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Does It Really Matter Whether Clients Pay for Financial Planning?

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There’s lots of industry discussion these days about the Certified Financial Planner Board of Standards’ proposed changes to its practice standards, including the expansion of a “fiduciary” duty to “financial” advice, Knut Rostad’s concerns about the implied acceptance of conflicts of interest, and widespread concerns about the Board’s ability and/or willingness to enforce these new standards.

I was talking to a financial advisor who is a CFP about this the other day, and he raised a concern is that has been the elephant in the room for all discussions about financial planning since its inception in the early 1970s: “Financial planning,” he said, “will never be a profession or even a business until clients will actually pay for it directly.”

On its face, this concern has indeed been part of financial planning since its beginnings. Originally, financial planning was invented to sell mutual funds during the down stock markets of the late 1960s and early ’70s, tax shelters in the late ’70s and early ’80s, and variable annuities in the later 1980s.

At that time, the stock market was once again booming, but financial planners had found a new business model: managing client investment portfolios for a fee. While some advisors considered dropping their financial planning services, the independent industry soon realized that client relationships were stronger — and client assets stickier — if they continued to offer financial planning.

The point of this history lesson is that very, very (did I mention very) few financial planners have ever made a go out charging directly for financial planning. Over the years, I’ve met a few advisors who charged hourly for just creating financial plans. But as I understand it, even today’s Garrett Planning Network folks, and the new wave of “flat-fee” charging advisors, include portfolio management or portfolio advice in their services.

So, financial planning has been almost always tied together at no additional cost with some other service that the clients pay for; and for many financial planners the service du jour is asset management. The question on the table: Is this really a bad thing for financial planners?

I would suggest that it isn’t and offer the following reasons why not. First, I’d point out that the very premise of the question is flawed: That is, if a particular service or item isn’t specifically mentioned on the customer’s bill, it was “free.” If you think about it, many of the products or services that we buy in our daily lives come with some item(s) or service(s) that doesn’t appear on the final bill.

When I get my motorcycle serviced at Santa Fe Harley Davidson, they always wash it — and get it a lot cleaner than I ever do. What’s more, over the years, their service people have given me advice about things to do and not to do to my bike that have made it much more enjoyable to ride (if that’s possible). Neither of those items appear on my bill. But they’ve made me a very happy and loyal customer.

Likewise, when I had my operation at the New Mexico Heart Institute a few years ago, my surgeon and his staff were incredibly nice. They spent a lot of time with me explaining what was going to happen, how I was going to feel, what to do about it, what I shouldn’t do when, and what to do when I did the things I shouldn’t do, etc. As you might imagine, there were lot of items on my final bill — but none of the above. Still, if I ever have to have another operation, those are the reasons I’ll go back to the NMHI.

Now, I’m not under any delusion that I’m not paying for any of these “extras.” In fact, that’s just the point. Of course the costs of my great Harley service and my medical support are built into my bills somewhere. But I don’t have to see them itemized on my bill or pay for them directly for them to have a substantial effect on my attitude about those businesses and their services. And I’m sure you could come up with dozens of examples in your life.

Why would the financial planning business be any different? As I mentioned, we know that providing financial plans increases both client and asset retention. Heck, even the Wall Street firms have figured that out. Which means that clients like it and appreciate it. And we know that the financial planning process enables advisors (who are so inclined) to have a much better idea of what the clients’ “best interests” are (regardless of what the CFP Board does or doesn’t do).

So, what possible difference could it make whether “financial planning” is itemized on the client’s bill? Neither are constructing an appropriately allocated portfolio, monitoring that portfolio, rebalancing it, coordinating managed portfolios with nonmanaged portfolios, working with a client’s other advisors (accountant, lawyer, insurance agent, etc.), updating a client’s financial information and so on. And yet, I doubt many would suggest that clients don’t value these services either.