Executive Summary
In a world where financial planning is guided by a standardized process but a lot of leeway about precisely what financial planning recommendations are crafted and implemented, the reality is that two well-intentioned financial planners can come up with remarkably different solutions for clients depending on their views and perspective. Whether it's the active vs passive debate, or permanent insurance vs buy-term-and-invest-the-rest, some planners just tackle client problems in a materially different manner than others.
So how can clients find the planner that's right for them, and how can planners ensure they're a good match for their clients? Consider crafting a "financial planning philosophy" document, that explains what you believe when it comes to all things financial planning, so clients understand the perspective of the advisor they're potentially going to work with. The point here is not to craft a politically balanced and sensitivity positioned document, but to help make it clear what your financial planning "deal breakers" are - the things you just don't believe in and won't recommend to your clients, period.
The goal of going down this path is to find people to work with who believe in what you believe - a crucial fundamental first step in having a positive long-term relationship. In fact, using your financial planning philosophy as a screening tool can be effective not only in trying to connect with prospective clients, but also potential affiliated professionals you might work with or refer clients to, advisors you might hire into your practice or work with as a partner, or even to evaluate the prospective fit of a potential successor buyer or merger of your advisory firm. In the end, it all comes down to shared beliefs, and the easiest way to ensure that your viewpoints are aligned is to state clearly what your financial planning philosophy is in the first place!
Different Ways To Do Planning
While the CFP Board establishes a standard 6-step financial planning process - establish the scope of the relationship, gather data, analyze the situation, craft recommendations, implement the recommendations, and monitor the plan - the guidelines for financial planners leave a great deal of leeway in the key 4th step: crafting recommendations. While certainly the CFP Practice Standards require a fiduciary obligation to deliver planning recommendations in the best interests of the client, in many situations there simply is no clear consensus about what constitutes the "best" recommendation in the first place.
While some situations are relatively clear - for instance, having health insurance is better than skipping it, having an emergency fund is important, and it's crucial to spend less than you make in the long run - the details of many other scenarios have far less agreement and little consensus. Should you pay down the highest interest credit card, or the lowest balance one that may give you the confidence to stick with the strategy? Is it a good idea to seek out investment managers who can deliver value above their benchmark, or just stick with a passive approach? Is it better to buy permanent insurance, or buy term and invest the rest?
Advocates on each side of those questions have some strong opinions about why their conclusion is right and the others are wrong, but the reality is that in today's world either can be done in a reasonably prudent manner on behalf of a client without running afoul of any legal or financial planning standards. Yet the differences are important. Clients that have strong feelings in one direction often cannot be swayed by an advisor who views the matter differently; in fact, even two advisors who work together may struggle and have significant conflict if their views on the issues don't align. Unfortunately, though, most firms and advisors can't even articulate what their philosophy is in the first place!
Documenting Your Firm's Financial Philosophy
The first step to being able to clearly articulate your firm's financial philosophy is to document it. Write it down. For your firm's "What We Believe" philosophy that explains how you view various key questions and issues. Just a few areas that the financial philosophy document might include are:
- Investments: Active or Passive?
- Debt: Something to use or something to avoid?
- Life insurance: Permanent, or buy term and invest the rest?
- Annuities: Does annuitization ever make sense?
- Risk: What does risk really mean in your view?
- Taxes: Follow the intent of the law, or push it as far as the law will allow?
- Wealth creation: Maximizer or satisficer?
The point here is not to cultivate some finely crafted universal principles that everyone can agree to, like the Financial Common Ground initiative. The point is actually to state your views that do not have universal agreement - because the goal is to make it clear what your personal beliefs, biases, and guiding principles are, to ensure that those you're working with share and agree with your fundamental philosophy. In other words, don't state where you agree with everyone, state where you differ, so it's clear what is unique about you and your beliefs, and clients can align themselves accordingly (or walk away). After all, the reality is that if there's not real alignment in philosophy between the advisor and the client, the relationship is likely to be full of friction and not work out anyway. Stating the guiding beliefs - and highlighting the mismatch up front - will just save everyone a lot of time and trouble and cost.
Once the financial philosophy has been stated, the firm can publish it, include it in the firm's marketing materials, and show it on the firm's website. For instance, you can see my version of the "What I Believe" page for this blog, where I share some my underlying views, beliefs, and the bias of my perspective regarding the practice and profession of financial planning. I realize that not everyone will agree with all of these statements, but all of my readers, subscribers, and anyone who wants to work with me should be aware of and understand my perspective. Hopefully, we will agree - or at least respectfully disagree - on the points. If we don't have alignment on most/any of these issues, so be it, but to say the least, knowing this will probably save us a lot of time in not trying to work together. Of course, in the context of an advisory firm, the "What I Believe" philosophy should not be about the practice and profession of financial planning, but about the service and delivery of financial planning to your own clients.
Notably, one of the benefits of publishing your financial philosophy on your website is that if/when/as you want to add something to it, refine it, or change it outright as your perspective changes, you can easily do so. In other words, just as our perspective on the world changes as we live our lives, so too should the financial philosophy document be a living document that changes over time.
Importance Of Having An Established Firm Philosophy
Why does it matter so much to have a clearly articulated financial planning philosophy for your advisory firm? There are many benefits.
The first, as noted earlier, is that it helps to ensure that clients will be a good match. After all, the reality is that if a client is dead set on absolutely maximizing wealth with aggressive tax strategies and picking active managers, and the advisor believes in satisficing, focuses on conservative tax strategies, and prefers passive investments, the financial planning relationship is unlikely to succeed in the long run. Which means, in essence, having a clear financial planning philosophy just helps to weed out mismatched clients from the start, which is a far more effective approach than investing heavily with time and effort into a new client relationship just to have them leave a few months later when it's clearly not working out!
The second benefit of having a clear financial planning philosophy is that it's something you can share with affiliated professionals you're working with, to ensure that they are on the same page as well, especially if they're people with whom you cross-refer prospective clients, and where they may refer clients to other affiliated professionals as well. For instance, if the CPA prefers a more aggressive tax planning approach than you and your clients, it's likely to create friction (as disagreements about a strategy between a CPA and a financial planner where the client is caught in the middle is a no-win situation for anyone!). Similarly, I knew an advisor who had a difficult client challenge when the client's CPA referred the client to an insurance agent who recommended whole life policies that conflicted with the planner's "buy-term-and-invest-the-rest" philosophy - putting the advisor in the awkward decision of challenging the insurance agent that the client's CPA had referred, a problem that potentially could have been avoided if the CPA had a better understanding of the planner's perspective in the first place. While certainly not all sticky situations with affiliated professionals can be avoided, ensuring there is alignment about views on many of these fundamental financial philosophy issues can eliminate a lot of client strife.
The third area where having an established financial planning philosophy can help is in the process of hiring or partnering with other financial advisors. To say the least, hiring a financial advisor who has a fundamentally different view than the overall company is likely to lead to friction at best, and outright client complaints or even legal liability at the worst. If the advisor doesn't share the views of the firm, it may be especially hard for that advisor to work with existing clients of the firm (who presumably have chosen the firm because they like the kind of solutions it recommends), or conversely it may be difficult for the firm to manage that advisor's clients if the advisor ever leaves (because the clients don't connect with the rest of the firm). Similarly, if two advisors are thinking about partnering together, they should be certain they financial planning philosophies match - otherwise, in the end, the firm is going to end out running as two independent silos and not a true ensemble firm.
In fact, this last point - about partnerships between advisors - is equally true in the context of firms that are looking to merge, or advisors looking to acquire (or be the successor to) another advisor's practice. In my experience talking with so many advisors over the years, a misfit in financial planning and investment philosophy is at the core of almost every failed merger and integration. It's often labeled as a "bad cultural fit" but it typically comes down to issues of financial philosophy, from the passive-DFA oriented advisor who tries to buy a practice that previously embraced an active management philosophy, to a merger between a firm that believes in using permanent insurance and aggressive tax strategies with another firm that does not. So if you're thinking about buying or merging a practice, make sure the financial planning and investment philosophies line up well before proceeding any further!
The bottom line, though, is simply this: when the overall vision and philosophy between two people (whether advisor-client, advisor-advisor, buyer-seller, etc.) don't align, friction often results. And in the world of financial planning, there are many "controversial" issues around which two people can agree or disagree. The easiest way to ensure alignment, and/or to avoid a mismatch that results in a lot of wasted time and effort, is to clearly articulate that philosophy up front, and make it known to everyone. Those who disagree with it will save you both a lot of time and trouble, and you may find those who agree with it more drawn to you than ever before... since in the end, we all like to do business with those who share our fundamental beliefs!
Creating a What You Believe, How we Treat our Clients, and/or Company Manifesto is a very good thing. I usually recommend putting it under your About Us page a sites navigation.
This is one of the many detailed things FAs can do to help themselves and their firm stand apart from the pack! And it’s especially needed for those who are “shopping” FAs online.
Michael,
I know you’re a firm believer in niches as a differentiator. I’ve always viewed this (firm philosophy) as more important by orders of magnitude. Many described niches have to do with the occupation of the client — “I help endodontists achieve lasting financial security.” But having clients across multiple occupations, interests, hobbies, etc. — all of whom share the firm’s guiding principles and philosophies makes much more sense to me.
Active or Passive? Why not both? Pensions do it – pricing portfolio – policy portfolio. No one right answer, do both.
Debt- something to use, something to avoid? Again, both are right answers in the right situation. Why corner yourself into any absolutist thinking when dealing with finances and human emotion. You need all the tools in your belt.
The greatest challenge for many businesses is they don’t know the right way to ask for referrals.
Steven Conville