What Is the Philosophy of Your Financial Planning Firm?

Crafting a ‘financial planning philosophy’ document that explains what you believe

In a world where financial planning is guided by a standardized process but a lot of leeway about precisely what financial planning recommendations are crafted and implemented, the reality is that two well-intentioned financial planners can come up with remarkably different solutions for clients depending on their views and perspective. Whether it's the active vs. passive debate, or permanent insurance vs. buy-term-and-invest-the-rest, some planners just tackle client problems in a materially different manner than others.

So how can clients find the planner that's right for them, and how can planners ensure they're a good match for their clients? Consider crafting a "financial planning philosophy" document, that explains what you believe when it comes to all things financial planning, so clients understand the perspective of the advisor they're potentially going to work with. The point here is not to craft a politically balanced and sensitivity positioned document, but to help make it clear what your financial planning "deal breakers" are — the things you just don't believe in and won't recommend to your clients, period.

The goal of going down this path is to find people to work with who believe in what you believe — a crucial fundamental first step in having a positive long-term relationship. In fact, using your financial planning philosophy as a screening tool can be effective not only in trying to connect with prospective clients, but also potential affiliated professionals you might work with or refer clients to, advisors you might hire into your practice or work with as a partner, or even to evaluate the prospective fit of a potential successor, buyer or merger of your advisory firm. In the end, it all comes down to shared beliefs, and the easiest way to ensure that your viewpoints are aligned is to state clearly what your financial planning philosophy is in the first place.

Different Ways To Do Planning

While the CFP Board establishes a standard 6-step financial planning process — establish the scope of the relationship, gather data, analyze the situation, craft recommendations, implement the recommendations, and monitor the plan — the guidelines for financial planners leave a great deal of leeway in the key 4th step: crafting recommendations. While certainly the CFP Practice Standards require a fiduciary obligation to deliver planning recommendations in the best interests of the client, in many situations there simply is no clear consensus about what constitutes the "best" recommendation in the first place.

While some situations are relatively clear — for instance, having health insurance is better than skipping it, having an emergency fund is important, and it's crucial to spend less than you make in the long run — the details of many other scenarios have far less agreement and little consensus. Should you pay down the highest interest credit card, or the lowest balance one that may give you the confidence to stick with the strategy? Is it a good idea to seek out investment managers who can deliver value above their benchmark, or just stick with a passive approach? Is it better to buy permanent insurance, or buy term and invest the rest?

Advocates on each side of those questions have some strong opinions about why their conclusion is right and the others are wrong, but the reality is that in today's world either can be done in a reasonably prudent manner on behalf of a client without running afoul of any legal or financial planning standards. Yet the differences are important. Clients that have strong feelings in one direction often cannot be swayed by an advisor who views the matter differently; in fact, even two advisors who work together may struggle and have significant conflict if their views on the issues don't align. Unfortunately, though, most firms and advisors can't even articulate what their philosophy is in the first place!

Documenting Your Firm's Financial Philosophy

The first step to being able to clearly articulate your firm's financial philosophy is to document it. Write it down. For your firm's "What We Believe" philosophy that explains how you view various key questions and issues. Just a few areas that the financial philosophy document might include are:

  • Investments: Active or Passive?
  • Debt: Something to use or something to avoid?
  • Life insurance: Permanent, or buy term and invest the rest?
  • Annuities: Does annuitization ever make sense?
  • Risk: What does risk really mean in your view?
  • Taxes: Follow the intent of the law, or push it as far as the law will allow?
  • Wealth creation: Maximizer or satisficer?

In the second part of our post, we'll go over the importance of having an established firm philosophy.

Page 1 of 2
Single page view Reprints Discuss this story
This is where the comments go.