.  I did this over 6-7 weeks.

What are some other great tips to know before the exam?

During your final week of review, you'll want to make sure you know the 'easy stuff' like the back of your hand.  The single most important (last minute) piece of advice is to know that the 'easy' questions count just as much as the 'hard' questions.

If you're having a hard time with a particular concept, it's okay to move on and focus on other 'easier' material if you believe it will be tested.  In my personal opinion, it's better to have 100% fluency over half of the exam, as opposed to 50% fluency over everything.   There is nothing better than being in the exam and flying through 5 questions in a row because you could answer them in your sleep.

Night-time Routine and Relaxation Saved my Score

During the days leading up to my exam, my stress levels were at all-time highs.  Frustratingly, high stress in the evening took their toll on my sleeping patterns and I wasn't getting as many ZZZ's as I needed.  We all know that a good night's sleep can work wonders on the body and mind, but test anxiety will do whatever it can to chop that number in half and ruin your momentum.

The night before the EA Exam #2, I did one quick final review (30-40 min of reading personal notes only - no quizzes) of the last topics I wanted to see, then I closed everything and took the rest of the evening to enjoy myself.  At that point, the hard work had already been done and it was time to focus on winding down for the evening.

I closed my laptop and made a trip to the gym to make sure I sweat out my stress and lifted weights until it burned.  After the workout, I ate a clean (and nutritious) meal while I watched my favorite TV show over a beer (yes, I had a beer directly after my workout - it was delicious).  I went on to get the best sleep I'd had in days and rode that momentum all the way until the Prometric employee handed me a piece of white paper that said, "Congratulations!  You passed the Special Enrollment Examination Part 2 - Businesses."

It's no secret that this exam is hard and there will be a million ways to lower your confidence right before the exam.  If you've put in the hard word for weeks and studied with great intent, you'll be more surprised (and impressed) with everything you know on test day.

Happy testing.