Financial Planning: Great Tool, Bad Product

I believe that Mr. Rivera accurately restates the position of those two commenters and his instructor, as well as that many of today’s flat-fee advocates. Comprehensive financial planning is a great thing (and as I noted above one of the key values that financial advisors can deliver to their clients). But it’s just a tool, not an end in itself.

Financial security is attained by growing investment portfolios, not by the plan itself. (It’s as if doctors decided to call themselves “vital statistics monitors.” While vital statistics are an important tool in medicine, they are only one part of good medical care–and not the part that people are interested in.) 

Realistically, most people don’t care how their advisor guides them to financial security, as long as they get the job done. And while many people see the wisdom in using a financial plan to help them get there, that’s not really what they’re paying for. Which is why historically they generally won’t pay for it as a standalone service. What clients will pay for is growing their investment portfolios, and if financial planning helps their advisor do that more effectively, then they are happy to go along with it.

Russell is also right that Derek and Elliot, and many others, are trying to separate financial planning from investment management (as many planners have tried to do countless times over the past 40+ years). But at least on a large scale, this seems to me to be a losing effort, because they fail to grasp that fundamental reality that client asset growth is the foundation upon which the advisory profession rests.

And asset management fees are not only the least conflicted way to pay for advice, they create the strongest identity of interest with the clients: when portfolios grow, the advisor makes more money, too.  

And yes, investments and/or large expenditures outside the investment portfolio do conflict with the advisor’s interest. But I see this as a very healthy conflict: clients need someone representing their financial future to say: “Hey, are you sure you understand the potential impact that a new ostrich farm could have on your retirement?” The client still has the final call, but as every advisor knows: in 9 out 10 cases, those “outside investments” are really bad ideas. I see this as part of saving clients from themselves.  

To me, the bottom line is that the wealthiest families around the globe pay AUM fees on their investment portfolios. That should pretty much say it all.