A Financial Plan is not a Financial Strategy

An application of a prominent business professor’s analysis of business strategy and business plans to the domain of financial advising

In a great deviation from my normal approach to academia, I want to talk to you about Harvard.

In particular, an emeritus professor (this is a fancy term for “retired professor”) called Roger Martin.

Before two weeks ago, I had never heard of him. This shows you how much time I spend in the business management literature (history of economic thought is much more my speed). But I’m glad the YouTube algorithm changed that.

In this short video below Prof. Martin talks about the difference between a plan and a strategy. He does it in the context of a business plan or a business strategy. What I’m going to do here, though, is explain to you how what he says about business plans and business strategies applies really, really well to finance.

The punchline is, echoing the video title, a financial plan is not the same thing as a financial strategy.

And that a Harvard professor, who, if the rather sensational language on his website is any indication, appears to be a pretty big deal is the one making the terminological distinction pleases me rather deeply. I often fear that my attempts at proper classification and conceptual distinction borders on hair-splitting. At least if I’m guilty of this, I’ve got at least one apparently big name right there with me.

I encourage you to watch the video before continuing in this essay.

Listen to how he defines a plan (sometimes referred to as a “strategic” plan) at the 36s mark: “It’s a set of activities that the company says that it’s going to do.”

He gives examples of opening a new plant or starting a new talent development program. He asserts: “The results of all of those [activities] are not going to make the company happy, because they didn’t have a strategy.”

So, what’s a strategy, Prof. Martin? A strategy is “an integrated set of choices that positions you on a playing field of your choice in a way that you win.”

In particular, strategy starts with a theory.

“Strategy has a theory. Here’s why we should be on this playing field, not this other one. And here’s how, on that playing field, we’re going to be better than anybody else at serving the customers on that playing field. That theory has to be coherent. It has to be doable. You have to be able to translate that into actions for it be a great strategy.”

Then he makes the following contrast: “Planning does not have to have any such coherence. … [A plan] tends to be a list [of activities] that has no internal coherence to it and no specification of a way that [the activities] are going to accomplish, collectively, some goal for the company.”

When I first heard that second part about planning, I thought, “Wow he just described conventional financial advising.”

List of activities? Check.

No internal coherence? Check.

No specifications to determine success? Check.

Unlikely to achieve the desired outcome? Mega check.

Oh but there’s more!

At 2:12 (stripping out the business examples): “See, planning is quite comforting. Plans typically have to do with the resources you’re going spend. … Those are all things that are on the costs side of businesses. Who controls your costs? Who’s the customer of your costs? You are. … Those are more comfortable because you control them.

A strategy on the other hand specifies an outcome, a competitive outcome that you wish to achieve, which involves customers wanting your product or service enough that they will buy enough of it to make the profitability that you’d like to make. The tricky thing about that is you don’t control them. You might wish you could, but you can’t. They decide, not you. That’s a harder trick. So that means putting yourself out and saying, ‘here’s what we believe will happen; we can’t prove it in advance, we can’t guarantee it, but this is what we want to have happen and that we believe will happen.’ It’s much easier to say, ‘I’ll build a factory, I’ll hire more people, etc.’ instead of, ‘I will have customers end up liking our offering more than those of competitors.’ The tricky thing about planning is that while you’re planning, chances are at least one competitor is figuring out how to win.”

He then gives the example of Southwest Airlines and cites a lot of the activities (e.g. flying point-to-point, only using 737s, not providing meals) that all followed from their over-arching strategy, or “a way of winning,” which, consisted, in part, in lowering costs, to therefore lower their prices, to then attract their competitor’s customers.

The other airlines, in contrast, “were not trying to win against one another. They were all playing to play … They were playing to participate … [without] a theory of ‘here’s how we could be better than our competitors.’ And that was fine, until somebody came along and said ‘here’s a way to be better than everyone else for this segment [of the market].’”

To avoid what Prof. Martin calls the “planning trap” or the “comfort trap,” you start with an observation.

“The most important thing to recognize is that strategy will have angst associated with it. It will make you feel somewhat nervous. Because as a manager, chances are, you’ve been taught that you should do things that you can prove in advance. You can’t prove in advance that your strategy will succeed. You can look at a plan and say, ‘well all of things are doable. Let’s just do those because they’re within our control, but they won’t add up to much.’ In strategy, you have to say, ‘if our theory is right about what we can do and how the market will react, this will position us in an excellent way.’ Just accept the fact that you can’t be perfect on that and you can’t know for sure. That is not being a bad manager. That is being a great leader. Because you are giving your organization the chance to do something great.”

Step #2: “Lay out the logic of your strategy clearly. ‘What would have to be true about ourselves, about the industry, about the competition, about customers, for this strategy to work?’ Why do you do that? It’s because you can then watch the world unfold. And if something that you say is in the logic that would have to be true for [the strategy] to work is not working out quite the way you hoped, [then you can] tweak your strategy. And strategy is a journey. What you want to have is a mechanism for tweaking it, honing it, refining it, so that it gets better and better as you go along.”

Step #3: Don’t let it get “over-complicated. It’s great if you can write your strategy on a single page. ‘Here’s where we’re choosing to play; here’s how we’re choosing to win; here’s the capabilities we need to have in place; here are the management systems; and that’s why it’s going to achieve this goal, this aspiration that we have.’ And you lay out the logic, what needs to be true for that all to work out the way we hope, go do it, and watch and tweak as you go along. That may feel somewhat more worry-making, angst-making than planning, but I would tell you that if you plan, that’s a way to guarantee losing. If you do strategy, it gives you the best possible chance of winning.”

Man oh man.

Conventional financial planning fits the “plan” bill perfectly. And hello! The word is right there in the name: “financial planning;” “financial planner;” “Certified Financial Planner.”

As long as you don’t think about it too long (and good luck if you know anything about economics), conventional financial planning is extremely comfortable. After all, damn near everyone is doing it.

It’s buy term and invest the difference.

Lord have mercy, it is certainly tax-qualified plans (there’s that word again…).

It’s the ostensible sanctity of the employer plan contribution (by the way, do y’all know that employer retirement plans exist to give the employer an — alleged — tax break? Tax-qualified plans do not exist for your benefit. Your benefit is — allegedly — involved in the process only to appease the IRS).

It’s diversification.

It’s mutual funds and ETFs and stocks and bonds.

It’s dollar-cost averaging and automatic enrollment.

It’s the number-vomit and alphabet soup of IRS code section headings: 1031, 1032, 401(k), 403(b), TSP, IRA, ROTH IRA.

It’s buying the top and selling the bottom.

It’s the mortgage.

It’s the auto loans, credit cards, HELOCs, and business lines of credit.

It’s silent dependence on the banker.

It’s an economically, logically incoherent list of activities and accounts that’s just there. It’s what everyone else is doing. It’s what your parents did. It’s just how the world works. Or so it seems.

Look, this isn’t even an IBC essay. This is a strategy essay. And maybe the element of strategy that stuck out to me most from the video is the centrality of a theory. To me, a theory is a causal explanation. For instance, “people struggle to accumulate capital throughout their lifetimes and are therefore less prosperous because bankers are simultaneously bleeding them dry with giant, deceptive interest costs and crushing their investment accounts with the business cycle that they cause.” That is a theory about what’s going on in the financial word. It doesn’t just describe. It explains. It gives reasons. The reasons that people are so badly capitalized is because the bankers take much of what they have and wipe out the rest over time.

And those reasons are meaningful. They correspond to reality. They hold water.

A meaningless reason, in contrast, is something like “well, yes, the stock market is down right now, but just stay in it because in the long run, historically, there’s been a [insert arbitrary percentage rate of return here] rate of growth in the market.”

That reason (to stay in the market) is meaningless because it is only true in a context so narrow as to not correspond to the reality people actually face. You can construct a historical stock market analysis with carefully selected beginning and ending points to generate virtually whatever percentage you want to squeeze out of it. But what is meaningful, what does correspond to an individual’s reality, is not that number. What’s meaningful to the individual, in contrast, is the fact of the business cycle, and with it, the inextricable, fundamental, permanent uncertainty in the value of investment accounts in an economy that runs on fractional reserve banking.

Likewise, the quantity of money you lose to bankers (by which I mean lenders) over your lifetime is immense. And the opportunity cost you suffer because of that lost quantity of money is even greater, because you don’t just lose the money to the lender in cleverly disguised interest costs, you also lose what that money could have done for you had you kept it. And so long as you don’t do anything to change that fact, you will be worse off.

That is a problem.

That, in Prof. Martin’s terms, is a playing field. You can choose to play that game. You can choose to become your own banker. You can affect that environment. The strategy to do that happens to be called the Infinite Banking Concept and the theory embedded within that strategy is called capitalization. A capitalization theory says that capital is the financial value of property, that you need a hell of a lot of it over your lifetime, and that leverage (borrowing) is the best way to use it. IBC dresses this theory of capital and capitalization in the terminology and specifications of a particular type of property (life insurance). And viola! There you have an economically, logically coherent financial strategy.

IBC fits Prof. Martin’s framework well.

It’s intentional. We’re deliberately picking the playing field where we want to be active; we specify our time long-term time frame (Think Long Range); and our actions (premium payment, policy loan origination, loan repayment, new policies) follow from our specified intentions.

It’s theoretical. There is an economically-informed, causal explanation about the problems people face, why they face them, and how to fix them.

It’s simple. Pay a premium. Take a policy loan. Repay the loan. In fact, it’s so simple that new policy-owners often ask me, “OK I’m paying a premium and building cash value, now what? What do I use the loans for?” That is an article for another time but hear me when I say this: paying a premium is enough. You do not need to go out and find some special, flashy investment opportunity to go deploy your newly built capital. Nelson’s nephew in Part 4 Equipment Financing merely financed through his policies the things that he was already buying. And it created an entire cash flow to support him for twenty years late in life. The Noise makes IBC sound complicated. It is not.

It very well could fit on a single piece of paper. It could fit in a sentence! For example, “I’m paying x% of my income in premium for whole life insurance so that I can build cash value, cut out the conventional lenders, provide for myself and my family throughout our income-generating years and late in life, and pass on a huge amount of capital to the next generation when God calls me home.”

It doesn’t lie. It doesn’t pretend that the mysterious long run, which no one has ever seen nor will ever see, will fix all of its glaringly obvious problems, as with conventional planning. No. It depends on your action. You need to pay the premium. You need to repay loans. And hello! You need to be an honest banker and increase your premium as your financial circumstances improve. If your income is increasing or your expenses are decreasing or both and if you are not paying more and more premium into more and more policies, then you are not doing IBC. So it’s on you, and there’s a lot about life insurance that is guaranteed, but IBC embraces the uncertainty of the future. It acknowledges that this is on you. It understands that those cash values over there on the illustration will not happen unless you make it happen. For a lot of people, that is not comfortable. Changing your mindset, changing how you think about money and finance is not comfortable. And it is sure the hell the case that virtually no one you know (unless you’re extremely lucky) is practicing IBC.

Prof. Martin’s final comment knocks it out of the park. If you merely plan, you guarantee failure. But if you do strategy, you at least give yourself the chance at great success.

So if IBC isn’t your thing (it is, even if you think it’s not), fine. But at least go “do strategy.” Choose one! Come up with one! Something! Because the conventional financial advisory system is a planning system — a non-theoretical, incoherent, economically ignorant, naive, failed system.

So stop it. Do strategy. And if you’re already doing it, do more of it. Do it better. The mind requires continual renewal. Revisit this stuff. Read Nelson’s book again. Rewatch his seminar (if you are practicing IBC and you have not watched his seminar, you are behind, and I get it, but you have work to do). Deepen your understanding. Be an example for your kids and your friends and your family. Stay out of the Noise. Master the practice of identifying stupid, conventional financial thinking that seeps into your brain. Go earn more so you can pay more premium. Stay the course. Walk the straight and narrow. Because the cretins in the Washington District of Criminals and the Wall Street vultures will never stop circling.

Forget planning. Embrace strategy. Become Your Own Banker.