Self-Prescribed Treatment Before Diagnosis

This morning, I received an email from someone seeking financial planning services.

Subject: Inquiry About Flat-Fee Financial Planning Services

Body:

Hi Daniel,

I’m looking to work with a fee-only financial planner on a flat-fee or project basis and would like to learn more about your services.

Brief background: I’m 73, still earning income, and managing approximately $1.5M in retirement and taxable accounts. I’m married; my husband is 63 and we keep our accounts separately.

I’m focused on diversification, Roth conversion planning, IRMAA management, tax efficiency, and long-term withdrawal strategy. I prefer to retain control of my investments but am open to partial delegation and strategic oversight.

Could you let me know:
• How you structure your fees (flat, hourly, retainer?)
• Whether you provide advice-only planning
• Your experience with Roth conversion and Medicare IRMAA planning
• What a typical first engagement looks like

If it seems like a fit, I’d be happy to schedule a brief introductory call.

~~~

Upon reading this email, one might say “Hey, seems like a good opportunity!” I agree, but on the condition that they’re unfortunately not a good opportunity for us! This is, however, a great case  to shine a light on some of the insights I gained as part of my dissertation research on consumer selection of financial planners, and where it’s better to focus on best fit rather than simply “winning all business” that comes your way.

Well-Researched Semi-Fluency

This is a positive indicator for financial planners when we are first introduced to clients. We recognize that most consumers of financial planning services have never been clients of a financial advisor or financial planner, and many of those that have worked with one in the past have done so on a largely transactional or short-term basis. However, when someone comes into our office for the first time with a list of questions that show they’ve been doing their homework, that’s a positive indicator that they’re seriously researching their potential candidates and are trying to approach their planner selection in a methodical and considered manner.

However, note that I said “semi-fluency.” This isn’t a critique by any means, but it’s also fairly normal that despite best efforts to research providers and the differences between them, many consumers are still a bit confused. Fee-only, fee-based, IRA, RIA, etc. it can all get a bit confusing! Financial planners often develop a skill of recognizing when someone is using the right words in the wrong context and parsing the details of what a potential client is telling them. This is likely no different than the ability of physicians to translate “my stomach hurts” into a more specific set of ailments through a line of questioning and process of examination. An issue arises, however, when a patient has already come up with a firm diagnosis of what they need to cure their ailments, or in our case, a set service to resolve their financial planning challenges.

So what are the “stomach hurt” self-diagnosed issues that raise potential contradictions of the requested “treatments”?

• Self-Diagnosis:
  • Diversification
  • Roth conversion planning
  • IRMAA management
  • Tax efficiency
  • Long-term withdrawal strategy
• Self-Prescriptions
  • “a fee-only financial planner”
  • “on a flat-fee or project basis”
  • “my husband is 63 and we keep our accounts separately”
  • “prefer to retain control of my investments but am open to partial delegation and strategic oversight”

Issues in Self-Diagnosis

First and foremost, let me say that all of the self-diagnosed issues here are perfectly commonplace. Diversification is a prudent practice of investment management that is broadly accepted among professionals, academics, and even many amateur investment enthusiasts. However, as we get into some of the other areas, we raise the issue that these may or may not be relevant planning issues.

For example, while Roth conversions are a powerful tax planning tool to accelerate tax liabilities into early retirement years that can then later be recouped through lifetime tax reduction, they often take close to a decade to break even. While it’s perfectly fine for someone to bring up this strategy as something you’re interested in or that you think you could benefit from, we are several stages away from being able to accurately analyze and forecast whether Roth conversions would be appropriate or effective in this individual’s case. Roth conversions also can come into conflict with the next two areas of interest, IRMAA management and tax efficiency. For those not aware, IRMAA is “income-related monthly adjustment amount”, or a set of additional charges applied to Medicare premiums if a household’s income is too high in a given year; And while tax efficiency is a raison d’être for financial planners, all of these issues are interrelated and require both separate and combined analysis for appropriateness in the accomplishment of both long term goals and funding of short-term needs.

When we look at the set of self-diagnosed issues this individual is expressing, none of them are out of place for a retiree or someone seeking retirement financial planning advice. However, the constraints in the self-prescriptions, or rather, “preferences” expressed in the email, are likely to cause serious or substantial issues with the delivery of quality services to address these particular issues.

Issues in Self-Prescription

First, there is nothing wrong with any consumer seeking to engage a professional in a specific way. No one said this individual had to hire us, and no one said we had to work with them, and thus, we cordially are not going to work together. However, when someone self-identifies and diagnoses their areas of financial concern and the potential strategies for solving them, and then goes on to define how they want to address those areas of concern before seeking professional help, they’re seeking help through a sub-optimal lens. This is an example of satisficing behavior under the theory of bounded rationality.

Satisficing is summed up rather simply: While people might benefit from obtaining all the possible information about a decision before making a decision, they are often adequately served by obtaining “enough” information before coming to a decision, and the potential problems caused by making decisions without all the information are typically small enough to warrant taking the risk. This was a behavior clearly on display during my research on financial planner selection, in which the vast majority of those in the experimental population selected a financial planner very rapidly and with very little consideration for cost and services. This gets back to the aforementioned issues with consumers of financial planning services having often never hired a financial planner before, but we’ll leave it at that.

So what’s the bounded rationality problem here? The individual seeking help in this case has self-diagnosed issues they want help with, which is very typical because most people don’t seek out a professional unless they have a problem the professional can solve. But then they have constraints and conditions on how they want it done, pertaining to both the compensation model, the service model, and conditions on the scope and nature of the help they receive; and this is problematic.

We do not know why this individual specifically wants a fee-only financial planner, or why they want to work on a flat fee or project basis, nor do we know why they and their husband keep their accounts separately, or why they prefer to retain control over their accounts. We’ll discuss the individualized issues with each of these in a moment, but keep in mind that we will proceed from that onto a discussion of why this is problematic holistically.

To start, we have no objections generally to someone seeking a fee-only financial planning firm. We’re a fee-only financial planning firm, and we operate in that manner because we very particularly want to serve clients without compensation conflicts of interest influencing how we do business. But some of the best retirement financial planners in the world are fee-based rather than fee-only; not because they’re deeply ingrained in the conflicts of interest that come with selling financial products, but largely because they’ve decided they want to be hands-on with the delivery of certain recommendations like long-term care insurance or annuities.

Requesting service on a flat-fee or project basis is a good example of semi-fluency. Flat fee is a compensation model, while project-based is a service model. Someone can offer ongoing services, project services, or hourly services on a flat-fee arrangement, and someone can pay hourly, one time, retainer, or by various percentage-based calculations for a project. I take the nature of the inquiry here to mean that this individual was seeking a planning firm to engage in the development of a financial plan on a one-time basis and was interested in doing so for a fixed price that wouldn’t change or fluctuate; that’s perfectly fine, but the same issues we raised with wanting a fee-only financial planner arise here, but in greater degrees. While there are some exceptional flat fee and project-based retirement financial planners out there, retirement planning is a subject area that is often well-served by ongoing or otherwise regularly renewed services and advice because it is so sensitive to ongoing changes in tax law, market conditions, and personal circumstances.

And finally, we arrive at one of the most critical issues with the self-diagnosis and self-prescription: the individual keeps their investments separate from their spouse’s, and wants to retain all or most control over their investments. This is essentially a fatal flaw in the nature of their quest to obtain financial planning assistance with issues such as Roth conversions, IRMAA, and tax-efficient withdrawal strategy. While many couples separate their financial accounts or “personal finances” for a variety of legitimate reasons, the tax code does not recognize or respect these reasons. Effective tax planning must always be performed at a household level, because all recommendations are subject to the tax ramifications of decisions made and actions taken by all members of the household.

Investment diversification will be meaningless across the household if one spouse is well-diversified while the other is perilously overconcentrated. IRMAA can be planned for if all income and sources of tax-impacting transactions, such as IRA distributions or capital gains, are accounted for, but it is effectively unplannable without oversight of all income-producing events within the household. Roth conversions are a powerful tool when analyzed with strong consideration of the household’s income from all sources and when tax brackets are carefully managed, but can be mucked up and become outright harmful if analysis fails to take all conditions into account. And tax efficiency and long-term portfolio withdrawal strategies are all but impossible to effectively plan for with only half the picture in sight, let alone then potentially suffering from the “telephone” effect of one professional providing a non-professional with guidance and then hoping they implement it in a correct and timely manner.

A Philosophy of Good Fit

You might read all of this and say: “Well, Dan, if this is all true, why don’t you just explain all of this to this person and then see what they want to do?” It’s a fair question, but permit me to share a basic principle of business in return: You can spend ten times the energy trying to convince someone of something they don’t want, even if it’s the best thing for them, or you can spend one-tenth the energy working with people who are delighted to engage with your services in the first place.

As I’ve said plainly several times now, there is nothing wrong with what this individual wants for themselves and I do not know their reasons for wanting to engage services as they have described; nor do I have the time or enthusiasm to convince them that they should want something different, particularly when this individual sent us an email of expectations and questions rather than exploring our website and service guides that clearly explain our service model, fee model, and expectations for client relationships. That’s no fault of theirs at all, but it’s simply a clear flag to us that they’re not our ideal client, and we’re not their ideal service provider, and that’s okay.

So where do we stand, and why do we do things the way we do?

MY Wealth Planners used to offer projects and one-time planning engagements. We stopped doing that when we saw that over and over again, we’d go through the planning engagement, offer to help with implementation, and then see that after the engagement was done, implementation was lacking or otherwise incomplete. We’d see time and time again that these folks, who, out of an abundance of fiscal caution, would rather pay for the advice and then “take care of it on their own,” come back later having taken care of nothing and being financially worse off rather than having just had us take care of it for them.

We used to bifurcate investment management as an optional and separate service, then eventually bundled it with planning at no additional cost, and now we require it for our clients. Why do so if not for profitability? Or rather, why offer more for no additional cost? Because, like project-planning, we’ve seen time and time again that many of our clients, inclined to managing their own investments, have a hard time doing it right. That’s not a criticism, and that’s no fault of theirs! We simply have the tools, expertise, and perhaps most importantly, time, to ensure that investments are managed effectively and efficiently, with the impact of taxes and the ramifications of their entire financial plan kept in mind with every trade and transfer. To this day, we still have a number of clients we can count on one hand that self-manage, and we’re happy to say these select few generally do a great job of it. But we’ve seen that in far too many cases, proper portfolio management is a chore best left to a professional.

But why the strong opinion on such matters? Why not let people do things inefficiently if that’s their preference, even if they end up slightly worse off for it? Simple: we are fiduciaries. We have a duty of care and a duty of loyalty to our clients. We have experimented with other services and other models and simply found that we cannot tolerate the general harms that such preferences cause those clients, even if they are their own preferences. Because we don’t view financial planning as an activity of making or saving money for money’s sake, but of enabling our clients to live their best financial lives. That means such inefficiencies might come at the cost of their quality of life, or the care of their loved ones, and that’s a relationship we decline to engage in.

None of that is to say people cannot be well-served by one-time projects, hourly advice, or alternative compensation models. It is simply to say that we do our best work for clients who want us to do that type of work for them, and for those who do not wish to enjoy the benefits thereof or pay reasonable fees for the delivery of such, we are happy to wish them well on their way in search of someone who will work with them the way they desire.

So, if you’re a client we work with today, thank you for entrusting us to do what we do best. If you’re wondering whether we’re a good fit for you or a close friend, family member, or colleague, we’d be delighted to discuss whether we’re the right match for you. What matters to us is not whether we can serve every person that comes to our door, but that we can do our best work for those who need what we can provide; and it’s a pleasure and privilege to do so when we can.