Executive Summary
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?
Definitely,
At the bottom, the skills needed are how to navigate all the various government and charitable organizations that help the poor (something financial planners generally know little about).
Then as you alluded to, the focus moves to human capital management and automating their financial systems to make good financial behavior the default. (see Ramit Sethi’s http://www.iwillteachyoutoberich.com for an example of someone who is serving this niche well). At this point we pick up a few planners, but still most do not have extensive skills in this area.
I would say most financial planner skill sets are targeted at the top 20% of society, with a smaller subset that goes down to the top half. I don’t think very many have the skillset to provide a lot of service to the bottom half.
David
Exactly where I’m aiming latest project, after our recent exchanges, Michael. Imagine everyone heading into sunset years in the new no-pensions world. Verrry big problem, for lots of people and thus for the economy and nation. Verrry good that you’re spotlighting it!!
Michael,
Why is it important to have different labels for the services rendered to those with different financial advice needs along the economic spectrum?
Poor people, who need the most basic medical care, go to a doctor at a clinic and receive the same professional “medical care” as someone paying thousands out of pocket for elective cosmetic surgery. A lower middle-class person declaring bankruptcy or filing a personal injury suit gets “legal advice and representaion” the same as a corporation doing a merger.
Steve,
Because different labels speak to everything from different expectations about service and care, to the specialization and training of the professional giving it.
You don’t get the same services from a free-clinic doctor as a plastic surgeon who specializes in cosmetic surgery. In fact, the former giving cosmetic surgery service to the latter would constitute malpractice!
Similarly, they may all be tied to “the medical field”, but there is a huge difference between a nutritionist, a nurse, a general practitioner, and a cosmetic surgeon. All may have to do with the health of the human body, but their knowledge and skillsets are radically different, require dramatically different training, have different responsibilities for client care, different expectations from clients, and very different service models.
Just because someone is a “doctor” doesn’t mean they’re capable, experienced, and qualified to perform any possible medical procedure for any possible patient. And not all health-related problems require the services of a doctor in the first place. So why do we treat financial planning as though any financial planner is capable of providing any type of advice for any client, and that any type of problem requires a financial planner?
Respectfully,
– Michael
Sounds like what you’re talking about is generalists vs. specialists. A poor person can go into a clinic and see a primary care doctor (or nurse practitioner) and be referred to an orthapedic surgeon – or even a plastic surgeon. All are practicing medicine.
I think we use the term “financial planning” to describe the generic nature of what we do as a profession. So maybe poor people get referred to practioners specializing in financial literacy, budgeting and human capital. And realy wealthy people get referred to lawyers, CPA’s, philanthropic planners, etc.
I don’t think anyone in our profession pretends they can do everything a client needs all by ourselves.
Steve,
I do think some of this is the distinction between generalist vs specialist.
But I think the issue is broader as well. Look at the actual topic list for the CFP Board as a measure of our profession’s “body of knowledge”, along with their Job Task Analysis. You will see VERY little there that is relevant to the lower half of the income/wealth scale.
So I think, at least as we stand right now, the knowledge and skills necessary to effectively serve that segment of the population are not something we currently cover in the training and education of financial planners. It’s not just a matter of insufficient specialization; we barely cover it at all.
– Michael
Makes sense. It’s hard to justify a significant investment in a demographic that can’t pay our fees. While we may someday have a univerasl health care system, I doubt we’re going to see one for financial planning.
Hey Michael, It’s been awhile (we worked together while I was at Forbes). Interesting topic. One thing to consider is that the poor don’t always stay poor, so it’d be good for them to have a plan in place. You might, for example, leave college with a low value skill that you figure out how to monetize 15 years later.
At the same time, I don’t see a ton of value in telling somebody to “live within your means” or “pay off your credit card debt.” A lot of very smart people just don’t make a lot of money these days. It’s like telling somebody who just spilled their drink not to do that.
But there are useful things that they can be told like, “join the company 401(k) at whatever level you can afford but set it to increase your contributions by 1% a year.” Or, “yes, you’re struggling with a new kid but in your state a 529 plan can be opened with $25. Set it up now, contribute the $25 a month and increase it in better times.”
They might also be steered away from dangerous credit counseling schemes and be educated about what to do in the event of a windfall, lest some unscrupulous broker or adviser lead them down the wrong path.
Today’s “too poor to be worth your while,” might be an excellent client someday.
Great post and great points. Before looking at the various aspects of financial planning, it may help to see if financial planning itself is a part of something else. I view it as a specialized function of life planning, which I would define as the discipline concerned with the allocation of personal assets/resources (time, money, energy, health, focus) to the optimal attainment of life goals. Financial planning, of course, has a specialized emphasis on financial resources and choices (allocation of money). Viewed as a tool to maximize the utility of money, financial planning applies to anyone. If financial planning is viewed more narrowly as solving problems relevant to money, this leads to two different sets of problems, solutions, and (maybe) practitioners. One being the “Wow, you folks have so much money that you can hire someone to tell you what to do with it!” scenario (love that story!) and the other being not having enough money. However, at a basic level, all financial planning derives from “home economics”. Economics is concerned with the trade-offs (choices) people make. Financial planning applies method to those choices to attain particular goals. So, I’d say financial planning is universal… with specialized problems, needs and solutions.
Appears to me there’s a big hole in the middle regarding investment.
For folks just getting by, there’s a lot of good “financial literacy” stuff on the basics – budgeting, debt, etc.
But in the middle, for folks who are saving and investing for the future but don’t have enough to attract expert services, while there’s good stuff it’s drowned in oceans of complexities, alternatives, confusion, and generalities. Generally, from the FinLit sources the stuff on investing is a scattering of generalities.
I found agreement about this problem in a compilation of studies issued from the Library of Congress last year.
Dick Purcell