John Lefferts' Blog

Tuesday, July 28, 2015

Two Words...Financial Planning

In the movie "The Graduate", there is a famous scene where Dustin Hoffman’s character Benjamin comes home from college to a party celebrating his graduation at his parents house. Mr McGuire, a friend of his parents pulls him aside to give some career advice:
Mr McGuire: I just want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr McGuire: Are you listening?
Benjamin: Yes, I am.
Mr McGuire: Plastics.
Benjamin: Exactly how do you mean?
Mr. McGuire: There's a great future in plastics. Think about it. Will you think about it?
Benjamin: Yes I will
In a sense, I feel like Mr. McGuire writing this post, but instead of one word, I have two words where I see a great future…Financial Planning.
The transformation taking place in the financial services business today is striking. And as we all know, when swift change like this occurs, there will be some winners and as many losers. Observing these changes, there are multiple factors lining up that point to a renewal in financial planning. Unfortunately, in too many cases, our industry has watered down the term "Financial Planning" to slapping a 1% fee on a managed account and moving on to gather the next pile of assets. The kind of financial planning I'm referring to is collecting a complete inventory of all assets, insurance policies, employee benefits, retirement plans, cash flow, tax returns, etc, identifying client goals, creating and implementing a plan complete with monthly budget while monitoring it to stay on track. Here are just a few observations that cause me to see a resurgence in financial planning:
  1.  AUM Fee Margin compression: Fees charged as a % for assets under management have drifted downwards over the past several decades recently settling in at about the 1% mark. Whether robo’s continue to gain traction or not, they are redefining investment management from a value added service into a commodity. Their current pricing ranges from free to 50 bps. Any charge above the robo's will in time be viewed as overcharging unless additional value above and beyond asset allocation is provided. planning.  
  2. Fiduciary as the standard: The issue of fiduciary versus suitability has been debated for decades. But today as the business mix of former commission based advisors has drifted towards fees while social and mainstream media are educating the public about "best interests", it’s hardly an argument any more. Whether the SEC and/or DoL make it the law of the land or not, a fiduciary standard has de facto won the argument. Charging fees was once unique and a differentiator...not anymore. Simply charging a fee for constructing a portfolio will not be enough value added to justify above market fees in the future. What will? planning.
  3. Compensation mismatch: While many advisors claim they offer financial planning as part of their AUM fees, there is evidence that in many cases it’s not entirely true. This article cites a study where 83% of advisors claim that financial planning is core to their practice where 28% of affluent investors say they have a plan created by their advisor. In my observation, many advisors who once did planning have since dropped the service in part because it’s a lot of work but more impacting, they aren’t being paid to do it. If you’re being paid to capture more AUM then that’s what you do. And if you’re not being paid to do financial planning, then that’s what you don’t do. Follow the money. This compensation mismatch will become more evident in time forcing advisors to better demonstrate the value added beyond the commoditized service of investment management. Again, two planning. 
  4. Compensation transparency: Now more than ever, there is a focus on dissecting all forms of compensation. And again, whether the SEC/DoL get a uniform standard done or not, I do expect further compensation disclosure requirements exposing this issue further. Advisors go to great lengths to hide the fact that they are getting paid, how much and for what service. And this happens whether they're charging fees, commissions, trails, renewals or a combination of them all. With complete and clear disclosure of compensation, it points to further movement away from commissions towards fees in addition to an "a la carte" approach to charging for services. I see portfolio construction/allocation remaining as a % fee for AUM but at a rate closer to where the robo's set it. For any further value added service it only makes sense to separate that out from the AUM and charge for what it's worth as an hourly, flat or retainer fee. The most likely value add an advisor can provide is modular or guessed planning.
  5.  Advances in Financial Planning software: Years ago, I headed a financial planning initiative where we built a $30 million financial planning center with huge mainframe computers. Advisors collected the data from the client, entered it into the software which was then electronically transmitted to the center in Alpharetta, Georgia. CFP’s in this center would review the plan for accuracy, print out a big book for "thud" value and overnighted it back to the advisor for delivery. We charged a fee up front for the planning separate from the products recommended afterwards. We thought it was pretty high tech at the time, but times have changed. Today, the mainframes are extinct, all the software has gone to the cloud and it’s no longer necessary to plunk down a big binder of data since it can be pulled up in real time on line integrated with current values. Michael Kitces does a great job discussing current and future planning software here. Today's technology has taken much of the complexity and clunkiness out of the process opening up new opportunities planning. 
  6. Succession planning: Career shops that recruit, train and develop inexperienced candidates are becoming fewer while the demand for financial planning is on the increase. This along with more advisors leaving the business than entering, needless to say we have a succession problem in the business. Financial planning is detailed, tedious and process driven work which is why so many have stepped away from it. But guess who will do the detailed work?...newbies. In my experience, I've had better results hiring young inexperienced talent and training them to do planning than by converting one who has since stepped away from it or never done it at all. The best way to successfully recruit, induct, develop and retain new talent into the business is through a career path in financial planning. I also believe that the time has come for large independent firms (IBD's and RIA's) to invest in this career path to protect the future value of their franchise from evaporating. A qualified farm team of financial planners would be developed and could then be deployed to join more mature firms to planning.
There is every indication that we're at a tipping point in the evolution of our business where it's a case of "change or be changed". With a shift towards fees and pressure to lower them, a desire for compensation alignment and the relative ease new technology has made the once tedious process, all signs point to financial planning as being positioned as the differentiator advisors need to survive and thrive in the marketplace. 
There's a great future in financial planning....think about it...will you think about it?
"Unless you are prepared to give up something valuable you will never be able to truly change at all, because you'll be forever in the control of things you can't give up.”  -Andy Law

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