Forget the Fiduciary Fight

It appears the U.S. Congress is set to fail the American public and allow major financial services companies to continue to provide the public bad financial advice. The Senate continues to fight against a fiduciary standard apparently unwilling to make difficult political decisions which could cost them major campaign contributions.

But why are those of us who would consider ourselves financial planners fighting to have other professionals act as fiduciaries? Why are we lumping ourselves together with the entire financial services industry when we should be working to separate ourselves? I say, let them have their conflicts of interest and their lack of focus on clients and their confusion. Let's take this opportunity to create true separation from the product distribution industry. 

People are desperate for good, honest financial advice. Let's grab the mantel as financial planners. Let's band together and work with one another to create a profession dedicated to serving people. Let's move to a different sandbox and leave the financial services people alone.

Let's find a place where we can sit around a table and decide what financial planning is and what it means to be a financial planner. We can welcome everyone who wants to put their clients interest first as the base qualification for admittance, then begin hashing out a definition. We can invite the Certified Financial Planner Board of Standards, Inc., the Financial Planning Association, and the National Association of Personal Financial Advisors to join and be integral to this movement. Let's finally make this break and plant our flagpole. Let's lay claim to being the true profession to help people with their financial well-being. If you don't like what we decide, you will certainly have every right to leave and return to the financial services industry. 

I like to occasionally ask myself my assumptions might be wrong. I asked myself this question about the fiduciary issue, and came to the conclusion I have outlined above. Now I ask you to take a moment and consider whether your assumptions might be wrong also. 

Maybe It's Time For a Free Financial Plan

The following post has also been posted on my other blog, Blogged Business Planning, and the discussion about this idea has been in full swing. I encourage you to visit this post on that blog to get the full comment thread.

You've already read about my beliefs on free financial plans in an earlier blog post. Now I am going to make an argument against that post.

Yesterday, financial planner Rick Kahler, CFP® posted a great piece titled "Study A "Test Drive" For Financial Planning" on his blog which does a wonderful job quantifying the benefits of financial planning. I applaud him for this "test drive" concept, but I think it's time to challenge the financial planning profession to take that a step further and offer a true test drive. 

I believe it is time for those of us who provide true financial planning - meaning planning focusing on a client's overall financial well-being, not just investments - to offer a true test drive. It's time we teach the public the true value of financial planning so they can learn for themselves why it has so much power and why investment management is not the true value financial professionals deliver.

What I propose is to take prospective clients through the financial planning process for free! Agree on a fee in advance, but allow these prospects to decide if they believe there is value in the financial planning process after they have had the opportunity to see for themselves. If you are delivering a valuable financial planning service focused on a strong promise and deep relationship with clients, I suspect many prospects will understand the value and agree to continue the relationship in a for-fee arrangement.

We can begin teaching more people about the benefits and power of financial planning if we show more people why it is so powerful. Removing cost commitment up front will allow us to reach more people. Sure you'll be taken advantage of by some people, but even in these people you may build goodwill and good word-of-mouth if the situation is handled respectfully.

So let's really start showing the public the value of financial planning. Give them a taste of financial planning for free. Consider it a contribution to the profession and as a marketing cost, if that makes the loss experience more palatable. This is what I plan to do as soon as I begin engaging with clients again.

A Little Secret About Stocks

I want to let you in on a little secret this morning...something that should not be a secret but that I have not seen written often. I suspect most of my readers have invested some of their money in stocks in one manner or another. Either you own some stock outright, or you own mutual funds that hold stocks. Now, let me tell you the secret about those stock investments you have:

Money invested in stocks is not spendable money

What I mean is that, barring true emergencies, you should never look to the value you have in stock investments as money available to support your lifestyle and spending now. You also should not see that money as available for next year or even five years from now. Money invested in stocks is money to be used well down the road...that's why stocks are long-term investments. Stock investments should be allocated for spending 10 or more years down the road. I would even argue for a number greater than 10 as a starting point. Stocks are volatile. Over the long-run, the expectation is that you will be rewarded for accepting that volatility and risk. That means you cannot expect to use that money until you have reached the long-run!

As you approach the need to use some money invested in stocks, that money should move to other investments. Very near term spending should be held in cash or cash-equivalents (money market funds, short-term CDs, etc...) For spending a bit farther out, look to other investments such as bonds and long-term CDs.

Once you have understood this secret and truly believe it, dealing with the volatility we have seen over the past couple years and poor performance over the past decade becomes more palatable. The short- and mid-term stock volatility can be painful to watch; but if you have followed this secret, the impact on your financial well-being should be minimized. 

So, let me give you the secret one more time: money invested in stocks is not spendable money.

My Confession: Have I Offered Solutions?

You may be getting sick of my ranting and raving; of my complaining about what the financial advisory industry looks like; and of the lack of value being delivered by financial advisors to you. You may wonder why I bring all this up, but never offer any solutions to the problems. The answer is simple: I do not have any solutions. I do not know what needs to happen in order to truly help you with your financial well-being. I do not know how to get the focus away from chasing overnight wealth and materialism.

This industry is simply chasing the money. What is being offered is what you are willing to pay for. You don't need expensive investment advice; but this is what you continue to ask for, so the industry delivers. You don't need someone to predict the future, but we continue to try (and mostly fail) because this is what you are demanding. The industry has no incentive to change.

I confess, I am frustrated and don't know how this industry and profession move forward. On my other blog, I am putting together a business plan for what my ideal financial planning practice would look like. I am not moving forward very quickly. I sit down to write the business plan, but get nowhere. I have an idea about what I would like to deliver, but have a belief that you won't pay for it. You want investment advice and predicting the future, not help with using your money to reach your goals and understanding the impact money has in your life. I can't deliver what you want, and you don't want what I can deliver and what you really need.

There is so much more that the financial advisory industry and  the financial planning profession can provide you. But for the most part you don't want it and we don't deliver yet. How does this change? I don't have any answers, only questions.

Do you have the answer?

Fire Your Financial Advisor!

I'm serious...go do it right now! Fire your financial advisor! You should expect more and better than what the financial advisory industry is offering you right now. You are paying too much and having too little delivered. Your financial well-being is being hurt as often as it is being improved.

The financial advisory world is so fundamentally flawed, so deeply entrenched in the money-making business that on the aggregate we are not bringing you a service worth paying for. This needs to change and quickly. There is one way to make that happen...stop giving us your money for too little service. Force us to change and to develop a better service for you. Don't pay us until we offer you more value for your money.

I may upset some of my colleagues by writing this because they believe they are doing things better. Frankly, I know there are some financial advisors who do a tremendous job and who do bring real value to client's lives. They are tremendously intelligent individuals who recognize that there needs to be significant and radical change to financial advice and financial planning. Unfortunately, they are in a drastically small minority dwarfed by the large money-making organization who work for their shareholders and do not care about their clients (or customers, as they consider you.) 

So stop paying us for promises to make you rich overnight. Stop paying us for investment management that has a high likelihood of doing worse than what you could get almost for free. Stop accepting financial planning that is designed to reach someone else's goals and expectations. Stop giving people money for doing these things. As long as you continue to pay, people will continue to offer these low value services.

It's time for the financial advisory industry and profession to evolve. It seems clear government will not be helping with this, so it is time you vote with your pocketbook. Effect change and demand more. Fire your financial advisor!

By the way, if you have a better solution in mind, please post it in the comments. I would rather see a solution which does not hurt the good people in the profession and I want to start a practice in this profession myself. However, I do not see any other way to get the industry to evolve into something of true value until you stop giving us money to do less.

The Riskiest Risk

Today I am going to provide you a tool to help you really understand the largest risk to any investment or strategy a financial advisor may recommend to you. It's so simple it will seem silly, yet it is also very powerful. The risk you truly need to be concerned with and the risk that can harm your financial well-being more than any other is the risk that a financial advisor pooh-poohs away as being too big and too unlikely to need to worry about. 

The conversation could go many ways, but ultimately the financial advisor will make a statement to the effect that worrying about a certain risk is useless because it means something has gone so fundamentally wrong that there are much bigger worries. What the advisor is really telling you is that they do not understand that risk and do not know how to manage or quantify that risk. 

I do not like to speak or write in absolutes, but I am making an exception. NEVER follow a strategy or accept an investment recommended to you that your financial advisor does not really understand. If they cannot properly explain the risk and instead use arguments with no substance, do not consider that recommendation any further. 

I have listed a few examples of phrases to listen follow below:

  • If company X can't meet its contract guarantees, we have bigger problems than your investment failing. 
  • The risk in this investment is different.
  • This company has never had problems in the past. If it has problems in the future, our economic system has been so deeply hurt that no investment can survive.
  • That risk of X happening is extremely small and unlikely to happen. If it does, we have much larger concerns to deal with.
Any derivative of one of these statements is not an explanation of risk. It is simply a way to avoid having to acknowledge that the risk is not well understood. If we have learned anything over the past couple years, it is that those unlikely and misunderstood risks are what can truly derail financial plans and financial well-being. Those are the risks to be avoided. 

Our economic system did teeter on the brink of total failure. Companies never expected to fail collapsed (or only survived with historic government intervention) virtually overnight. Yet, the sun rose the next day and we had to continue to live our lives. We had to continue to think about our financial well-being and future financial selves. We did not have the luxury to not worry about the damage done to our finances because what had happened was low risk.

Avoid these types of risks at all costs. Call your financial advisor out when they do not explain a risk to you and instead use an empty explanation. Your financial advisor is not being malicious or trying to deceive you. They likely truly believe what they are saying. Nevertheless, they are doing you a disservice when recommending something who's risk they do not truly understand.

I Don't Know What Financial Planning Means

Ask a financial advisor to define financial planning and they will give you an answer. Unfortunately, you could ask five different advisors and receive five different answers. The financial advice industry does not have a common lexicon to describe what it is we do nor to describe financial theories and concepts. In speaking with other advisors, I have often recognized that we were using similar words, but not discussing the same thing. This is a major problem both for the industry and profession, and for clients. How are you, as a client, supposed to understand what is being discussed if the industry cannot even agree on definitions.

In a previous post, I discussed the lack of clarity in titles used by financial professional. None of these titles are terms of art, although I hope that in the future we will see that some become so. This is one glaring example of the lack of shared vocabulary in the industry. 

Another example can be found when discussing investment advice. Professionals who believe in active investment management often use the phrase "buy-and-hold" to characterize passive investment management. A professional who believes in passive management is unlikely to believe in the concept of "buy-and-hold" recognizing that passive investment management does not mean doing nothing. Passive and active managers do not agree on the definitions of their investment styles, despite being similarly trained.

A third example, and of particular interest to me, is the definition of financial planning. I have a definition of financial planning, one which I know is not shared by many other professionals. I have met financial professionals who believe financial planning to be nothing more than investment management; and others who believe investment management could be excluded entirely from the definition of financial planning. 

The most disturbing part of all of this is that there is no dialog in the industry to try to arrive at common definitions. We recognize that there are differences, but continue speaking with one another even while we understand that we are not speaking the same language.

Clients and potential clients are hurt by this. You cannot know with any confidence what a financial professional is intending to explain when the definition can vary so significantly from one professional to another. The industry must begin to correct this if we truly hope to work for our clients. We must have a forum where open discussion can occur to create a common language. We must agree on the definition of financial jargon.

If Your Financial Advisor Does Not Talk To You About Budgeting, They Are Failing You

The concept of budgeting frightens you, doesn't it? Financial advisors long ago learned that bringing that word up with clients often caused clients to disengage from a discussion and no longer listen closely. Many people don't like the idea of budgeting. They feel it will restrict they choices, be difficult to implement and just a general pain in the rear. Many advisors decided to spend very little time on budgeting discussion, or ignore them entirely, because of the negative effect it had on clients.

Advisors who are claiming to help you reach your goals but have chosen to not spend time working with you on your budget are failing you.

I think this because I believe that understanding the way you use your money is the most important element to making well-informed financial decisions. Going through the process of creating a budget helps you understand your spending habits and helps you recognize ways you use money that you were not aware of or had not intended. Working on a budget is the best tool to truly understand what your priorities are, what you value, and how you really want to use your money.

Creating a budget is not designed to restrict your use of your money. It is your money after all and you have a right to spend it as you choose. Creating a budget is designed to help you understand your spending and adjust your spending to items you value the most. Creating a budget creates financial freedom for you and allows you to make well-informed financial decisions that will help you reach your goals.

If your advisor does not work on budgeting with you, or at least discusses the importance and gives you tools to do it yourself, they are missing the most important and highest impact financial advice service they can provide to you. 

Your Financial Advisor Is Already A Fiduciary

Have you entrusted your financial advisor or investment advisor with managing your investments? Have you acted in good faith and asked your advisor to protect your wealth? If you've answered yes to those questions, I believe your advisor owes you a fiduciary duty whether required to by law or not.

Wikipedia defines a fiduciary relationship as the following:

In a fiduciary relation one person, in a position of vulnerability, justifiably reposes confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests.

If your financial professional as selling their services as trust-based and asks you to rely on their judgement and advice when dealing with your financial well-being, you should be able to expect a fiduciary duty to arise. You are entrusting your wealth to another and should be able to expect that they are acting in your best interest.

I continue to believe that we should push for Congress to enact a legal fiduciary duty for everyone providing investment advice. Even barring such legislation, I think you should expect that fiduciary duty to be offered to you. I also believe all professionals providing investment advice should recognized their implied fiduciary duty whether required to by law or not.

I am not an attorney and have no legal training, but by looking at the definition this just makes sense. Advisors and financial services organizations market themselves in a manner that seems to imply a fiduciary relationship. Lets demand they deliver on that marketing promise and work in your best interest.

Blogged Business Planning

I have started a second blog which you may find interesting if you are a financial professional. I will be using this blog to create a business plan for a financial planning practice. My goal by going through this process on a blog is to create a practice which has total transparency to potential clients and partners. And I hope for the blog to be a space for sharing of practice management ideas between financial planning professionals. I would like my business plan ideas to be vetted in a public place, but I also hope that other professionals will be able to draw ideas and inspiration from the discussion that occurs on the site.

It is not yet a certainty that I will pursue the path of building a financial planning practice (there remains at least one alternative employment opportunity which I am pursuing that would excite me greatly), but I think this exercise can be valuable to myself and others. Therefore I have decided to start this process now. 

Please feel free to join me at the Blogged Business Planning blog to discuss practice management ideas, review my business plan and practice thoughts and to join a place to have a critical discussion about what a financial planning practice should look like.

It's Not About The Damn Product

No Financial Product Will Achieve Your Financial Well-Being

If you've worked with a financial professional who has claimed that a financial product would be the solution to achieve financial well-being, you have been sold a lie. There are no financial products that are the answer to financial well-being. Consider financial products to be similar to over-the-counter medication. They can often treat symptoms making things seem better, and can occasionally provide a narrow solution to a problem; but they are never the solution to overall financial-well being. Financial products must be a part of a comprehensive strategy which only good financial planning can provide to achieve a path to financial well-being.

Returning to the over-the-counter analogy, consider trying to lose weight and live a more healthful lifestyle. You would not simply purchase weight-loss drugs and expect you life to become more healthy. You may lose some weight, but your heart would not become stronger and your endorphins would not increase (both benefits of aerobic exercise), you would also not enjoy the benefits of improving your diet. You would have treated the symptom of being overweight, but not have gained the overall health benefits of an overall lifestyle change.

Purchasing financial products is no different. The product may help with one problem, but you will not enjoy the benefits of focusing on your goals and values, crafting a path to reach those goals, understanding your cash flow and understanding your relationship with money. Your financial well-being might be slightly improved, but you would not have enjoyed the major improvement possible with good financial planning.

Don't allow a financial product salesman to sell you a bill-of-goods they cannot delivery. Financial products are not the answer.

LFA Blog Post Frequency

Since I began this blog, I have been trying to write a post every week day. Except for a couple days were circumstances dictated that I focus on other items, I have met this goal. Over the past couple weeks, however, I have felt like I have been forcing some content and not written the quality material I hoped to. So I will be refocusing and writing three posts (minimum) per week. I believe this should give me the space to write better content and bring more value to my readers.  Let me know if you disagree.

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