Financial planning is broken.
To start the discussion, it is important that you understand what financial planning is. Financial planning is a very technical term. No, seriously, it is. If you are not a Certified Financial Planner, then you can’t technically use the phrase financial planning. I am not a CFP (for very good reasons that I will discuss in a later post). Therefore I can’t technically say that I help create financial plans without risking censure from the financial industry. Seriously. Yes, it is stupid. But it’s also stupid that you can’t buy beer on Sundays in Indiana, but I’m not going to loose sleep over it.
The craziness of the industry doesn’t stop there. Often times when I appear on TV or radio programs I am introduced as a Personal Finance Expert. However, after one appearance when the host said “Personal FINANCIAL Expert”, I was almost fined by an industry regulator. That’s right. I can say that I’m a Personal Finance Expert, but I can’t say that I’m a Personal Financial Expert. While I’m out there trying to give tips and techniques to help average people make financial progress, I’m being impeded by the letters “ial.” That, buddy, is a broken system.
Don’t get me wrong, the industry needs serious regulation. Many aspects of the financial industry still lack regulation, and this is not a good thing. But regulation is the least of the industry’s problems. It is has become unprofitable to help those that most need the help. That isn’t an accusatory statement. It’s just true. The financial industry has addressed this in two impotent ways: 1) sell relatively unhelpful financial products to people that need a different type of help and 2) ignore that particular group of people all together.
I have been involved in the financial services industry since I was 20 years old. I worked as a brokers assistant my sophomore year in college. I have always known that I was going to be in the financial industry. There was about a one year period when I thought I was going to be a cop, but that sentiment quickly dissipated when I realized that the “slap and tickle” self-defense system which I employed was ineffective against real criminals. But, I digress. I realized very early that the financial services industry had some serious flaws.
- The first of these flaws was the use of greed and fear. Greed and fear are very strong emotions, and they can easily be used to feed into the mental weaknesses of people looking to make financial progress. This isn’t entirely a negative thing, but these tools in the wrong hands have often resulted in many a Ponzi scheme. I have found that if you are able to avoid an advisor that sells on either greed or fear, then you are off to a good start. Which brings us to an interesting side point. The truth is that this side point is as good of point as any in this blog. Side point: lots of people could give two rips about greed and fear, they just need someone to point them in the right direction. The financial industry has done a very poor job for those that don’t need a traditional financial plan.
- The second flaw that I discovered was the blatant lack of accountability. The financial industry always seemed to stop short of doing the things necessary to “force” people to accomplish their goals (much in the way my fitness trainer gets me to do one last rep). The financial planning industry is brilliant at creating financial plans that are only fit for a vacuum. Most traditional financial plans actually collapse the second the planning meeting ends. I’m not throwing the industry or even your financial planner under the bus, but the industry overestimates Americans’ level of personal responsibility. But this challenge shouldn’t be ignored, it should be embraced. I am 100% confident more efficient planning can be achieved by riding clients harder. There needs to be less graphs and 30 year projections. There needs to be more short term goals, and constant advisor interaction. Makes sense doesn’t it? It is exactly what a personal fitness trainer does. But there is a MAJOR problem. It is nearly impossible to properly compensate a financial advisor to do this work. The conundrum lies in the fact that those that need the most guidance, also need the most money. In other words, they can’t afford the advice which will get them in better financial shape. This is a similar issue that the personal training world deals with. Financial stress only goes away when you implement the plan, not just form the plan.
- The third indication of suckiness is the old “come back when you have money to invest” line. When I bought my first house back in 2000, I was walking through the place with a representative of the homebuilder just prior to the closing. The purpose of the walkthrough was to find any flaws in the construction of the home. I pointed out a really bad drywall flaw in the corner, and the guy said “look, man, this isn’t a $1 million house. Everything won’t be perfect.” The problem was that the $106k house I was buying WAS a $1 million to me. Every time that my industry tells someone to “come back when you have money,” I cringe. The rule of thumb in my industry is an advisor will make the average income of the clients he/she serves. This is the primary cause of “ignoring the little people.” I feel strongly that a financial advisor should REALLY help you budget and get out of debt, but unfortunately there isn’t a compensation structure that makes it worth anybody’s time.
There are some amazing financial advisors out there, and I sincerely hope you find one. I don’t care whether they get commission, get a fee, or both. I honestly think that you need to spend less time worrying about how your advisor is compensated, and more time scrutinizing the effectiveness of their work. Are you actually accomplishing your goals, and are they the reason? If yes, then they are good. Are you failing at your goals or accomplishing them in spite of your advisor? If yes, then they suck.
Thoughts? I’d love to hear them. Comment below. Industry peeps want to comment? Please do.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.