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How Financial Planners SHOULD Act

by My Journey to Millions
Financial Planning Cartoon

Due to my position at work, I get a ton of trade magazines on a daily basis.  It just so happens that “trade” in this case means law, money, financial planning magazines so that is pretty okay with me!  In my daily flipping to find out if anything life breaking has occurred I came across a great article written by Roy Diliberto titled, “Basic Truths: Financial Life Planning” in the February edition of Financial Advisor Magazine.

Mr. Diliberto provides, what he believes should be self-evident truths for being in the business of what he refers to as Financial Life Planning.  The below tenants are phenomenal goals, but just as there are unscrupulous doctors, lawyers (*gasp*), mechanics, etc. there are bad financial planners, or almost worse in my opinion those in the product placement business vs actually those wanting to plan.

Basic Rules/Truths Financial Planners Should Follow

According to Mr. Diliberto here are self-evident truths:

• All advice and recommendations should only be made after we thoroughly understand our clients’ values, attitudes, money histories, goals and dreams. The financial life planning process is the basis for this understanding. Of course, that means taking the time during the discovery process to ask the right questions. We need to know how their history affects their actions today, what their core values and priorities are, what transitions they anticipate in their lifetime and what is important for them to accomplish in both the short and long run. This is time-consuming, but critical to doing the right job for clients.

  • There needs to be a renewal meeting each year to discover changes that may require alternative strategies. This is in addition to regular reviews.
  • All people who provide financial advice should act as fiduciaries, whether or not they are legally required to do so, because it is the right thing to do. I can’t imagine a client choosing to do business with a financial advisor who is unwilling to commit to putting clients’ interests above his own. You don’t need to wait for a law to pass to adopt this strategy today.
  • We need to create memorable experiences for all of our clients.
  • We need to practice transparency in all of our dealings with our clients. That means disclosing all potential conflicts of interest including how much we earn from our recommendations.
  • No prospect is more valuable than any client.
  • Diversification is not dead.
  • Since we do not know how to “beat the market,” we don’t claim to be able to do so.
  • The goal to achieve the “maximum rate of return” is neither a goal nor measurable. We are leery of potential clients who tell us this. We probe what it is they mean by this and try to stress the importance of investing to reach one’s goals and not attempting to maximize returns just for the sake of getting returns. If they insist on chasing returns, we know that they are not a good fit for our firm and we graciously tell them so.
  • Investing is not a contest.
  • There is a great deal of difference between risk and market fluctuation. Risk, the way we define it, is running out of money before you run out of life. Fluctuation is what may occur during the interim. The greatest risk is allocating a portfolio in such a way that it avoids fluctuation but guarantees a return so low it assures that the client’s money will not last.
  • It’s OK for clients to invest most or even all of their money in fixed income. This may seem to contradict the market fluctuation comments made above, but it is different. If a client can reach all of her financial goals in life and avoid market volatility, there is nothing wrong with this strategy if it is what will make the client comfortable. After all, why do people invest in the first place? Is it to accumulate money to watch it grow, or is it to reach their financial goals? We believe it is the latter.
  • Clients don’t fire financial planners because of market fluctuations. That is, unless their advisors have claimed to be money managers immune from normal (and abnormal) fluctuations.
  • Most individuals who act out of greed are not greedy. Many people spend too much time listening to the so-called “experts” who, with the advice they provide through the media, encourage people to seek the highest return they could (asking, “What is the hot stock this week?”) As a result, many clients want to chase returns because so many people tell them the objective of investing is to maximize returns.
  • “Stay the course” is not blanket advice. Clients are unique, and in times like those we’ve just experienced they need to be treated uniquely.
  • Disciplined saving to reach long- and short-term goals is far more important than investment returns. We need to encourage our clients to maintain a saving strategy, particularly when markets are not performing well.
  • Clients will forgive us for poor returns during down markets, but not for failure to understand them or their goals.
  • The odds of success (as calculated by Monte Carlo simulations, etc.) literally change every year, every quarter and even every day.
  • Retirement is not mandatory. Financial planners need to change their question from, “When do you intend to retire?” to “How do you visualize your life in your 60s, 70s, 80s and beyond?”
  • Our most important asset is our employees.
  • Emphasis added by me

I think, for the most part, Mr. Diliberto’s discussion of what a Financial Planner should do/be is great!  The investment tenets are a little confusing, but I think his point is that there should be a line between financial planning and investment advisor/hedge fund investing/private equity investing.  If that is his point then I agree with him.

That leads to the problem of investment products.  Do you use a fee based approach, which in the end could cost a lot more (if the fees are higher than the commission would have been on an A, B or C share mutual fund)?

At my office, we have fee based planners and non fee based planners at my office, but they are all objective and put the client first.  I think the fiduciary standard, which was drilled into my head during law school, would solve a lot of the industry’s problems.

What do you think about the so-called truths above?  Do you agree with them? Don’t agree? What would you add?

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Revanche 02/17/2010 - 2:01 pm

If I didn’t believe in those tenets as basic truths of a financial planner’s fiduciary responsibility, I couldn’t have started taking CFP classes. I love PF, and I love money management, but I couldn’t fathom pursuing those interests professionally without a strict code of ethics. If you must boil it down, I’d consider “Do unto others” a fair interpretation. If I couldn’t treat my clients and their money with the respect and attention I give my own, then I shouldn’t be a CFP.

Evan 02/18/2010 - 12:51 am

Congrats on taking the CFP classes – I have heard it is a really rough exam.

While I don’t think you are in the minority, there are a lot of bad apples that ruin the whole bunch when it comes to the financial industry as a whole.

Investor Junkie 02/19/2010 - 3:26 pm

“there are a lot of bad apples that ruin the whole bunch when it comes to the financial industry as a whole.”

Unfortunately I think that’s why you guys get a bad rap and looked as higher paid used car salesman.

In addition, money is like another child. People are super sensitive with it.

Darren 02/25/2010 - 6:04 pm

I agree with point #4 about transparency. In my opinion, it’s probably one of the most important things to disclose with a potential client.

I also agree with point #11 that it’s okay to invest the bulk of a person’s money in fixed income if it helps achieve their goals. However, in my opinion most people have such big goals, that they cannot be achieved financially be merely investing in fixed income securities.

I also love your emphasis of point #18 regarding retirement. People shouldn’t merely think of when they want to retire, but what they actually want to do in those years. After all, it’s not like people suddenly retire just want to sit around the house all day (at least I hope not)!

financeanalyz 10/10/2010 - 6:09 pm

The post sounds to be convincing. Bu when we talk about how financial planning should be or the right process on it. I guess it should be more transparent to clients.

Curran 04/11/2019 - 12:01 pm

Not even close. In the US the overwhelming majority of “advisors” operate under suitability, meaning as long as they pick investments suitable for your risk tolerance, they can charge commissions.

The gold standard is being a fiduciary acting in your best interests ONLY, without the slightest regard to being paid.

Hope that helps!!


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