For most, the question of “minimums” in financial planning is a practice management issue from the firm’s perspective: how much in fees must a client generate to be economically feasible, based on the firm’s particular service model?
Yet as financial planning seeks to broaden its scope and serve more people, a question arises from the opposite side of the table: is there a certain amount of income or net worth necessary to even make financial planning advice useful to someone?
Is there such thing as having too little money, income, or wealth, for financial planning to even be a worthwhile thing to pay for in the first place? In other words, is there a minimum for a financial planning relationship, from the client’s point of view, below which the prospective client just doesn’t have enough income or assets for a financial planner’s advice to be relevant?
Income And Net Worth Minimums For Financial Planning
The inspiration for today’s blog post draws from my discussion last week about distinguishing private wealth management from financial planning; is there some point where a client’s net worth and income are so high, that it necessitates a level of knowledge, skills, and expertise that is distinct (or at least, radically more specialized) than the standard financial planning body of knowledge? In a similar vein, though, we might ask the reverse question as well: is there a point where a client’s income and net worth are so low, that it requires some other distinct set of knowledge and skills, such that we can no longer really call it “financial planning”?
For instance, much of the training that we receive as financial planners arguably has very limited applicability for the “average” American (much less most of those below the median). Nearly half of all Americans don’t even pay income taxes, so to say the least, the typical planner’s array of income tax planning tools is often a moot point, except for tax credits like the Earned Income Tax Credit, which many (most?) planners have never once seen a typical client claim. Similarly, when the average 401(k) balance is only $64,300, and 55% of seniors rely on Social Security for the majority of their income (and for 26% of seniors, Social Security is more than 90% of their income!), traditional asset-based retirement and investment planning (what money to save in which accounts and how to invest it) is arguably of quite limited value. In turn, a discussion of proper risk protections – adequate insurance coverage against death, disability, home, and auto – is also difficult when 64% of Americans don’t even have the rainy day funds to handle a $1,000 unexpected expense, to say nothing of the amount of disposable income necessary to buy various forms of insurance coverage.
In short, many/most people at or below the income and wealth of the “average” American simply don’t need the type of advice provided by the “average” financial planner. That’s not to say Americans don’t need financial help; but the focus is, at best, on proper spending and budget guidelines (where financial planners have been noticeably lacking in the public discourse), and to the extent that work can be done to support the average American’s personal balance sheet, helping the human capital side (where, again, financial planners often do not tread) is likely far more productive than advice about the investment and financial assets side. In many cases, the discussion is focused entirely on credit card, student loan, and other debt management – yet again, weak subject areas for the “average” financial planner in my experience, and topics that have at best very limited coverage in the typical financial planning curriculum.
Beyond that, there’s the reality that for many Americans, the issue is not so much financial planning advice, as it is simply obtaining a basic level of financial literacy and learning fundamental financial life skills. And in point of fact, many of these, too, are not directly taught within the core curriculum for financial planners – for instance, how to balance a checkbook. Nor is it entirely clear whether teaching financial literacy is really a subset of financial planning at all, or a distinct discipline unto itself (albeit one which many financial planners would support).
But perhaps at the most basic level, there’s the story once told to me by a fellow financial planner who visited the Philippines. In a conversation trying to explain what he did as a financial planner to a teenager in the third world, the feedback the planner heard was “Wow, you folks have so much money that you can hire someone to tell you what to do with it!” And perhaps at the core of this young man’s response was the true essence of financial planning: it’s only something you need once you have enough disposable income to have to make a decisions about how to spend it in the first place (including the decision whether to pay a financial planner to help you make other financial decisions).
The point here is not that financial literacy and reaching the majority of Americans who just need relatively basic financial guidance is a bad thing. It’s simply to raise the question – are those audiences and teachings really part of “financial planning”, or do they represent a separate discipline, that deserves its own professional education and training that is perhaps similar, but separate and distinct, from how a financial planner is educated and trained? Just as there is perhaps a point where you are so wealthy that the majority of financial planning no longer applies to you, is there also a point where you have so little wealth and income that a financial planner’s advice just isn’t relevant because you don’t have the disposable income to direct TOWARDS a financial decision in the first place (not to mention paying the planner for the advice)?
So what do you think? Is there some “universal minimum” point where an individual just doesn’t have enough income and assets for the financial planning body of knowledge and process to apply? Is there a name for that separate discipline? Is it financial literacy and financial life skills, or something else? Should financial planning try to expand to embrace that segment of the population, or help define a separate education and training program designed to really serve it?