The financial services industry has had a tectonic shift from the hay day of having a stockbroker calling you up and telling you what the hot stock of the day was. While the term stockbroker is slowly vanishing from the lexicon many still exist today with new rebranded titles like Financial Advisor, Wealth Manager, or Wealth Advisor. The industry has shifted from giving hot stock names of the day and to a focus on financial planning. Even the most widely recognized credential by the public the CFP (Certified Financial Planner), literally has the words Financial Planner in it. Google searches for the words financial planner have also risen substantially over this period. There are even full financial groups that are solely dedicated to financial planning or they may have a laser focus on financial planning but limited expertise in investing. Experts in planning but none in investing, what gives? It’s all the same thing, right?
Why the shift to financial planning
I see two big trends in why we are moving towards financial planning increasingly more and more.
We are moving towards an ever more personalized economy from social media feed showing things relevant to your liking to being able to stream thousands of shows at a click of the button. People want a more personalized approach to their finances or so they think. This personalized approach can have costs associated with it. Some financial advisors charge separate fees for their financial planning services while others may bundle these services and throw it in with their investment management fee.
People are living longer and pensions are only shrinking becoming fragments of the past. This creates not only a shift of much more responsibility for someone planning their financial needs. Since now it’s their responsibility to have enough money over their lifetime. It also creates a need for people to be more strategic in their planning as life expectancy is much longer now than 100 years ago.
What exactly is financial planning
While the word investment management is pretty clearly defined, taking money and investing it. The term financial planning is very squishy and nebulous. Even professionals in the finance industry have a very wide opinion of what that service means. Some think it means budgeting for your kids’ college, and others may view it as a tax strategy to transfer wealth to the next generation. There is also not always a clear consensus either on the delivery of that financial planning information. Do you verbally tell someone what to do, scratch it on a piece of paper, or give the same templated 30-page pdf document that looks like a lab report with different financial planning topics in blocks to cover? The beauty of capitalism is there are a few leading professional software’s that are focused on financial planning to help define with tools to help define this and deliver something tangible for clients when talking about financial planning. The tools cover a wide array of needs. Tools include budgets, net worth tracking, cash flow analysis, social security, estate planning, and more. Somebody that is paying off credit cards is probably not thinking of estate planning and vice versa.
This brings us to an interesting point that financial advisors have to be expert financial generalists since most people have a wide variety of needs for their personal finances. Now we live in an era of specialization and it’s common for financial advisors to specialize in a client segment. However, even within a segment you never know what special circumstance someone has until you know the full story. Just like a heart surgeon who specializes in the heart he has to know about the general body. If the body starts doing something outside of textbook stuff specifically for the heart; then he knows what to do. Finances are the same thing, someone could be very wealthy but maybe they spend money like water and have huge lines of credit where they are racking up interest. Debt management and estate planning could both be simultaneous issues.
Is financial planning just a marketing ploy to make more money from the public
You have to ask are people paying for no reason when usually a bare minimum hourly for financial planning is $150/hr and often much higher hourly rates. It’s not uncommon to see financial planning cost +$400/hr.
What is mindboggling is how there are lots of clients that have no financial planning done for them by advisors that include it in their pricing! What others pay hundreds and thousands for, there is a whole group of people doesn’t even take, for free. Now if the reverse happened and you had a financial planner you hired where they included money management in their service as being free but you looked back 5 years later and the money was sitting in cash for no reason, chances are you would fire them on the spot. Is financial planning a service that gimmicky that even people offered it for free don’t always use it?
My speculation is higher net worth people tend to have less time or they value their time more is why they hire someone in the first place because they don’t want to think about their finances, period. Some high net worth individuals that have a financial cushion may not want to have a lengthy strategic planning meeting because even if it helps them financially it’s immaterial to their life. Other high net worth individuals may see planning as an immaterial part of their life while simultaneously looking at it to be an extremely important part of keeping the wealth in the family tree after they are gone.
The mass affluent on the other hand, have many decisions to make as they are trying to arrive at that high net worth status. Working hard maximizing every penny so they can hopefully join the ranks of their high-net-worth peers. Writing a check for hundreds an hour when you are only making let’s say $150k is a painful check to write. Logically it brings up the point of how much money are you getting back or maximizing your finances for the dollars spent to plan them. Small financial planning decisions can have thousands and thousands of dollars of impact on your long term net worth. An example of this is simply moving taxable funds to the proper tax-advantaged account like an HSA. However, these things aren’t happening every day, and what about if there aren’t large money decisions to optimize within that person’s financial life what are they paying for then?
Enter the grey zone, humans have to rationalize their decisions otherwise as the greek philosophers would say we have no Ethos or Logos. I would argue people are paying for a personal consultant or life coach. Which is not to be scoffed at. Just like people pay for therapy, and even pay for friends. Financial planning is your fitness trainer for money. Maybe there needs to be a change to the diet or workout regimen but you still show up week after week shelling out cash doing the same routine you’ve already memorized. Why? Because your trainer holds you accountable, they keep you motivated along the journey, they’re a friend, and if your training form starts to get sloppy they are there to keep you back on track. When you show up to the gym and have a trainer there is no wizardry they can do to get you in the shape you want to look like a year from now; tomorrow. The same thing applies to financial planning. There are tougher financial diets you can follow, that most may not have the stomach for. However, even if you are the toughest person out there, there is a limit to what can be done before patience is required.
