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Financial Planning > Tax Planning

The Importance of Having an Established Firm Philosophy

By Michael E. Kitces

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In the first part of our post, I discussed the importance of documenting the your firm’s financial philosophy. The point is not to cultivate some finely crafted universal principles that everyone can agree to, like the Financial Common Ground initiative. The point is actually to state your views that do not have universal agreement — because the goal is to make it clear what your personal beliefs, biases, and guiding principles are, to ensure that those you’re working with share and agree with your fundamental philosophy.

In other words, don’t state where you agree with everyone, state where you differ, so it’s clear what is unique about you and your beliefs, and clients can align themselves accordingly (or walk away). After all, the reality is that if there’s not real alignment in philosophy between the advisor and the client, the relationship is likely to be full of friction and not work out anyway. Stating the guiding beliefs — and highlighting the mismatch up front — will just save everyone a lot of time and trouble and cost.

Once the financial philosophy has been stated, the firm can publish it, include it in the firm’s marketing materials, and show it on the firm’s website. For instance, you can see my version of the “What I Believe” page for this blog, where I share some my underlying views, beliefs, and the bias of my perspective regarding the practice and profession of financial planning. I realize that not everyone will agree with all of these statements, but all of my readers, subscribers, and anyone who wants to work with me should be aware of and understand my perspective. Hopefully, we will agree — or at least respectfully disagree — on the points. If we don’t have alignment on most/any of these issues, so be it, but to say the least, knowing this will probably save us a lot of time in not trying to work together.

Of course, in the context of an advisory firm, the “What I Believe” philosophy should not be about the practice and profession of financial planning, but about the service and delivery of financial planning to your own clients.

Notably, one of the benefits of publishing your financial philosophy on your website is that if/when/as you want to add something to it, refine it, or change it outright as your perspective changes, you can easily do so. In other words, just as our perspective on the world changes as we live our lives, so too should the financial philosophy document be a living document that changes over time.

Importance Of Having An Established Firm Philosophy

Why does it matter so much to have a clearly articulated financial planning philosophy for your advisory firm? There are many benefits. The first, as noted earlier, is that it helps to ensure that clients will be a good match. After all, the reality is that if a client is dead set on absolutely maximizing wealth with aggressive tax strategies and picking active managers, and the advisor believes in satisficing, focuses on conservative tax strategies, and prefers passive investments, the financial planning relationship is unlikely to succeed in the long run.

Which means, in essence, having a clear financial planning philosophy just helps to weed out mismatched clients from the start, which is a far more effective approach than investing heavily with time and effort into a new client relationship just to have them leave a few months later when it’s clearly not working out.

The second benefit of having a clear financial planning philosophy is that it’s something you can share with affiliated professionals you’re working with, to ensure that they are on the same page as well, especially if they’re people with whom you cross-refer prospective clients, and where they may refer clients to other affiliated professionals as well. For instance, if the CPA prefers a more aggressive tax planning approach than you and your clients, it’s likely to create friction (as disagreement about a strategy between a CPA and a financial planner where the client is caught in the middle is a no-win situation for anyone!).

Similarly, I knew an advisor who had a difficult client challenge when the client’s CPA referred the client to an insurance agent who recommended whole life policies that conflicted with the planner’s “buy-term-and-invest-the-rest” philosophy — putting the advisor in the awkward situation of challenging the insurance agent that the client’s CPA had referred, a problem that potentially could have been avoided if the CPA had a better understanding of the planner’s perspective in the first place. While certainly not all sticky situations with affiliated professionals can be avoided, ensuring there is alignment about views on many of these fundamental financial philosophy issues can eliminate a lot of client strife.

The third area where having an established financial planning philosophy can help is in the process of hiring or partnering with other financial advisors.

To say the least, hiring a financial advisor who has a fundamentally different view than the overall company is likely to lead to friction at best, and outright client complaints or even legal liability at the worst. If the advisor doesn’t share the views of the firm, it may be especially hard for that advisor to work with existing clients of the firm (who presumably have chosen the firm because they like the kind of solutions it recommends), or conversely it may be difficult for the firm to manage that advisor’s clients if the advisor ever leaves (because the clients don’t connect with the rest of the firm). Similarly, if two advisors are thinking about partnering together, they should be certain they financial planning philosophies match — otherwise, in the end, the firm is going to end out running as two independent silos and not a true ensemble firm. In fact, this last point — about partnerships between advisors — is equally true in the context of firms that are looking to merge, or advisors looking to acquire (or be the successor to) another advisor’s practice. In my experience talking with so many advisors over the years, a misfit in financial planning and investment philosophy is at the core of almost every failed merger and integration. It’s often labeled as a “bad cultural fit,” but it typically comes down to issues of financial philosophy, from the passive, DFA-oriented advisor who tries to buy a practice that previously embraced an active management philosophy, to a merger between a firm that believes in using permanent insurance and aggressive tax strategies with another firm that does not. So if you’re thinking about buying or merging a practice, make sure the financial planning and investment philosophies line up well before proceeding any further.

The bottom line, though, is simply this: when the overall vision and philosophy between two people (whether advisor-client, advisor-advisor, buyer-seller, etc.) don’t align, friction often results. And in the world of financial planning, there are many “controversial” issues around which two people can agree or disagree.

The easiest way to ensure alignment, and/or to avoid a mismatch that results in a lot of wasted time and effort, is to clearly articulate that philosophy up front, and make it known to everyone. Those who disagree with it will save you both a lot of time and trouble, and you may find those who agree with it more drawn to you than ever before… since in the end, we all like to do business with those who share our fundamental beliefs. 

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