‘There are known knowns; there are things we know that we know.
There are known unknowns; that is to say, there are things that we now know we don’t know.
But there are also unknown unknowns – there are things we do not know we don’t know.’
I often find myself using these words (or a version thereof) when chatting to clients about their financial plans. Having finally gotten around to looking up who they should be attributed to I find myself reminded that they are the words of Donald Rumsfeld, a former US Secretary of Defence, who was actually referring to the threat of terrorism. It might therefore seem slightly odd to be using this phrase to introduce an article on personal finance. However, I find that it rather perfectly sums up the situation we all find ourselves in when setting financial goals and managing our money.
Indeed, I would argue that we might all benefit from bringing these words to mind when reviewing our finances and setting out our financial goals.
In relation to our personal finances this quote can be viewed in two directions. As a financial adviser I can apply this to myself and my firm and consider how it affects the products and services that we offer. It makes me think about how we go about our advice process and how we ensure that our clients are presented with all the information they need as well as the information they didn’t know they needed.
The consumer, on the other hand, might consider the context and how this can affect their decision-making process. How can we be sure, when making any decision, that we have fully considered all the facts and all the possible outcomes.
For all financial decisions the information gathering stage is crucial. We often call this the ‘fact-finding’ stage, perhaps slightly dismissively, but it’s always worth taking the time to be clear about what you do know, the known knowns.
Don’t overlook the importance of taking the time to gather the basic facts and setting out this information in a clear way. As a financial adviser I will always start the advice process by gathering as much factual information as possible. So much so that the initial stages may seem tedious to the client, who is being asked questions which may seem entirely irrelevant or even slightly intrusive!
As with many businesses, our clients will usually contact us knowing that they want a particular service. They may even have an actual product in mind. They might need to obtain a mortgage so they can buy a home, or want to build an investment pot in order to achieve their goals for retirement. Whatever it may be, they will go through their own research phase and may even contact us with a specific plan sketched out.
But our clients are often not experts in the things they buy. I’m the first person to admit how little I know about most of the things I buy, so why should I expect my client to know the right questions or to understand the gaps in their own knowledge. These are the known unknowns.
If I take my car in to be serviced I understand generally what I want but not exactly what needs to happen in order for my car to run more efficiently, or safely, if I think about the state of my brake pads at the last service my car had!
Personal finance is full of long, complicated documents, often packed with jargon and mysterious small print. The implications of making a bad decision can be life-changing and can have a massive impact on real-life issues such as your retirement date, the ability to buy a home or the financial health of your family after a sudden illness.
The role of your financial adviser is to unpick the relevant facts from your conversations and to understand those general requirements, your hopes and dreams, and turn those dreams into plans. We need to know what information is missing or what factors may have been completely overlooked.
It’s about having the right technical knowledge certainly, but perhaps more importantly it’s about unpicking what we are being told and searching for the gaps, the information we know that we still need, and that will be essential if the client is to make an informed decision. Those known unknowns.
Our clients rightly expect us to know where those gaps lie and to have the ability to perhaps give bad news when a plan might be tougher to achieve than expected. Hopefully, early enough that plans can be adjusted while there is still time for the adjustment not to be too painful.
One of the most complex areas of financial planning is retirement planning, and in particular, the choice of retaining an ‘old’ pension or switching to a new product. The client will be aware of the facts but may be unclear what those facts will translate to in real life. They might be aware of their options and the generic benefits of moving to a new scheme but may not have considered the pitfalls. This is where your professional adviser will be able to take the facts and present them to you in such a way that the known unknowns can be identified and you can be better prepared.
But, of course, there is always that last, and important factor that simply can’t be predicted. Those surprises are what Mr Rumsfeld might define as the ‘unknown unknowns’.
The unknown unknowns
None of us are happy when we find out our plans are unrealistic especially after the fact, when time and money might have been expended. Sadly, very few of us will go through life without meeting a financial curveball of some sort, many of which simply cannot be predicted, perhaps when a sudden illness strikes or if you have an unexpected addition to your family.
Maybe you didn’t know that you would be penalised if you need to draw funds from a particular investment earlier than intended. Or perhaps that your pension income is not as secure as you thought it was. Or that your mortgage terms and conditions prevent you from paying off the capital early.
You didn’t know, and you didn’t know that you didn’t know!
Your financial adviser, as a service provider, will succeed more often by helping to educate their clients about the things they didn’t know they didn’t know.
If I tell you that by starting work on your behalf you have made a commitment to pay a certain level of fees but where our recommendation might be that you do nothing, or that the advice may incur additional cost, you might well be put off. But I would hope you might also be thankful for the open and honest disclosure, and be grateful for the opportunity to make a decision based on specific information which is relevant to your situation rather than the well-intended but generic advice from friends and family.
Laying out those unknowns can be hard, and we may lose some clients along the way because we destroy the fairytale answer that we’re going to solve all of their problems and there will be no headaches.
But those clients who hear those hard truths will, I hope, be thankful that we’ve taken that extra step to keep them more informed and are prepared to guide them through their scary and unknown financial wilderness with our expertise and support.
Otherwise, another of Rumsfeld’s quotes might come in handy: ‘It is easier to get into something than to get out of it.’ (Rumsfeld’s Rules, January 1974)
If you want to contact Helen or the team at de Carteret Wealth they can be reached on 860660 or firstname.lastname@example.org.