A major topic of discussion among advisors is how to achieve recognition for financial planners as professionals on a par with accountants and lawyers. Lew Altfest, whose credentials include Ph.D., CFP, CPA, CFA, and PFS, has been among those working toward that goal, both as an Associate Professor of Finance at Pace University and as president of L.J. Altfest and Company, the fee-only firm he founded with his wife, Karen, more than 20 years ago in New York. His new book, Personal Financial Planning (McGraw-Hill Irwin, 2007) is already being adopted in college classrooms around the country. He spoke by telephone with Managing Editor Bob Keane in early January.
In the book you talk a lot about Total Portfolio Management.
Financial planning professionals know that they have to include all the client’s assets and liabilities in doing their work. Yet the only tools that have been used in financial planning have to do with just stocks and bonds. Total portfolio management, TPM, looks at all assets and liabilities in a portfolio setting. It not only takes into account financial assets but real assets, like real estate and human assets.
Human assets, while non-tradable, are for a good part of your lifespan your most important asset. [In doing TPM] There’s a stress on expenses and liabilities, including financial liabilities like a mortgage, but also your committed spending pattern, like putting your kid through college and upkeep costs on your home.
There’s a chapter on behavioral finance. Is that something that planners need to be aware of?
I’ve always believed that psychology was very important in all forms of economics and finance, including investments. Behavioral finance is another dimension of total portfolio management. In a way it’s an extension. It can help you become more efficient in your decision-making because certain things we do with machine-like behavior, using rules of thumb that are based on faulty assumptions.
What do you hope to accomplish with the book?
My goal is to advance the field, to have personal financial planning and the planners who practice it–hardworking guys and women who do a great job–get recognized for it, and to teach them how to improve their own planning.
Do you think there’s still a long way to go in terms of having financial planning accepted as a legitimate profession?
I think we’re a good way there, but still have a way to go. In general we’re going to get more and more sophisticated in financial tools and a portion of the people, not all, are going to be more sophisticated in human sensitivities to help clients out. We’re going to move in quantitative terms and we’re going to move in behavioral, at least for some people.
It’s controversial and some people say it should be left to psychologists, so I’m not going to say you need this to be successful, but it certainly is an area that’s going to get more emphasis in the future.