This morning I thought I would post something I wrote a couple years ago. It is a short piece describing what I believe to be a true financial planner. It was written to help individuals understand what a financial planner should actually be doing for them.
The main premise of the piece is that a financial planner does something different than many individuals realize and that it is important to seek out a professional actually providing the service you would like to receive. My thinking has expanded a bit since having originally authored this. I do think it is still valuable to post this piece. I will post about my current expanded thinking in the near future.
The Rectangle and the Square
One of the frequently asked questions of a financial planner is, “What does a financial planner do?” Some believe a financial planner is someone who provides investment advice. Others believe a financial planner helps prepare for retirement. Many believe that anyone providing financial planning advice must be a financial planner. While all of these things are part of what a financial planner is, none of them fully capture a planner's scope of service. My goal with this column is to lay aside some of the misconceptions about financial planners and provide a clearer understanding of a financial planner's duties.
Recalling the lessons of grade school, many of us can remember the similarities of the rectangle and the square. One of the most intriguing days in school is when the teacher explains that “all squares are rectangles, but not all rectangles are squares.” Rectangles can have many different footprints, with sides of varying lengths. The definition of a square, however, is far more restrictive. In fact, the definition of a square begins with a rectangle. The definition of a square is a rectangle with four equal sides.
In the financial advisory world a similar scenario exists. There are many professionals who belong to the financial advisory industry - the rectangles -, but very few of these are financial planners - the squares. All financial planners are rectangles as well as squares, but all individuals providing financial advice are not financial planners. The rectangles generally include anybody providing advice regarding an individual's finances. The financial advisory industry includes professionals such as insurance salesmen, investments advisors, tax preparers and financial planners. They may hold licenses or designations such as the Certified Financial Planner™ (CFP®) designation or the Chartered Financial Consultant (ChFC) designations. However, none of these titles or designations makes an individual a financial planner. This is because in order to truly be a financial planner an individual must adhere to a stricter definition than simply providing financial advice.
There are two items which are added to the financial advisory definition – rectangles - to create the financial planner definition - squares. An individual who does not meet both requirements is not a financial planner even though they may provide a form of financial advice incidental to their true business.
The first addition to the rectangle's definition is that a financial planner must provide broad service reviewing a client's total financial picture. Seven vital areas must be included in a planner's service. These include:
Helping define financial goals and objectives
Reviewing cash flow
If an individual in the financial advisory industry provides service in all these areas, they may be a financial planner. However, they must go a step beyond simply reviewing each area by being committed to all service areas equally. If the individual has a significantly greater focus on one or two areas, they are likely not financial planners. This is not to say that individuals who focus on one area are not excellent at their chosen specialty; however, this specialization does not allow them to truly act as a financial planner. It should also be added that a financial planner can, under certain circumstances and in agreement with a client, determine that some of the areas may warrant less focus.
The second addition to the definition of a rectangle is of equal importance. In order to be a financial planner, an individual must act as a fiduciary. To be a fiduciary in the financial planning sense is to act in the client's best interest ahead of all other interests, including the planner's, at all times while helping the clients achieve their goals. This also means helping clients understand the implications of various options in financial matters, so the client can make informed decisions. This may require the financial planner take the difficult position of telling a client they are mistaken in their thinking, even though this could potentially harm the relationship.
What is a financial planner?
Returning to the original question, “What does a financial planner do,” it is now simple to put together a meaningful answer. A financial planner provides financial advice to individuals in respect to their entire financial picture with the purpose of helping clients reach their short and long-term financial goals. In doing so, a financial planner always places the client's interest first and helps the client understand the implications of the decision being made. A financial planner is not an investment advisor, insurance salesman, tax preparer or estate planner. What sets a financial planner apart from the vast majority of the financial advisory industry is that a planner views each of these areas equally and affords the same amount of care to each area, providing clients with truly integrated financial advice and planning.