Financial planning. Seems straightforward. Led Zeppelin, Soraia, and the confusion surrounding financial planning.
Note that this is my profession. I am a CERTIFIED FINANCIAL PLANNER™, (abbreviated CFP®) and by definition I am talking my book. I will do my absolute best to avoid selling me, my firm, or my services in this treatise.
My hypothesis is that it is confusing because money, a quite emotion-triggering tool, is used in many ways and present in most things that we do. Exchange for value is at the heart of our culture, society, and economic system. For some, a sound financial plan is one thing: a solid cashflow analysis showing you how much you can spend and save. For others, well, keep reading.
Clear Like Mud.
Given the human desire to be wealthy not be poor (which means income and generation of sales come first for a large swath of our working population, and seems especially true in financial services), the competitive nature of humans, and the ability of various lobbying organizations to influence financial services regulation, it is not surprising that exactly what is financial planning can be quite uncertain, leaving you dazed and confused.
“I’m a financial planner” sounds a lot like “I’m from the government and here to help”. This sentence is, however, substantially more attractive than “I’m selling a product and trying to find a way to convince you that you will be better off having purchased this product”, which, as it should in many cases, sounds much like “I have a hammer and you look to me like a nail”. The problem: There is neither a widely accepted definition nor any specific regulation governing the use of “financial planner”. Another issue? Financial topics are emotionally powerful and often engage your fight or flight mechanism, with irrational and illogical results. Also of note: the titles people use in financial services add confusion due to their abundance, marketing goals of the firm or person, and lack of regulation.
There are people who are asset managers - whose focus is on creating the greatest rate of return on your investments - who reference financial planning in their marketing materials. Some people/firms are selling insurance, in particular permanent insurance, and label themselves as planning firms. Others are focused on annuities. There are people who solely provide planning, for fee, with no implementation, asset management, or monitoring services. Some provide planning and monitoring services with no asset management or insurance implementation. Yet we all like to say we are financial planners, since the term is attractive to potential clients.
Discussing finances has a tendency to trigger the fight or flight mechanism in the brain, hence people avoid the discussion. Many people have money-driven anxiety, especially if they have a scarcity mentality. There are folks who are money hoarders, who won’t spend although they can. The mental health issues surrounding money can be substantial. The CFP® Board recently added financial psychology to the CFP® curriculum. Study and continuing education of this topic is now mandatory for CFP® holders. How your brain deals with money, and what it wants to hear and believe regarding your finances, can be confusing. The decision science is clear - more choices equals fewer, or worse, no, decisions. It is of no help when the industry adds complexity.
You will see all manner of titles for people who claim to do financial planning: financial representative, financial advisor, sales assistant, financial specialist, wealth management advisor, director of wealth management, fee-only financial advisor, and fee-based financial advisor, among others. The multiplicity of titles adds fuel to the confusion fire. Why is my own title “Financial Advisor, Managing Director?” It is well-received by Google, Bing, and other search engines, that’s why. Personally, I think what I do is guide and coach clients, and I prefer that title, but if you are a potential client and using a search engine, well, Google and its counterparts prefer Financial Advisor, Managing Director.
It is absolutely no wonder that the non-financial services public is confused as a result. Based on some things I see, I think a fair amount of people who call themselves financial planners are confused.
What Is Financial Planning?
The CFP® Board, which is the regulatory body for CERTIFIED FINANCIAL PLANNERS™, provides the following definition.
FINANCIAL PLANNING DEFINITION (from the CFP(R) Code of Ethics, found here)
Financial Planning is a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.
EXAMPLES OF RELEVANT ELEMENTS OF THE CLIENT’S PERSONAL AND FINANCIAL CIRCUMSTANCES
Relevant elements of personal and financial circumstances vary from Client to Client, and may include the Client’s need for or desire to: develop goals, manage assets and liabilities, manage cash flow, identify and manage risks, identify and manage the financial effect of health considerations, provide for educational needs, achieve financial security, preserve or increase wealth, identify tax considerations, prepare for retirement, pursue philanthropic interests, and address estate and legacy matters.
There is tremendously abundant territory that may need to be covered. The relative land mass involved is highly dependent on the person and their unique circumstances. Planning can entail all of the items below, and this list is not all comprehensive:
Executing a repeating and repeatable planning process.
Tax minimization.
Buying or selling a business.
Optimizing stock options, restricted stock units, and qualified small business stock.
Maximizing tax-deferred savings.
Paying for college and other large expenditures like boats or second (or third) homes.
Determining how much you can and should spend and save (perhaps the worlds most sensitive subject, with the only real competitors being sex and religion).
Earning income doing what you choose, for how long you choose, and to make changes when you choose.
Preserving your wealth across family generations.
Ensuring that you are cared for and someone can make financial decisions should you not be able to care for yourself.
Modeling and envisioning various lifetime scenarios and their financial and non-financial outcomes.
Arguably, the plan alone is not useful. Unimplemented, you performed an arduous and probably complex exercise to potentially create an expensive stack of paper a many-paged PDF. It follows, then, that a good plan also has an implementation plan and process. The ultimate value is in the execution. The implementation portion could be be self-administered or performed by an advisor. Which choice you make is 100% dependent on your time, capabilities, and interests. Some implementation components, and again this is not a comprehensive list, are:
Understanding and managing spending and saving.
Evaluating, selecting, implementing, and monitoring investment accounts, allocations, and performance.
Evaluating, selecting, implementing, and monitoring insurance solutions, both personal (life, health, disability, long-term care, business buy-out, for example) and property/casualty (home, business property and risk, business continuity, for example).
Filing and managing business, property, and personal income taxes, both domestic and foreign.
Designing, executing, and managing estate plans (primarily wills, trusts, powers of attorney, advance medical directives).
Designing, executing, and managing business and/or employment agreements.
Engaging and coordinating the right team of Certified Public Accountants (CPA) and Attorneys.
Having a process to determine when to update the plan and repeat the process.
Every person has a unique story and set of circumstances. There is no single plan or set of plan components that fit every client. Not withstanding the fact that you are genetically unique, when it comes to your life and finances you are not like anybody else (I happen to prefer the Soraia version. The original Kinks version here is awesome, too).
In my opinion, no firm whose revenue and/or net income is primarily derived from product sales is a financial planning firm. I do not care how great the product is. A product is not a plan. So many things change that it is exceedingly rare that that any product is a fantastic product throughout your lifetime. Yes, the plan document and recommendations are products, and a well-done plan is dynamic and flexible. Financial planning is a process whereby a human tells their story from past to present and then intentionally composes the story of their financial future. The plan is then repeated and modified as life and circumstances change. If the person works with an advisor, the advisor’s role is to collaborate with the client, taking action as needed on the client’s behalf.
Sundry:
A large thank you to Joy Lere (find her here), who counseled me to use a timer so that I can deeply focus for brief periods and at the same time not get so focused (it’s an ADHD thing - symptoms here) that I write for hours and forget about meetings, eating, etc. There are always things to learn. They might seem small and end up being large.
My laugh of the week, and I don’t even drink.
Selected financial psychology reading (with embedded links):