Almost by definition for many, the essence of financial planning is that it's comprehensive. Financial planners don't just look at a particular problem or product; they account for everything holistically to arrive at a recommendation and solution that fits in with the big picture. In other words, they don't just plan for a slice of the pie; they plan for the whole pie. Yet it seems that for many planners, the "whole pie" is the client's balance sheet; we plan for all the different assets (and liabilities?) that the client has, not just a particular account. What about the OTHER pie, though? Not the asset one; the INCOME pie.Read More...
GAO Study On Financial Planning Regulation Paints a Clear Picture of Problems and Recommends… More Studies
Yesterday the US Government Accountability Office (GAO) released the results of its study on the regulation of financial planning, as mandated by the Dodd-Frank Wall Street Reform legislation. Seen by many as a potentially significant step in the recognition of financial planning as a profession, the study came far short of recommending standalone regulation for financial planners, instead finding that the regulatory structure for planners is already "generally comprehensive" and delivering as its primary recommendations... more studies. Nonetheless, the GAO report represents the clearest picture yet of the financial planning landscape, with acknowledgement of the problems entailed in varying standards of care for different financial services channels, and consumer confusion over the myriad of titles and designations that financial planners use.
How Do YOU Develop Rational Financial Planning Recommendations In A World Where People Aren’t Rational!?
As financial planners, we have a responsibility to give people the best advice to guide them towards achieving their goals. In most cases, it's very straightforward to develop these recommendations, by applying the technical rules and looking at "the numbers" to calculate what path/route/option is best. Yet ultimately, the solutions don't count unless they're implemented correctly, and if you want to take that next step, you have to deal with real world behaviors. Which leads to a fundamental problem: what happens if the "best" solution is one that's not conducive to human behavior? How do you navigate the intersection between behavior and the numbers? How do you develop rational financial planning recommendations in a world where people don't always behave rationally?Read More...
Is The Passive Vs Active Debate Different Than Strategic Vs Tactical?
The debate about which is better - passive versus active investing - has been around for a long time. But in a world of pooled investment vehicles, especially with such a breadth of mutual funds and exchange-traded funds (ETFs), there are technically two levels on which decisions must be made: within the funds, and amongst the funds. Consequently, to describe the approach of an investment advisor, we should ultimately describe the process at both levels, to make clearer distinctions. For instance, are you strategically passive, or would strategically active be a better description. Wait, strategically active? What does THAT mean!?
Do You Show Human Capital On the Balance Sheet?
Planners are accustomed to dealing with most types of capital that clients may have, whether it is stocks, bonds, real estate, cash, bank accounts, or other investments. Yet the reality is that for many clients, the biggest piece of capital on their balance sheet is not the stuff that they own; it's themselves, and their ability to earn income in the future. However, as planners we rarely track and account for a client's human capital; and as a result, we may overlook the financial advice that can truly have the greatest long-term impact for a client's success.
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Is There Any Value In Investing In Gold?
If there’s one new asset class that seems to have truly caught the imagination of clients, it’s gold. Technology, real estate, and emerging markets have all caught fire for some period of time in recent years, but gold still seems to stir something emotional in us, above and beyond just the pangs of greed that have characterized the other hot investments of the decade. Perhaps it’s the fact that gold is something that theoretically performs well in times of distress; it can serve as a hedge in times of inflation, help protect against the declining value of our currency, and be a safe harbor when everything else is in trouble. Given so much client anxiety about today’s economic environment, it’s not difficult to understand the appeal. In the end, there is perhaps only one significant problem: gold doesn’t actually have any value; it can only accomplish these financial feats of strength because we believe that it can.
Are You Giving Clients What They Want? Or Just What You Think They Want?
The growth of the financial planning profession over the past 40 years is a testament to the fundamental need that it serves; if financial planners weren’t delivering value, firms wouldn’t be growing the way that they are.
Yet for so many planning firms, there is no process to really evaluate what it is that clients want, and whether they’re receiving it. Instead, we craft an offering that we think clients will like, and then try to convince them to hire us to receive it.
But is that really the best way to build a business’ service offering?
Must Tactical Asset Allocation Lead to Inefficient "Risky" Portfolios? Not According to Markowitz!
Under classic Modern Portfolio Theory, there is a single portfolio that is considered to have the most efficient risk/return balance for a given target return or target risk level; any portfolio which deviates from the "optimal" allocation must, by definition, either offer lower returns for a comparable level of risk, or result in higher risk for the same level of return. Accordingly, as the theory is extended, advisors should avoid making portfolio shifts that constitute tactical "bets" in particular stocks, sectors, asset classes, etc., as it must by definition result in a portfolio that is not on the efficient frontier; one that will be accepting a lower return for a given level of risk, or higher risk for a comparable return. Unfortunately, though, this perspective on MPT with respect to making tactical portfolio shifts is not accurate, for one simple reason: it is based on an invalid assumption that there is a single answer for the "right" return, volatility, and correlation assumptions that will never change over time, even though Markowitz himself didn't think that was a good way to apply his theory!
What IS The Difference Between "Being Tactical" And "Market Timing"?
With the financial crisis of 2008-2009, some planners appear to be considering - if not adopting - a somewhat more active approach. Unfortunately, though, for many planners any investment strategy that is not purely passive and strategic must be equated to "market timing" - a pejorative term. Yet the planners who have implemented some form of tactical asset allocation generally do not call themselves market timers; they recoil at the term as much as passive, strategic investors do. So where do you draw the line... what IS the difference between being "tactical" and being a "market timer"? In truth, it seems that once you dig under the hood, the differences are nuanced, but they are many, and significant.
Does Setting Goals Lead To Success, Or Limit It?
It is viewed as almost common wisdom: the key to success is to set clear goals so that you can achieve them. After all, if you don't know what your goals are, you can't determine the path to reach them. Financial planning itself is rooted deeply in this philosophy, given its significant emphasis on goals (whether for retirement, college, legacy, or something else) as a foundational step in the financial planning process. Yet as I reflect on my own financial and business success over the past decade, I am struck by a startling realization: not only did I not set any goals for myself, but I'm quite certain that if I had, I would be less successful today. Because it's not about goals, really. It's about habits.
