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What Is Financial Planning? The Profession Has Some Educating To Do

Ron Lieber, who writes the “Your Money” column for The New York Times, wondered what kind of tough questions clients were asking their financial planners after last year’s financial crash. To find out, he moderated a panel with five of my financial planning colleagues at last fall’s FPA convention in Anaheim, CA.

Lieber asked the financial planners three questions:
1. Did their clients feel they should have seen the crisis coming?
2. Did they feel the philosophy of asset allocation failed?
3. Because of scandals like the Madoff debacle, were clients trusting them less?

The planners’ responses (No one really saw this coming; asset allocation didn’t fail; there are thieves in every profession.) didn’t surprise me. Some of the reader comments did. If these comments indicate what the public understands about financial planning, the profession has a lot of educating to do.

I’ve divided a selection of the comments into four areas of concern: trust, compensation, investment advice, and education.

Trust
• “Do it yourself and don’t trust a soul besides yourself.”
• “From all I have heard about financial advisers over the last couple of years, I am grateful that I am not one and I have not used one.”
• “I’m not paying a financial planner to help me and my spouse through these times at all.”
• “Stay away from these people, who apparently can’t weed thieves out from their own ranks.”

Much was written about money manager Bernie Madoff, who defrauded investors out of billions of dollars. This underscores a fundamental misunderstanding of the difference between a money manager and a financial planner. Money managers oversee large pools of money owned by multiple investors, such as mutual funds, pension funds, managed accounts, and limited partnerships. Financial planners provide advice on a broad range of financial areas including taxes, retirement, cash flow, estate planning, and investments.

Compensation
• “The only ones who are making money…are the professional mutual fund managers and financial planners who collect fees for their alleged investing expertise.”
• “It is my belief, after working with several, that they are only out to fatten their wallets at your expense.”
• “Work longer, save more, invest in TIPS, the market is random, risk cannot be diversified away. You will never hear this from financial advisers. They wouldn’t make any money.”
• “I put my money with a financial advisor. He makes money off every trade whether it makes money or loses it…but he’s the devil I know.”

These folks may have been looking for unbiased financial advice in the wrong places. They seemed unaware of the difference between a financial salesperson and a fiduciary financial planner.

Investment Advice
• “[Financial planners] did not see the downturn coming, really? Many, many folks did.”
• “Stay away from these people, who apparently can’t predict major, obvious macroeconomic trends.”
• “After paying $2,500 a year to a financial planner and having her recommend investments that tanked 60-70% during the past year….I say: skip the financial planners.”

This thinking shows a real misunderstanding of financial markets, long-term investing and the role of a financial advisor.

Education
• “[Financial planners] don’t need college degrees, just a certificate of training.”
• “Anyone can do this on their own.”
• “Don’t waste your money on financial planners as they [know] nothing more than you.”

True, anyone can use the term “financial planner.” However, a Certified Financial Planner® must have at least an undergraduate degree in financial planning and three years of experience.

If financial planners want to keep the confidence of their clients during hard times, the profession certainly has some educating to do.

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One Response to What Is Financial Planning? The Profession Has Some Educating To Do

  1. richard trachtman March 23, 2010 at 6:51 pm #

    Right Rick. Certified Financial planners do have necessary education and and they have to keep taking continuing education courses. To look up CFP’s in your area contact the Certified Financial Planner Board of Standards, Inc. Their web site is http://www.cfp.net and it allows you to verify whether an individual is a CFP.

    If you worry they will just try to sell you stuff, you can hire one just to review your entire financial position and advise you how to balance it. Then you can go back to your brokers, insurance agents etc. and tell them what you want. Anyway, that is what we do & we didn’t fare too badly in this last downturn.