A Financial Planning Safari

Daniel YergerFinancial Planning Leave a Comment

Greetings! Today we’re going on a safari of the assorted beasts and brokers that often can be confused by a layperson for financial planning. Financial planning is a rare and special beast that is still offered by the minority of those calling themselves financial advisors, planners, counselors, coaches, and so on. Within this particular landscape, there are many things that can look and sound like financial planning to the uninitiated, but with today’s guide, you’ll be better equipped to identify the assorted shenanigans that financial firms get up to when attempting to convince consumers that they’ve gotten financial planning.

Life Insurance Needs Analysis

A tricky bugger, the “Life Insurance Needs Analysis” is an activity that bears several markings of financial planning. This includes questions about your life goals, your family, and your current financial position. However, a discerning eye might quickly notice that the questions are largely those of family and financial discovery: Who is important to this potential client and what assets do they have available? Once the basic context of the client’s life has been gathered (you will note that questions about debt are suspiciously absent), the client will be presented with one of two potential solutions, largely dependent upon whether the client was more interested in protecting what they already have or more interested in growing their assets. The solutions will be either a very large and very long term life policy, or a permanent policy (also called “Whole” or “Universal”; there is some difference between the two flavors). The presentation may include both options or just the permanent life policy (it’s rare to see just a term policy presented). In either case, this specific comparison will be made: “With Term Life, you’re renting the coverage. With permanent life, you own the coverage.” However, as I’ve indicated many times before,  permanent life insurance is rarely the optimal solution when protecting the family or growing assets. Notably, for the Life Insurance Needs Analysis performed by the agent, they will be deeply reticent to discuss any other options as the solution for your financial needs. A few months after the sale is complete, you might come to realize that all you ended up with as a result of the “financial planning engagement” was a life insurance policy, little to no answers to your other questions, and a suddenly much harder to reach agent.

The Broker’s Good Idea Fairy

This concept was perfectly well illustrated in the Wolf of Wall Street, but a Broker’s Good Idea Fairy is like his lawyer: He represents the broker, not you. When people stumble upon a broker with an exciting title like “Private Wealth Manager”, they will often be dazzled by incredible pitches and presentations showing how this broker’s products have beaten the market by 10%, 20%, 30%, or 40%. Asked for evidence that the broker has used these products historically in the way presented and you’ll get a lot of compliance-ese to explain why that’s not really important, what’s important is the backtest! Whatever problems you’ve come to the broker with, he’s got a mutual fund, variable annuity, or unit investment trust that can solve that problem. Need money for your kid’s college? Broker-sold 529 plan that costs 10x the self-managed option just in the sales charges and twice as much on ongoing management fees. Looking for a “safe investment”? Bond mutual fund with a 3.5% sales charge. Safer investment? How about a fixed indexed annuity with a 9% hoopla and a no-trapdoor-floor with a participation rate of 17. Sounds pretty good, right? Ultimately, the good idea fairy relies upon providing quick and exciting sounding solutions to your financial problems. Unfortunately, because of the relationship of a broker, as with the agent, you will likely find that financial planning quickly evaporates once you’ve opened your account and transferred funds for your first purchase. But not to worry, as Mr. McConaughey has kindly pointed out in the Wolf of Wallstreet, when you’re ready to try something else, your broker will be there with “another brilliant idea, a special idea, a situation, another stock to reinvest in one more time.”

Fee-Based Financial Planning

This is a tricky one so stay with me. The majority of firms offering something closer to true financial planning (maybe not quite on the mark, but close) do so on a “assets under management” model. This means you invest your savings with the advisor, they put the savings into various investment options, and they charge a percentage fee from your account for doing so. Now, for those who’ve worked with MY Wealth Planners®, you’re going “that sounds like what you do with my investments you manage”, and you are correct in the description. The key difference we’re going to articulate here with fee-based financial planning is that this is not billed as “investment management”, which is an entirely separate service from financial planning in the case of my firm, but as financial planning. “Give us your savings to manage and we’ll give you financial planning as a bonus.” Is the easiest way to differentiate. Firms that offer this model typically do so at a rate much higher than standalone financial advice. In Longmont, CO alone, there are firms that charge as much as 3.25% per year for the fee-based service alone, and that’s before you get into investment costs. However, this investments-plus-financial planning service can become problematic quickly. First, it introduces an enormous conflict of interest into the relationship with the fee-based advisor and the client: All advice that would reduce the balance of the client’s account is verboten. You can test this easily if you have a fee-based advisor. Simply ask the advisor if you should buy investment real estate, and watch the multi-paragraph email or long monologue about the problems with investment real estate emerge, without any discussion regarding the pros of the choice. The same will happen when you suggest paying off debt, paying down a mortgage, or even making a significant withdrawal from your account for something like a home renovation: All of these are bad ideas that should be avoided, says the fee-based advisor. The second issue is that fee-based investment platforms are famously loaded with extra expenses. You will find that not only are you overpaying for financial planning in your direct fees but that rather than low-cost index funds, you’re likely to find that you’re investing in expensive actively managed funds. And if you do get low-cost index funds or ETFs put into your portfolio, expect that your financial advisory fee will be higher to offset the loss of revenue sharing.

Ending the Safari

Ultimately, financial planning is a tough thing to find. The best advice for locating it is to decide how much financial planning you need. A few hours of advice on one or two topics? An hourly planner is probably great. Just getting your course charted out so you know you’re pointed in the right direction? A one-time project-fee based planner is great. Need ongoing guidance as you navigate your career, life choices, and personal finances? A subscription-based service is perfect. Just always be careful that when the way you pay for a financial plan is through the purchasing of something else that’s not a financial plan (like insurance, an investment product, or investment service), there’s a very healthy chance that you’re simply being sold the product, and that there is no financial planning to follow.

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