Along our continuing journey to become better advisors, Adam and I recently discussed whether or not we should start offering “Financial Planning” services to our clients.
In a world where technology has made asset allocation increasingly commoditized, many financial advisors (FAs) have turned to financial planning as a way to increase both service to their clients and revenue for their firm. FAs pay thousands of dollars to take classes and tests in order to receive a Certified Financial Planner (CFP) designation. Clients, after providing a more detailed outline of monthly revenues/expenses, assets/liabilities, etc., receive a binder containing his or her financial plan, and with it, the comforting validation they are “on track.”
Over the last few years, Adam and I have met with many local advisors and planners to discuss our industry. FAs are a chatty bunch and rarely miss an opportunity to inform competitors of their greatness. Not long ago, we had lunch with the CEO of a well-known advisory firm here in St. Louis. This firm requires all clients to participate in their financial planning, making it the real service they offer, as opposed to asset management. Out of honest curiosity, I asked how best to judge the quality of a financial plan or planner (Good article on this). He said the best financial planners were the ones who got the most referrals from their clients. This was the point in the conversation where my skepticism began to set in. So, the best financial planners are the best marketers? That didn’t sit right with me since most can agree the best salesmen aren’t always selling the best product. Surely there has to be some metric, or is it only after 25 years of working with a CFP you can look back to determine whether or not you received “good planning”?
(Aside: This skepticism applies to asset managers as well. The most Assets Under Management (AUM) certainly doesn’t correlate to the best performance, in fact, there is evidence to suggest the opposite.)
We find that investment management and finanical planning dovetail quite a bit, so let’s just address the most common questions clients ask a financial planner.
Question: How do I get started?
Answer: Step one of financial planning is the same for everyone: Take advantage of employer sponsored retirement plans. If possible, max out your 401k; Certainly utilize the maximum match from your employer. After that, contribute the maximum allowed to a ROTH or Traditional IRA. If you’re doing this and still have extra money accumulating each month, open a non-qualified account or think about a 529 plan if you have children.
Question: How much money do I need to retire?
Answer: This is not as scary or as complicated as it seems. Just back into the number. How many gross dollars per month do you think you’ll need when you retire? $5k per month? $7k per month? How long do you want to work? How much is your portfolio worth today? Using those three numbers, you can determine how much a month or year you should be putting away. Here’s an easy-to-use spreadsheet.
Question: If I have some extra cash, should I pay down debt or invest the money?
Answer: This is a common question we get all the time. People feel differently about debt, so the answer varies. But in general, if your interest rate is lower than your average portfolio return, invest. If it’s higher, pay off the debt. Many people just don’t like having debt, so they’d rather pay it off regardless and that’s totally fine. Personally, I like Dave Ramsey’s Debt Snowball Method for paying off multiple debts over time.
Question: Based on our household income, how much house can I afford?
Answer: A simple Google search gets you pretty far down the road. General rule of thumb is that about 30% of your take home pay should be used for mortgage, taxes and insurance.
I’m not anti-financial planning, just as I’m not anti-asset management. I’m pro-transparency. Without question, occasional complex individual needs arise which require the services of multiple professionals. I just don’t like making a blanket statement and using financial plans as tool for financial advisors to up-sell an existing client base. I feel it’s disingenuous (and dangerous) to promote a linear relationship between “if I do X, then Y will happen” when it comes to people’s financial life. Embedded in every financial plan and every portfolio is a myriad of variables that we only know one thing about…they’re wrong. Realizing that delaying gratification today for an ultimate payoff years down the road is the real value provided by an advisor or financial planner will shape this conversation more accurately. Knowing the path is different than walking the path. Having a walking partner along the way is infinitely more valuable than any binder can be.
-Brad