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Financial Planning Shadow Games

The investment management industry continues to evolve.  Fee compression and regulatory changes around the upcoming Fiduciary Rule are all positive developments for investors.  We are in the early innings of a much needed and overdue shift to build a more trustworthy and client-centric industry. Independent, fee-based financial planning has been at the forefront of the fiduciary movement, but is it all that it’s cracked up to be?

Many financial planners market themselves as fiduciaries using language like “objective, fee only, no commissions” to market to potential clients.  In our opinion, the primary benefit to financial planning is getting to know clients, modeling complex scenarios, and helping to build appropriate investment portfolios.  Financial planning is a positive exercise, however, investors should consider the following when working with a “fee only” planner.  

  • We would strongly discourage paying a financial planning fee ANDan asset based fee.   Some financial advisors charge several thousand dollars to run financial plans.  Most reputable investment firms will offer financial planning as part of their overall wealth management fees.  

  • Planners often make it seem like they’re in the back room with a calculator doing advanced algebra, but the reality is that robust financial planning software (MoneyGuide Pro and eMoney) does the heavy lifting.  The advisor does need to make sure the correct data gets entered to produce a meaningful plan.  

  • Planners can work under the guise of being objective, but will use financial plans to sell products. The CFP Board (Certified Financial Planner) requires advisors to only adhere to a fiduciary standard when involved in financial planning (CFP Standards). 

  • In our opinion, planners are not investors.  Running Monte Carlo simulations and placing clients into a basket of mutual funds is a sub-optimal approach.  

  • Many institutions deliver proprietary planning tools that are really more geared toward identifying and gathering outside assets. 

  • Projecting “rosy” portfolio values based on lofty capital market assumptions can give clients an unrealistic picture of the future.

  • A financial planner’s objectivity and behavior is often tainted by their compensation plan.  Financial planners roaming the halls of retail brokerage firms, banks, and insurance companies will have a tough time providing conflict free advice.

Financial planning has a valuable place within investment management, but we should not lose sight that our industry exists to build client wealth.  Investors looking for a wealth manager should not get hung up on the financial planning aspect.  Any qualified investment professional should be able to build an objective, customized financial plan.

Full disclosure: Pure Portfolios offers financial planning solutions through MoneyGuide Pro to all clients paying an investment management fee.  Investors should always be mindful of net of fee performance, costs (account fee + cost of owning assets + commissions), and potential conflicts of interest when evaluating their investment manager.

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