What is a financial plan and how do you build one?

A financial plan is a personalized strategy that outlines where someone’s money goes and how to finance their needs and goals. Who needs a financial plan? Everyone should have a financial plan. They do not all have to be complex. Many are simple.

Basic financial plans may include the following tools:

Budgeting
Debt management plan
Retirement investment strategy
Tax Guidance

Complex, or more comprehensive, financial plans can include the above but also add things like:

Real estate investing
Business advice
Estate Planning
Philanthropic pursuits

Financial Planning is the process of a client working with a financial advisor (like a CPA or a CFP®) to help establish their financial plan. Our firm focuses on developing and implementing comprehensive financial plans for well-rounded advice and coordination with other professionals to help clients accomplish their goals per their distinct values.

Anyone can create a financial plan

If you have a simple financial situation, you may not necessarily need a professional to help you set up a plan. We do recommend working with a financial advisor to take the complexity out and optimize it for the benefit of the investor and their family.

Here are some steps to help kickstart your financial plan.

STEP 1: Define your Goals

A financial plan is centered on your financial goals. You may categorize your goals into short-term, medium-term, and long-term periods.

Short-term goals can range from a few months to 1 year time. This could be things like going on a trip, buying a car, or paying off debt.

Mid-term goals range from 1-5 years. These goals may include paying off debt, pursuing higher education, saving up for a down payment on a house, planning a wedding, or starting a business.

Long-term goals are goals with periods from 5+ years. Usually, these goals are stretched even further from 10, 20, or 30+ years. Here are some common long-term examples: investing in college for a dependent, retirement, or paying off your mortgage.

STEP 2: Create a budget

A solid budget will give you an idea of your monthly cash flow. This means tracking your take-home pay and your expenses every month.

There are many ways to do this like the 50/30/20 budgeting rule, the zero-based method, or the envelop system. The key here is to see where you are overspending and see where you can save more as you work towards your goals.

STEP 3: Build an emergency fund

According to the Federal Reserve, most Americans cannot afford a $400 - $500 emergency bill. As the emergency cost increases, fewer Americans can afford it. As a general rule of thumb, a family should have three to six months of living expenses saved in an emergency fund to protect against the unexpected. We advise that people create a Starter Emergency Fund of $1,000 first.

STEP 4: Pay off consumer debt

This would include credit cards, auto loans, personal loans, and student loans . These debts can often be the most burdensome for Americans and if you find yourself struggling to make ends meet, make an effort to pay these off after you’ve completed the steps above.

STEP 5: Invest in your retirement

A great place to start is by investing in your company’s 401(k) or 403(b) plan. If they have a match, take advantage of this. Make sure you are getting the match.

Don’t have access to a 401(k) ? Open a Traditional or Roth Individual Retirement Account (IRA). You have 100% control over where the money goes and how it’s invested.

Open a Health Savings Account (HSA) for future medical expenses. Contributions, investment growth, and withdrawals are all tax-free (assuming the withdrawals are used for eligible medical expenses).

Max out contributions to all your accounts if you can. You can have a 401(k) ,IRA, and HSA open at the same time. In 2023, IRA contributions are capped at $6,500.

If this seems like a lot to handle, it can be. We can assure you, It’s worth the work and the extra effort to have a financial advisor help you and your family throughly address these topics. These are some basic steps to help you get started today. If your life grows more complex, it will be important to monitor your plan on a more consistent basis.

Whom should I hire if I need help with my financial plan?

It is wise to seek counsel from experts in any area of life. Financial advisors can help you choose investments that align with your goals, give you a strategy to pay off debt, lower your tax burden, and so much more.

Here at Human Investing, we are fiduciaries which means we are legally bound to always act in our client’s best interest. That means no commissions or selling pressure. Professor Kent Smetters of the Wharton School of Business notes fewer than 2% of all financial advisors are fiduciaries.

Fee structures and fiduciary standards

Before you hire a financial advisor, make sure to ask for their fee structure.

Some advisors charge hourly or a flat rate depending on the service. Many advisors will charge a percentage of all of your assets under management (AUM) and others still will get paid a commission depending on the product you purchase from them. You will want to ensure that the firm you choose to go with is working in your best interest and you are getting the most out of what you are paying them for.

Financial planners and advisors that abide by a fiduciary standard look out for your best interests first. Financial managers that are not fiduciaries may be highly experienced and skillful, but they can put the interests of their company over the interests of their client. The National Association of Personal Financial Advisors (NAPFA) or Broker Check are great places to start researching Financial Advisors in your area.

If you are interested in learning more about Human Investing and our financial planning services, check out our website.

Featured

Jake Stewart, CFP™
Jake is a CERTIFIED FINANCIAL PLANNER™️ practitioner dedicated to helping clients accomplish their goals per their distinct values. He specializes in building comprehensive financial plans with an emphasis on retirement planning, tax mitigation, and long-term income management. He and his team effectively manage the financial landscapes of their clients by giving proactive counsel and ensuring their clients’ peace of mind.

1. I want to support my child through college. When should I start saving?

The earlier you save, the more time your money has to grow.

The benefits of saving early are dramatic, but there's still value in starting now—even if your child is in high school. The dollars you save will not have as much time to grow, but they are dollars you will not be borrowing. You’ll also be in a better situation if you choose an account that gives you tax benefits, such as immediate tax deductions or tax-free withdrawals.

Still not sure if saving for college is right for you? Check out this article by Peter Fisher, co-founder and managing partner of Human Investing.

2. Should I spend my cash paying off high interest loans, or invest it?

Historically, the average rate of return for stock market investments is approximately 10%, while on average, the APR on credit cards has been hovering just above 20%. So, if you are investing when you have credit card debt, you are likely paying a higher interest rate on your debt than you are earning via your investments. Unless you have a huge amount in investments, you end up losing money overall.

3. When do I start saving for retirement?

Again, start saving as early as possible to give your money maximum time to grow. Depending on your employer, you may already have some form of retirement benefits accruing. There are various ways of saving for retirement, including employer sponsored plans like 401(k) and 457b plans, or personal retirement savings like Roth and Traditional IRA’s. A mix of the two is the best way to ensure ample savings for retirement, but deciding which is best for you requires some analysis of your current and expected employment and income status.

4. Is my investment portfolio right for me?

As you age and get closer to retirement, you want to make sure the risk level of your investment portfolio is balanced to match your growth and maintenance needs. While having all of your investments allocated in the stock market may result in a high return on investment, it can also result in high losses. This can be catastrophic for a person planning on retiring soon. On the other hand, if a young person has a few decades before they are planning to retire, but they are only investing their money in bonds, they are losing out on the potential growth of higher risk investment options.

Investment in both bonds and stocks allows for a mix of potential income and growth, and the best fitting ratio is different for everyone. Reach out to us to speak with our retirement planning team to discuss your current allocations. We care here to help better prepare you for a comfortable retirement.

5. What should my emergency savings look like?

The most common numbers suggested for an emergency fund is 3-6 months’ worth of your current living expenses. These include expenses such as housing, food, healthcare, debts, and so on. You do not need to include things like entertainment, nonessential shopping, or vacation expenses. If you are, you have too much going into your emergency savings fund that could be invested elsewhere. Below is a chart showing example savings amounts and how they compound over the course of two years.

6. When should I begin utilizing expert tax services?

You may be at a point where using your preferred e-file service to do your taxes is still getting the job done just fine, but at what point do they get too complicated for you to be doing them on your own? Once you begin to deal with things like property taxes, retirement plans, and investments, it may be best to have an expert handle the numbers for you.

Luke Schultz, the Director of Tax at Human Investing, has over 12 years of experience in the areas of tax compliance and planning. With a heavy focus on planning, he spends much of his time working closely with individuals, putting emphasis on proactive planning to help clients make the best decisions for them and their families.

Want to get started?

Schedule an appointment with an advisor here or feel free to call us at 503-905-3108.

Sources:
Vanguard, When should you start saving for college?
The Balance, Rule of Thumb: Should I Pay Off Debt or Invest?
Money Under 30, Should You Pay Off Student Loans Early?

The Fiduciary Standard

All Human Investing employees are required to abide by the fiduciary standard. When a financial advisor has a fiduciary duty, they must always act in the beneficiary's best interest.

Financial advisors fall into two buckets: fiduciaries and non-fiduciaries. Surprisingly, not all financial advisors have a requirement to put member's interests first. Worse yet, some advisors and their firms can be dually registered, swapping back and forth between fiduciary and non-fiduciary roles.

Suitability Standard vs. Fiduciary Standard

Financial professionals who are not fiduciaries are held to a lesser standard known as the "suitability standard." What this means is that the recommendation from a non-fiduciary only needs to be adequate.

Other Watch Outs When selecting an Advisor

If an advisor states that they have FINRA Series 7, 6, or 63, that means they are licensed to sell products for commissions. An advisor would only have those licenses for two reasons: 1) to sell commission products or 2) collect commissions from products they (or someone else) have sold.

There are many individuals and firms that say they are financial planners and do financial planning. But did you know that many of the people that say they are financial planners are not trained in the process and profession of being a financial planner? Individuals responsible for member financial planning are CERTIFIED FINANCIAL PLANNERS™. A CERTIFIED FINANCIAL PLANNER™ certification is “the standard of excellence in financial planning. CFP® professionals meet rigorous education, training and ethical standards, and are committed to serving their clients' best interests today to prepare them for a more secure tomorrow.”

NOT PLANNING AHEAD MAY cost you more than YOU THINK.

Let’s take the example of a future expense of $25,000 for any situation*.

*Fill in the blank: year of college for a child 👩‍🎓, down payment for a home🏠, wedding 👰🏻, car purchase 🚘, vacation 🌞, etc.

How do you pay for the $25,000 future expense?

In this hypothetical, an individual can choose to (A) make a monthly investment over the next 10 years or (B) borrow the $25,000 and make monthly payments to pay off debt for the next 10 years. See the cost break down here:

*Note: This is for illustrative purposes only. Investment returns, interest rates, and loan periods will vary.*

SO WHAT ARE YOU PLANNING FOR TOMORROW?

Building a savings plan and starting early provides 27% in savings over 10 years, with a total cost of only $18,240. Conversely, the cost of convenience by borrowing adds to the overall cost by more than 33%, raising the cost to $33,360. This example is at a 6% interest rate, but unfortunately, much consumer debt is often financed on a credit card with an average APR now above 16%. A 16% interest rate on a one-time expense would more than double the cost over 10 years.

This simple illustration provides a two-sided application. As illustrated above, building a financial plan can save someone thousands of dollars. Procrastinating and not building a plan can in turn cost someone thousands. Either way you look at it, it is important to consider the real cost of any financial endeavor in order to make a well-informed decision.

Our team at Human Investing is available if you have questions or would like help building a financial plan.

Featured

Will Kellar, CFP®
Will is motivated by the opportunity to serve hardworking people and their financial pursuits, through advocacy, problem solving and great advice. He’s a CERTIFIED FINANCIAL PLANNER™ practitioner who loves the feeling of when our team makes a positive tangible impact in someone's life.

An “Agency Problem”

Before we get into compensation models, it is imperative that we identify and define a concept called an agency problem. In its simplest form, an agency problem is one that contains a conflict of interest. It is a situation when someone (called an “agent”) is entrusted to act in the best interest of another party (called a “principal”) but has interests that are different (and often competing).

Remember that term “fiduciary?” A fiduciary standard is imposed and regulated due to the inherent agency problem that exists between the client and the financial services professional (and/or industry). To review, the CFP Board defines fiduciary through the lens of the interaction between a financial planner and a client. Its fiduciary standard of care “requires that a financial advisor act solely in the client’s best interest when offering personalized financial advice.”

Think about that for a second

Who else’s interest would they be serving when they offer advice? The very fact that a fiduciary standard is required reveals the problematic state of the industry. It is worth repeating…we can and simply must do better! However, the business models of financial planning firms and the compensation of financial advisors are anchors that necessitate considerable and seemingly insurmountable effort to move beyond the current climate.

So how are advisors paid?

In a commission and fee firm (often termed a “hybrid model”), advisors are often paid based on the commissions generated on the products sold. More directly, commissions are charged to buy and/or sell a mutual fund and when selling an insurance product such as a cash-value life insurance policy or an annuity. These commissions are called gross dealer concessions (GDCs) to the brokerage firm and the advisor receives a percentage of the GDC. The percentage that the advisor receives is most often determined by their relative tier based on the volume of sales dollars, meaning that the more products sold, the higher the percentage of GDC received.

In a fee-only firm, it is common for advisors to receive a salary as well as bonuses based on a percentage of their book. That means that the more assets they manage, the greater their additional compensation. More money can be made by bringing in new clients.

So what is the dominant incentive? It is quite clear that the incentive in the former is to sell investment and insurance products, and the incentive in the latter is to build and protect their book of business. But what about the amount and quality of financial advice? What about the degree of service and attention? What about providing an unbiased perspective? These are the conflicts that exist.

Citing these conflicts is not intended to suggest that a particular individual within any of the systems above is not providing high quality financial advice and excellent client service. It is meant to clearly call out the inherent conflict of interests that exists within these compensation models.

Conflicts everywhere

And since Charlie Munger’s quote has been proven true for decades, we would be wise to pay attention. Truly, it is the case…find the incentive and you will likely find the outcome. So what outcomes are naturally linked to these incentives? At worst, if the incentives are large bonuses that are paid for selling products that generate a (very large!) commission, the interest of the advisor is to sell as many of these products as possible.

Selling = more $$. The interest of the client is sound, comprehensive, and objective advice and purchasing only products that best meet their needs. If the incentive is bonuses that are paid based on the volume of assets managed, the interest of the advisor is to provide advice that results in more managed assets and allocate time on only activities that build and retain assets.

More assets managed = more $$. The interest of the client is sound, comprehensive, and objective advice and purchasing only products that best meet their needs. This is not about the character or the quality of the advisor. It is simply about incentives. Incentives lead to behaviors, and behaviors lead to outcomes. Or as Peter Drucker once said, “What gets measured gets managed, and what gets managed gets done.”

The conflicts of interest in a fee and commission model have been highlighted and bantered about for a long time. In fact, the strong movement towards a fee-only business model has been fueled by the increasing visibility of these challenges. So we would like to devote most of our time to the primary fee-only advisor compensation model which is salary plus a bonus paid on the advisor’s book of business (amount of assets managed).

Even a fee-only structure has its limitations

This might look harmless, but there are conflicts that remain. If a large portion of compensation is determined through a percentage of the assets you manage (“your book”), the incentive is to protect the book. This means employing a time allocation method that first considers the question, “Does this activity help me build and/or maintain my book of business?” Activities that result in a “yes” response to that question are prioritized while the incentive is to minimize or eliminate activities that result in a “no” response to that question. The big problem is that many of the important services that clients are looking for do not involve activities that yield bigger books. For example, conversations around topics like financial literacy education, budgeting, debt management, benefit planning, educational funding strategies, talking through goals and values, and charitable giving rarely lead to more assets under management. So conversations are primarily directed at wealth management, retirement funding, and risk management/insurance needs at the expense of ignoring or minimizing these other vital topics. Why? Because they do not align with the incentive.

Look for comprehensive planning vs. product-focused planning

Further, for some clients the best thing they could do is to pay down debt, invest through their company’s 401(k) plan, invest in real estate, and/or engage in charitable giving. However, none of these activities builds assets under management and all of them could potentially subtract from managed assets. Again, the incentive is aligned toward advisor behaviors/advice that is contrary to the best interests of the client. Anything that takes away from the percentage bonus for the advisor is incentivized to be avoided. This dynamic is what has predominantly contributed to the difference between product-focused financial planning and truly comprehensive financial planning that we discussed several months ago and is reflected again in the graphic at the end of this post.

Truly comprehensive financial planning is such a small portion of overall financial planning due to the inherent compensation incentives.

Finally, the fee-only compensation model helps illuminate why many individuals and families do not have access to financial planning assistance. Simply and crudely put, they are not worth the time because they do not have enough assets for the planner/advisor to manage. This client may be willing and able to pay for services, but the current compensation method does not incentivize the advisor for spending time with this client.

Compensation methods need to change. It is not only a matter of preference. Real outcomes are at stake. We can and simply must do better!

Check out the rest of the series with Ryan and Marc:

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China.

Featured

Marc Kadomatsu, CFP®, ChFC®, CLU®
Marc brings extensive experience in financial planning, executive benefit, estate, tax and insurance planning. He’s a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Consultant (ChFC) and Charted Life Underwriter (CLU) designations. He’s a member of the Estate Planning Council of Portland and is the former President and Board Chair of the Financial Planning Association (FPA) of Oregon and SW Washington.

Why not just make the necessary changes to correct what’s broken?

At this point in our blog series, you might be asking yourself the question, “If things are so bad with the current state of financial planning, why not just make the necessary changes to correct what’s broken?” That is a logical conclusion, but while the problems are obvious, the solutions are challenging (possibly a little like some of the political debate topics you will be hearing for the next few months!).

There are two real challenges here

One that we have already mentioned: nothing big is wrong. It is a host of smaller pieces that are broken, and those small pieces accumulate into a perception of confusion and mistrust and suboptimal financial planning outcomes.

A second challenge is that the core problems are so deeply rooted in the culture and systems that make up the industry that even obvious needed changes are difficult to address. It is the proverbial turning of the Titanic, if you will. So, a better place to begin might be defining the culture through the lens of how we arrived at where we are currently and identifying some of the elements of the culture that make it so sticky and unwieldy.

As forecasted last time, there are many weighty systemic issues woven into the culture of financial services that make this move to a better model extremely difficult. These are true anchors working against a migration to something better. In this piece, we are going to start at the top and take a look at the business model of most financial planning firms and set the stage for why things are as they are.

How financial services make money

As we have discussed, the financial planning profession has its roots in investment services and the insurance industry. Firms make money largely be selling either investment products (stocks, bonds, mutual funds, real estate trusts, options, etc.) or insurance products (whole life, variable life, annuities, etc.).

Each of these products are sold with a commission and the firm makes money with each product sold. It is quite possible that a firm gets paid $10,000, $15,000 or even $20,000 or more for selling one variable annuity product. So, as you can imagine, this system is full of agency problems or conflicts of interest and has brought about many pieces of regulation to try to control these built-in conflicts. Selling products often comes at the expense of offering services.

It is for this reason that we ended our last post talking about “fiduciary.” Fiduciary is a legal requirement imposed to make sure that planners/advisors are acting in a way that is in the client’s best interest. And, as we asked last time, who else’s interest would they be serving when they offer advice?

The very fact that a fiduciary standard is required reveals the problematic state of the industry

This problem and others have led to a slow migration to other business models. Improvement. The commission-only paradigm began to change into a business model that is comprised of both fees for service and commission on products. This has further extended into a model where revenue comes exclusively from fees, with no commissioned products being sold. In fact, the CFP Board recognizes three different categories of compensation for planners:

Commission only
Commission and fee
Fee only

In order to be considered a fee-only advisor (or firm), no commissioned products can be sold. The CFP Board has defined the term “fee only” in the following way: “A certificant may describe his or her practice as “fee-only” if, and only if, all of the certificant’s compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage or performance-based fees.”

While the definition might seem to align with what you would expect of a fee-for-service relationship, the dominate model looks much different. Instead of being paid to produce a financial plan or paid on an hourly basis, the vast majority of financial planning firms generate most of their revenue through what is called an “assets under management” (AUM) model.

WHAT THE ASSETS-UNDER-MANAGEMENT model MISSES

There are planners who do hourly work or charge by the plan, but that is the extreme minority of revenue dollars produced. The assets under management model assigns a percentage fee to the client assets that are managed by the firm. The more assets managed, the more money made. It is typical for the amount charged to be on a sliding scale so that the percentage applied to assets goes down if you hit certain targets. For example, if a firm charges 1.25% of AUM for assets under $1 million and 1.00% of AUM for assets over $1 million, a client with $500,000 invested would pay $6,250 for the year. A similar fee structure would be used to calculate annual fees during each future year. If the client had $3,000,000 invested, that client would pay $30,000 annually.

There is nothing inherently wrong with this model, but it does explain why most financial planning firms look like investment service firm silos, or what we have termed “product-focused financial planning.” Other services can be offered and truly comprehensive financial planning can be conducted, but it is most often done without direct compensation. In other words, you are not paid for it. This is the largest and heaviest anchor working against a change from a culture of product-focused financial planning to truly comprehensive financial planning.

The incentives are stacked too heavily towards products and wealth management. In order to change the incentive, the entire business model would need to change. And as you can imagine, that is a big ask. The more hidden cost is one of being stuck—of knowing what would and could be better, but experiencing the seemingly impossible task of getting there. In life, the one thing more frustrating than not knowing or being able to figure something out is the ability to observe, understand and know what needs to happen but not being able to do anything about it.

Associated costs are a continued and mired state of public distrust, a ridiculous amount of regulation and required disclosure, an opaque world in which terms like “advisor” and “planner” are almost impossible to decipher, and ultimately failing to offer the community the entirety of what they need… truly comprehensive financial planning.

Check out the rest of the series with Ryan and Marc:

Want to talk about your financial plan?
Want to learn more?
Come talk to us or e-mail Jill at jill@humaninvesting.com.

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Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China.

Featured

Marc Kadomatsu, CFP®, ChFC®, CLU®
Marc brings extensive experience in financial planning, executive benefit, estate, tax and insurance planning. He’s a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Consultant (ChFC) and Charted Life Underwriter (CLU) designations. He’s a member of the Estate Planning Council of Portland and is the former President and Board Chair of the Financial Planning Association (FPA) of Oregon and SW Washington.

Let’s return to the medical analogy. Imagine being a patient with an illness

A patient would never want to go to a doctor who has a drug or pill already identified and evaluates the condition of the patient by searching for ways to use that drug or pill to treat the patient. Instead, a patient would want a doctor who evaluates the medical situation with an unbiased lens and only uses a drug or pill if it is the most effective way to treat the identified condition. Isn’t that the way you would want your financial life approached as well – to have someone look over your entire financial picture (including your values, goals, dreams, concerns, fears, etc.) and advise from that perspective instead of looking for a way to sell a financial product?

Within the medical context, think about what may be missed and how often the product (drug) would be the wrong form of treatment! The patient is seeking a service, not a product. The product is a potential outcome of the service, but it is not what the patient or client pursues. If so clearly a problem within a medical context (or almost any other professional context), why does this phenomenon of product sales disguised as financial planning remain so apparent within the financial services industry? Sure, financial products (insurance and investments) will be part of most financial plans; however, they should only be used when designed to meet a specific need identified through a comprehensive and unbiased financial planning process. If the product (drug) comes at the expense of a comprehensive evaluation, it compromises the best interest of the patient…or, in this case, the client.

Why is this happening?

It is the tethering of product sales and commissions to a "financial plan" which is at the core of the challenge. This persistent culture of product sales paraded around as financial planning is a systemic issue. The prevailing practice and system around “financial planning” has weakened the full potential of the financial planning profession. Tragically, for clients, this dislocation has weakened outcomes for the humans we are attempting to serve humanely. The focus needs to be directed squarely on service, not products. While this right move seems obvious, there are many weighty systemic issues woven into the culture of financial services that make this move extremely difficult. The list below identifies the most significant anchors working against a migration to something better, and we are going to use upcoming posts to focus specifically on each of these:

Business models of financial planning firms
Compensation structure for planners
Role of incentives
Career status and prestige based solely on sales achievements
Measures of success and effectiveness tied to a book of business
Conflicts of interest that are not transparent
Academic preparation, credentialing, and pathway to a profession in financial planning

There is much talk in the financial services industry about the term and concept of “fiduciary.” Besides being an odd word and slightly fun to say, what is it? The CFP Board defines fiduciary through the lens of the interaction between a financial planner and a client. Its fiduciary standard of care “requires that a financial adviser act solely in the client’s best interest when offering personalized financial advice.” Think about that for a second. Who else’s interest would they be serving when they offer advice? The very fact that a fiduciary standard is required reveals the problematic state of the industry. We can and simply must do better.

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China.

Featured

Marc Kadomatsu, CFP®, ChFC®, CLU®
Marc brings extensive experience in financial planning, executive benefit, estate, tax and insurance planning. He’s a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Consultant (ChFC) and Charted Life Underwriter (CLU) designations. He’s a member of the Estate Planning Council of Portland and is the former President and Board Chair of the Financial Planning Association (FPA) of Oregon and SW Washington.

It’s a growing career field.

There are many ways to measure where an industry might be in its lifecycle, but since we were planning a program whose goal is to place students in jobs after graduation, the closest statistic we could measure this statement against was the projected job growth within the industry. According to the Bureau of Labor Statistics Occupational Outlook Handbook (OOH), employment of financial planners is expected to increase by 7% from 2018 to 2028. This is moderately higher than the average for all occupations, which is just 5%. Most professions that are dying do not have a projected job growth rate that is 40% higher than the overall growth rate.

So why was such an odd question posed?

It is evident that we were not talking about the same profession. But how could that be? If the respective profession were changed to nursing, it would not be confused with pharmacology. Architecture wouldn’t be confused with lumber production. Those professions (and most all others) are rather clearly defined by name and distinguished from other professionals. Why such confusion involving the work of financial planners?

In last month’s blog, we proposed a long list of systemic factors that have impaired financial planning outcomes and distorted the way in which financial planning is done. Near the bottom of that list was a perilous factor whose proximity near the end of the list was not indicative of diminished importance. In fact, it’s the focus of this month’s post and one that will provide the foundation on which subsequent pieces will be built. It is an overarching paradigm that has played a significant role in creating the current culture and systems of financial planning—a culture that we believe has weakened the full potential of financial planning outcomes and circumvented most clients’ primary needs.

Here’s the factor:

Investment services silo while human-centered financial planning is comprehensive in nature.

In other words, using the term financial planning to represent what is instead solely the investment services function. Historically, most all financial services have been addressed in silos. An individual would have a bank for all savings and cash management functions, go to a stockbroker for non-retirement investing, use a Human Resource office to establish and fund a retirement investment plan, use an insurance agent for all insurance needs, have a Certified Public Accountant for tax preparation, contact a realtor and mortgage banker for housing and property purchases and funding, and hire a lawyer to address any legal matters. Most of these professions still exist and serve valuable market functions.

Comprehensive financial planning uses aspects of most all of these job functions in the implementation steps found within a financial plan, with the critical element being the integration and interaction of all areas of financial management. No financial area stands on its own.

More misconceptions.

However, the investment services silo structure remains different from all of the others — it has experienced radical transformation, leading us to agree with this questioning administrator if he had in mind a stockbroker when we said “financial planning.” Indeed, the historic profession of being a stockbroker is largely dead. Consider the progression of tax-advantaged investment accounts (primarily for retirement and college funding), the evolution of mutual funds and exchange-traded funds, the broad access to information, the speed of technology, and the automation and machine learning tools surrounding asset allocation. The world of investment management has morphed from being one of stock picking and asset selection to one of managing diversified investments across asset classes in tax efficient ways in order to fund future goals with optimal risk/return profile portfolios.

The confusion surrounding this topic also led to this administrator’s next question, which was, “Don’t robots already do financial planning?” (It should be noted that this is not one person’s perception and inquisition—we are asked a variation of this question all the time). See, the misunderstanding here is based on the same paradigm. If financial planning is defined as asset allocation and building an efficient investment portfolio that considers a client’s risk profile, then, indeed, robots (algorithms and machine learning) have replaced humans to a considerable extent.

This is good, right?

Well, that’s not really the critical question. It is far less about the industry being right than it is about the involuntary need to stay relevant by keeping up with the break-neck pace of change. In other words, the speed of change has altered the industry right in front of our eyes without much deliberate architecture. The system changed. Go back with us to last month’s post about the state of the industry. In that article, we stated a purpose for the blog series as defining what we see as wrong with the industry.

A major part of the complexity is that it is not any one thing. Nothing big is wrong. It is smaller pieces that are broken, and those small pieces accumulate into a perception of confusion and mistrust and suboptimal financial planning outcomes. The practice of investment management and investment managers all around the world have provided valuable services to clients as they work towards growing financial assets to meet future financial goals. This is good. But it has created a world where it is now virtually impossible for the marketplace to distinguish between a “financial advisor” and a “financial planner.” No matter what term the industry uses, the profession is filled with financial planners who almost exclusively do investment services work.

This is a long way from comprehensive financial planning.

Investment planning is only one piece of financial planning, and ignoring the other components leads to suboptimal outcomes. Again, it is not about semantics (what we call ourselves), but it is instead about substance and structure.

In our next post, we will begin to build a picture of how we view the most comprehensive and purest form of human-centered financial planning. Here’s a teaser…if you like puzzles, you’re in for a treat!

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China.

Featured

Marc Kadomatsu, CFP®, ChFC®, CLU®
Marc brings extensive experience in financial planning, executive benefit, estate, tax and insurance planning. He’s a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Consultant (ChFC) and Charted Life Underwriter (CLU) designations. He’s a member of the Estate Planning Council of Portland and is the former President and Board Chair of the Financial Planning Association (FPA) of Oregon and SW Washington.

Times of disruption create the most significant opportunities for progress.

These moments do not come easily and virtually never come without a cost. But the advancement is the cause that makes it worth it. The world’s greatest transformations and progressions have followed similar patterns. In our effort to push forward, we will most likely step on some toes and create some uncomfortable conversations. It is inevitable, but hopefully it can be done in respectful ways that lead to eventual breakthroughs. Our purpose is not to undermine, isolate, or hurt anyone. We intend to create dialogue, with our ultimate goal of influencing and improving the financial planning process.

The best outcomes will arise from collaboration.

In our effort to ascertain and convey these systematic factors and challenges, we probably have some of it wrong. There are likely better (and undoubtedly) alternative solutions to those we have conceptualized. We also appreciate that there are many perspectives on the same situation. We have asked a bunch of questions of ourselves, and more questions develop as proposed solutions are created. Technology is changing everything. The world changes at a pace that makes it challenging to keep up and stay intentional about everything we do. Even as we process the current state of our industry and share a small list of insights pertaining to what we believe are progressions in our service to clients, we are actively looking to continue to change as things evolve. We do not pretend to have it perfectly illuminated and have the one best operational model in place. What we do know and are driven by is that clients’ needs and interests must be at the center of everything we do, and there is room for improvement in this initiative. The industry can get closer to this ambition, and any step in that direction is a step worth taking (and perhaps a feather worth ruffling). Thank you for taking a seat at this table.

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China.

Featured

Marc Kadomatsu, CFP®, ChFC®, CLU®
Marc brings extensive experience in financial planning, executive benefit, estate, tax and insurance planning. He’s a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Consultant (ChFC) and Charted Life Underwriter (CLU) designations. He’s a member of the Estate Planning Council of Portland and is the former President and Board Chair of the Financial Planning Association (FPA) of Oregon and SW Washington.

“Isn’t financial planning a dying profession?”

A first-year undergraduate student majoring in Financial Planning approached me after class one day and asked what he thought was a very simple question – “What’s the difference between a financial planner and a financial advisor?” Simple answer? Not really.

As I was working to establish a CFP Board Registered Program at a university, an administrator asked me the following few questions as part of his vetting process: “Isn’t financial planning a dying profession?” “Don’t robots already do financial planning?” “Who is going to hire a 23- year-old financial planner to help them with their finances?” These came from a smart individual who had a strong record of professional success. What was he talking about?

I was speaking with a long-distance friend the other day who told me, “I’m sure glad that my financial planner doesn’t charge me a fee each time we meet but, instead, she only takes a very small percentage from returns on the investments I have with her.” Did this financial planner appropriately disclose compensation methods? I am sure she did. Did this friend understand the true cost of what he was paying for financial planning services? Obviously not.

“We don’t trust you.”

Several years ago, I was at an annual conference for a large financial planning organization. The conference organizers planned an innovative and unique keynote session where they invited a panel of strangers gathered randomly and spontaneously from off the streets outside of the meeting venue. This group of individuals was diverse and clearly represented many demographic and socioeconomic classes. They were asked a variety of questions about their need for financial advice and desire for help with the money management tasks of life. It was evident that this group was readily willing to admit their lack of financial knowledge and self-efficacy when it came to money-related topics and behaviors.

Then came the curve ball. The panel was told that the room of people (nearly one thousand) who were in front of them were all financial professionals. They were asked another simple question – “Would you hire any of these individuals to help you with your personal finances?” Every one of the panelists said “no!” When asked why, they all said in their own words a message that sounded like “we don’t trust you.” Did these individuals need help managing their financial decisions? You bet. Were they looking to the financial planning industry to fill that role? No. Before you dismiss this as a case of non-target-audience identity for financial planning services, let me introduce you to another conversation.

“I can’t get objective advice anywhere!”

Recently, I found myself in a conversation with the leader of a local company. He had come to our financial planning firm as a prospective client for planning services. Given the fact that he had been affluent for a significant number of years and was nearing the latter part of his working years, I inquired about his experiences with financial planning in the past and what brought him to our company. His answer was firm and without deliberation – “I can’t get objective advice anywhere!” Was this individual the ideal financial planning client? Pretty much. Why is it so hard to get objective advice?

So, what is the difference between a financial planner and a financial advisor?

Do you know? Could you explain it to this young and eager student? Is there a difference? We would argue that it does not matter. The core issue is about substance and structure – not semantics. People are looking for a service and not a job or profession title. Why do we continually encounter situations like the ones we have described? Why all the confusion around the discipline of financial planning and why the lack of trust and objectivity? Why is this not a prevailing theme of most other professions (think doctors, lawyers, architects, teachers, pharmacists, engineers, etc.)? It does not take much more than a quick look at the culture and system of the industry to find the dilemma.

There is a long list of systemic factors that have impaired financial planning outcomes and distorted the way in which financial planning is done. Here are a few:

Products over services
Business models of financial planning firms and compensation structure for planners
Career status and prestige based solely on sales achievements
Role of incentives (Charlie Munger was right when he said “Show me the incentive and I’ll show you the outcome”)
Conflicts of interest that are not transparent
The need for and confusion surrounding “fiduciary”
Measures of success and effectiveness tied to a book of business
Academic preparation/credentialing/pathway to profession
Focus on money content and education while overlooking behavior
Technology/Machine learning and the loss of the human
Investment services silo instead of comprehensive financial planning
Individual planner model instead of team approach

Restoring confidence in all of us

We are going to be publishing a series of blog posts that highlight and elaborate on these dynamics that have contributed to the rationale for the questions that are mentioned above and the current state of the financial planning profession. In other words, we are going to define what we see as wrong. See, it is not any one thing. Nothing big is wrong. Big things tend to be addressed with swift action through market response or regulation. It is smaller pieces that are broken and those small pieces accumulate into a perception of confusion and mistrust and suboptimal financial planning outcomes.

We will not stop at identifying problems but, instead, will share what we believe are solutions to these obstacles. We will elaborate on how we do financial planning and define its effectiveness by addressing these challenges to offer our clients the most comprehensive and purest form of human-centered financial planning. It is exactly why our core purpose is to faithfully serve the financial pursuits of all people. That is a big ambition, but it is precisely what individuals and families need, and it is our highest ideal for financial planning. We believe it is a mission worth pursuing.

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China.

Featured

Marc Kadomatsu, CFP®, ChFC®, CLU®
Marc brings extensive experience in financial planning, executive benefit, estate, tax and insurance planning. He’s a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Consultant (ChFC) and Charted Life Underwriter (CLU) designations. He’s a member of the Estate Planning Council of Portland and is the former President and Board Chair of the Financial Planning Association (FPA) of Oregon and SW Washington.

Welcome to the Human Investing Journal

Inspiration for the saver and investor in all of us

Search for a specific topic

Anyone can create a financial plan

STEP 1: Define your Goals

STEP 2: Create a budget

STEP 3: Build an emergency fund

STEP 4: Pay off consumer debt

STEP 5: Invest in your retirement

Whom should I hire if I need help with my financial plan?

Fee structures and fiduciary standards

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1. I want to support my child through college. When should I start saving?

2. Should I spend my cash paying off high interest loans, or invest it?

3. When do I start saving for retirement?

4. Is my investment portfolio right for me?

5. What should my emergency savings look like?

6. When should I begin utilizing expert tax services?

Want to get started?

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The Fiduciary Standard

Suitability Standard vs. Fiduciary Standard

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NOT PLANNING AHEAD MAY cost you more than YOU THINK.

SO WHAT ARE YOU PLANNING FOR TOMORROW?

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An “Agency Problem”

Think about that for a second

So how are advisors paid?

Conflicts everywhere

Even a fee-only structure has its limitations

Look for comprehensive planning vs. product-focused planning

Check out the rest of the series with Ryan and Marc:

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Why not just make the necessary changes to correct what’s broken?

There are two real challenges here

How financial services make money

The very fact that a fiduciary standard is required reveals the problematic state of the industry

WHAT THE ASSETS-UNDER-MANAGEMENT model MISSES

Want to talk about your financial plan? Want to learn more? Come talk to us or e-mail Jill at jill@humaninvesting.com.

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It’s a growing career field.

So why was such an odd question posed?

Here’s the factor:

More misconceptions.

This is good, right?

This is a long way from comprehensive financial planning.

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Times of disruption create the most significant opportunities for progress.

The best outcomes will arise from collaboration.

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“Isn’t financial planning a dying profession?”

“We don’t trust you.”

“I can’t get objective advice anywhere!”

So, what is the difference between a financial planner and a financial advisor?

Restoring confidence in all of us

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About Us

Want to talk about your financial plan?
Want to learn more?
Come talk to us or e-mail Jill at jill@humaninvesting.com.