Executive Summary
A new blog video post by financial planner Tim Maurer makes an interesting point - the very essence of our 6 step financial planning process includes a conflict of interest that we as financial planners must navigate: that while gathering information and setting goals may be the most important step for a client, it's not the step where we get paid.
The Business Conflict Of Interest In Financial Planning
As Tim illustrates in his video, the 6 step financial planning process enumerates how we as financial planners should engage with a client through the financial planning experience. The core steps are listed below:
- Establish and define the client-planner relationship.
- Gather client data, including goals.
- Analyze and evaluate current financial situation.
- Develop and present financial planning recommendations and/or alternatives.
- Implement the financial plan recommendations.
- Monitor the plan.
As Tim points out, for most clients the most important step of the process is #2, where the focus is on the client's goals. After all, without goals, how can a plan be developed, implemented, and monitored? And if the goals are poorly defined, then the plan and its recommendations will be sub-optimal at best, or wrong at worst.
Yet the reality is that for virtually all of us as financial planners, we are not paid for step #2. We are paid for step #5, either directly (e.g,. commissions based on financial services products that are implemented) or indirectly (e.g,. billing on assets under management once the financial plan allows the portfolio to be invested). Even the classic financial planning project fee is somewhat prone to this conflict; the planner has an incentive to reach the implementation step as quickly as possible, so the plan can be put to work and the planner can move on to the next client engagement. Arguably, the only planning business model that is not highly prone to this type of conflict of interest is the hourly planning model, such as that espoused by Sheryl Garrett and the Garrett Planning Network; in the hourly model, the incentive is turned around 180 degrees, and instead prolonging the engagement becomes the primary conflict.
Of course, a conflict of interest is not the same as inappropriate behavior. A conflict of interest simply reflects the possibility that behavior will be corrupted by the incentives. And of course, not all conflicts of interest necessarily imply the same extent of potential improper behaviors. Nonetheless, Tim's point remains - that the conflict of interest is there, and any financial planning business model that hinges on implementation (either to get compensated for services, or simply to move on to the next client engagement) must navigate the conflict with moral and ethical behavior (given that most other ways to mitigate conflicts of interest do not apply in this context).
So the next time you sit down with a client to work through the financial planning process, be cognizant of your conflicts of interest. It's not something that we can necessarily remove - as any professional is entitled to be paid for their services, and any business relationship will entail certain conflicts - but once you're aware of the issue, you can be certain to maintain the ethical professionalism necessary to navigate it successfully.
Footnote #1: Click here for more information about Tim Maurer and his book "The Financial Crossroads," and be sure to check out some of his other 90-second videos.
PS: Tim, you have my sympathies on the 90-second effort. I've been known to be... a little verbose... in my explanations, too. 🙂
Michael,
Thank you so much for weighing in on this, and especially for expanding on the hypothesis to remind us that nearly every transaction and even the most professional of engagments have some sort of economic bias or conflict involved. That doesn’t mean it’s necessarily “bad”–simply that it must be recognized, a responsibility that I fear too many in financial services don’t undertake. We’ll never arrive, but we continue the journey… And you’re not verbose, Michael, just thorough!
Warm regards, Tim