Yesterday the US Government Accountability Office (GAO) released the results of its study on the regulation of financial planning, as mandated by the Dodd-Frank Wall Street Reform legislation. Seen by many as a potentially significant step in the recognition of financial planning as a profession, the study came far short of recommending standalone regulation for financial planners, instead finding that the regulatory structure for planners is already "generally comprehensive" and delivering as its primary recommendations… more studies. Nonetheless, the GAO report represents the clearest picture yet of the financial planning landscape, with acknowledgement of the problems entailed in varying standards of care for different financial services channels, and consumer confusion over the myriad of titles and designations that financial planners use.
As financial planners, we have a responsibility to give people the best advice to guide them towards achieving their goals. In most cases, it’s very straightforward to develop these recommendations, by applying the technical rules and looking at “the numbers” to calculate what path/route/option is best. Yet ultimately, the solutions don’t count unless they’re implemented correctly, and if you want to take that next step, you have to deal with real world behaviors. Which leads to a fundamental problem: what happens if the “best” solution is one that’s not conducive to human behavior? How do you navigate the intersection between behavior and the numbers? How do you develop rational financial planning recommendations in a world where people don’t always behave rationally?Read More…
The debate about which is better – passive versus active investing – has been around for a long time. But in a world of pooled investment vehicles, especially with such a breadth of mutual funds and exchange-traded funds (ETFs), there are technically two levels on which decisions must be made: within the funds, and amongst the funds. Consequently, to describe the approach of an investment advisor, we should ultimately describe the process at both levels, to make clearer distinctions. For instance, are you strategically passive, or would strategically active be a better description. Wait, strategically active? What does THAT mean!?
Planners are accustomed to dealing with most types of capital that clients may have, whether it is stocks, bonds, real estate, cash, bank accounts, or other investments. Yet the reality is that for many clients, the biggest piece of capital on their balance sheet is not the stuff that they own; it’s themselves, and their ability to earn income in the future. However, as planners we rarely track and account for a client’s human capital; and as a result, we may overlook the financial advice that can truly have the greatest long-term impact for a client’s success.
If there’s one new asset class that seems to have truly caught the imagination of clients, it’s gold. Technology, real estate, and emerging markets have all caught fire for some period of time in recent years, but gold still seems to stir something emotional in us, above and beyond just the pangs of greed that have characterized the other hot investments of the decade. Perhaps it’s the fact that gold is something that theoretically performs well in times of distress; it can serve as a hedge in times of inflation, help protect against the declining value of our currency, and be a safe harbor when everything else is in trouble. Given so much client anxiety about today’s economic environment, it’s not difficult to understand the appeal. In the end, there is perhaps only one significant problem: gold doesn’t actually have any value; it can only accomplish these financial feats of strength because we believe that it can.
The growth of the financial planning profession over the past 40 years is a testament to the fundamental need that it serves; if financial planners weren’t delivering value, firms wouldn’t be growing the way that they are.
Yet for so many planning firms, there is no process to really evaluate what it is that clients want, and whether they’re receiving it. Instead, we craft an offering that we think clients will like, and then try to convince them to hire us to receive it.
But is that really the best way to build a business’ service offering?