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Financial Planning: Great Tool, Bad Product

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In my July 15 blog (What Do Advisors Really Do Anyway?), I wrote that, in my view, professional financial advisors provide three major benefits to their clients:

1) They protect their clients from making “emotional investment mistakes.”

2) They protect their clients from being over charged and/or being subjected to undo risk by the financial services industry.

3) They protect clients from making rash life choices that will undermine their financial futures (divorce, business partnership dissolution, career change, etc.).

Upon reflection, I probably overlooked at least one additional benefit: to help clients approach their finances with a comprehensive plan. But even though a financial plan is, in most cases, essential to helping clients reach their financial goals, I believe that many financial planners make a mistake by overstating its importance. 

For example, I recently received the following email from financial advisor Russell Rivera, president of Voice Wealth Management in New York, in response to that July 15 blog:

“I wanted to clarify what commenters Derek Tinnin and Elliott Weir are thinking.  In a sense, you and Derek (and Elliott) are having the discussion on two different levels. They are working [toward] a world where the planner is separate from the investment advisor. However, they seem to understand that planners are investment advisors. This is likely, in their minds, the problem.

I am in the midst of taking my Capstone course for CFP certification and asked our course leader about your recent blogs. In class, he worked on the general assumption that planners do not/should not also take the investment manager role for incentive/conflict reasons, and to elucidate the planning value separately.”  

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. 


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