“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. 

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@priscilladupreez

In order to achieve retirement readiness, financial planning should be the focus of most individuals and families. Indeed, knowing how much a household needs to save and invest in producing a suitable level of income at retirement makes much sense.  At the same time, given the recent uptick in market volatility, I have noticed additional benefits.  Clients who have gone through the financial planning process appear to be at greater peace with the stock market gyrations.  Further, when focused on executing their plan and not mentally tethered to the markets, clients are less prone to letting their behavior negatively impact their long-term performance.

Much of the time, financial planning does a great job of identifying how much an individual or family should own in both "safe" and "risk" investments to meet short-term cash and safety needs, as well as long-term growth objectives.  In the absence of a financial plan, investors are left to wonder if they have the right mix of investments.  Moreover, when market volatility increases, they are often the first to let their emotions get the best of them.  Absent a financial plan; the focus is on the stock market.  If the focus is on the stock market, and the market is temporarily going down, the pain of the volatility or what psychologists call "loss aversion bias" is too much to handle.  As a result, at exactly the wrong time and for the wrong reason, we get a call to "sell everything" locking in those temporary losses—only to see the market recover as the investor sits on the sideline wondering when to get back in.  Selling into a market that is going down is a significant reason investor returns and market returns are so different.

Dalbar, Inc. tracks investor return versus market returns, and the results are eye-opening. Our observation is that much of the gap between the long-term investor return and the long-term market returns are due to poor behavior and investors lacking a financial plan.  In our view, having a financial plan is paramount as it gives a leg up to investors in two ways: 1) it helps center the discussion about money around goals and 2) it allows investors to minimize their dependence on monthly, quarterly, and annual stock market swings while redirecting the discussion back to goals-based planning.  Goals-based planning is just a discussion on how many dollars will be needed and in what timeframe—this process alone will help determine the amount of safe versus risky investments.  

Finally, comprehending the odds of success or failure in the market may be a massive help in keeping nerves at bay and focused on the things that matter most.  Although the legal language would point us towards a statement about past performance being no indication of future success, we can look at the distribution of returns in the stock market going back to 1825 and feel very good about the chance of a positive outcome.  It all adds up to 71.5% of the time the stock market has been favorable, in spite of many ups and downs in between.

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As our friends at Charles Schwab post their 2018 Modern Wealth Index data[1], their research findings are eye-opening:   

1. Sixty percent of Americans live paycheck to paycheck

2. Only twenty-five percent have a written financial plan.

Ultimately, the Schwab findings point to a challenging financial future for most American.  About one-half of all American households with residents age 55 and older have no savings such as a 401(k) plan or IRA.  The latest GAO report findings make sense given the number of workers living paycheck to paycheck.

Money isn’t something a whole lot of people enjoy talking about, but at some point, the tone should change so that we can put these glaring facts on the table and work towards a flexible solution.  It seems the findings are explicit (at least with the 2018 Modern Wealth Index): if you have a written plan, you’ll be in the top decile of financial performers.  In other words, you’ll put yourself in an optimal position to have both financial peace and wellness.

[1] www.aboutschwab.come/modern-wealth-index-2018

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Exciting news from the Human Investing office:  In the year 2017 alone five babies will be born into the families of Human Investing (2 girls and 2 boys already, with 1 boy on his way)! For myself and the other new parents in our office, 2017 has already been a year of much joy, little sleep, ‘dad jokes’, cliché parenting sayings and a bunch of finance nerds trying to figure out how to care for their little ones and save for their college education. Here’s what we came up with. First the cost –

In recent years, the average rate of inflation in college costs has been about 5%.

Source: National average cost data © 2017 The College Board, “Trends in College Pricing 2016.”

Parents like my wife and I and others in the office may have different goals and philosophies on how much we would like to cover for our child’s education expenses - whether a dollar amount, like $50k, or a percent of the education expense. Whatever the philosophy, we understand the need to save. But what is the best vehicle to do so? Here are a few of the most common options and some important considerations to take into account when saving or choosing an account type:

• 529 Savings Plan: 529 accounts allow you to set aside after-tax contributions that grow tax free. The balance can be used for qualified higher education expenses, such as tuition, room and board, and books. States may offer 529 plans to residents, often with tax breaks or additional incentives - check your state here.

• Coverdell Education Savings Account (ESA): ESAs allow you to set aside after-tax contributions that grow tax free. Account value can be used for expenses not exclusive to college. Unlike 529 plans, there is flexibility to use ESAs for qualified education expenses from Kindergarten through Graduate School.

• Roth IRA: The Roth IRA can be used as a combination retirement account and educational savings vehicle. Your after-tax (Roth) contributions can be invested for retirement purposes and college expenses can be withdrawn with exemption to early withdrawal penalties. Additionally, the value of your Roth IRA will not hurt chances for financial aid eligibility as it is not considered assets on the Free Application for Federal Student Aid (FAFSA).

• Uniform Gifts to Minors Act and Uniform Transfer to Minors Act (UGMA/UTMA): The original college savings account, UGMA/UTMA assets are transferred to the child’s account and are invested on their behalf until he or she reaches age 18 – 21 (defined by state). At this time, the beneficiary can use dollars for whatever they wish. With a UGMA /UTMA you can realize $1,050 of gains tax-free per year. Note: UGMA/UTMA is in the child’s ownership for FAFSA purposes.

* This data is provided by www.savingforcollege.com and is subject to change. The numbers provided reflect 2017 regulation and will fluctuate with time. Please contact a trusted tax professional to understand exact tax implications.

The consensus: If you are looking to maximize saving for college and want to make it a family affair (any one can contribute) then the 529 is the best option. If you are not sure about college for your child but would still like to save for their future, then other great options like a UGMA/UTMA may be beneficial. Want to talk about what type of account is best for you or share baby stories? Let’s talk, Human Investing is here to help.

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