Thursday, April 24, 2014 

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When Financial Planning Falls Short
True financial planning involves more than just creating a document

Joshua Pierce, CFPToday, every financial firm seems to be touting "financial planning" as a way to attract new customers. I have visions of Dennis Hopper telling me "You don't need a nip and a tuck, you need a plan" when I go to sleep at night. But what does financial planning actually encompass and what does a financial planner really do?

From a broad perspective, it can be said, that a financial planner is anyone that can give advice regarding one's financial situation or strategy. And the results can be as variable as that vague definition would suggest. In fact, skeptics might say that a financial planner is someone who will put enough fear in you so that you feel compelled to buy their "investment solution." This rang true to me when I recently met a so-called "financial planner" at a charity event, and after a little digging he explained that the crux of his plans for his clients revolve around insurance. To this individual, there is an insurance product for every person, for every need, and that planning is as necessary to the extent that one is insured at an appropriate level.

But a true financial plan does not revolve around any one "thing" or person - except the client. A plan does not begin with a solution, such as insurance, but instead begins with a person completing a financial inventory, establishing some goals for the future and developing a plan on how to get there. Any plan may call for insurance, in fact the basis of a financial plan should be risk management to some degree, but no plan should be positioned to fit one certain type of product, whether it is insurance, reverse mortgages, or any other specific investment vehicle.

More specifically, the Certified Financial Planner Board of Governors offers this six-step definition of the financial planning process:

  1. Establishing and defining the client-planner relationship.
  2. Gathering client data, including goals.
  3. Analyzing and evaluating your financial status.
  4. Developing and presenting financial planning recommendations and/or alternatives.
  5. Implementing the financial planning recommendations.
  6. Monitoring the financial planning recommendations.

These steps seem pretty simple to follow and they are, in fact, a great guideline for any financial planning practitioner. However, I would argue that many financial planners, and to be fair, sometimes their clients never go beyond step four and even fewer go beyond step five. This deprives clients of perhaps the most important aspects of good financial planning.

Don't get me wrong, the first three steps are important and obviously necessary to get a clear picture of where one is in terms of their financial lives and where one wants to go. And developing a recommended plan to achieve those goals (step 4) is, of course, essential as well. In that regard, the development of robust, low-cost financial planning software, using what is commonly called "Monte Carlo" simulation, has definitely been a boon for the financial planning industry.

Today a planner can run thousands of different "scenarios" for a financial plan varying such assumptions as the performance of the stock market, future cash savings, spending needs and the like, all in the blink of an eye. If for example, 1,000 different scenarios were run and in 850 of them you achieved your goals, a planner would tell you that your plan has an 85% chance of success.

But their very ease of use, along with all the pages of charts and graphs these programs can generate (which look great bound in a nice book that often never gets looked at again) can cause both planners and clients alike to lose sight of the rest of the financial planning process.

As noted by former Boeing executive turned financial planning guru, Henry (Bud) Hebeler in a recent interview with Businessweek, "The problem [with financial planning software], is that planners think it is predicting the future." As powerful as this software is, the future results for your financial plan in its pretty charts are only probabilities - not actual outcomes.

Nothing in life is guaranteed, especially returns on investments in the stock and bond market. In reality, any sort of financial plan, whether it uses Monte Carlo or not, is just a snap shot in time of a current financial position for an individual. That is to say, it is a picture of where one is currently and shows a picture of where one may go depending on how certain variables play out.

Financial planning should be an ongoing service, above and beyond a simple snapshot of what may happen in the future. Unfortunately, few people (both in and out of the financial industry) truly understand that. While as noted, the first four steps are important, I would argue that efficient implementation of the plan (step 5) and the ongoing monitoring of the plan (step 6) are the more critical determinants of a plan's ultimate success. If a client receives a plan, but never actually implements its recommendations, then they are arguably no better off than they were without a plan!

But to me, the real "missing element" in much of financial planning today is (step 6), monitoring. Monitoring is not flashy, it has no cache, and it may be the hardest part of the process, but without it, you are assuming that all the facts about the client's situation and all the assumptions about the future returns on various investments stay the same throughout the client's life! Whereas, in fact, any analysis of one's current situation (step 3) is almost obsolete soon after the first meeting since life is always changing, always evolving.

I often tell my clients to think of financial planning in a way that is similar to a "choose your own adventure" book. These are the books in which the reader is constantly faced with decisions that lead the main characters down certain paths throughout the story. In a financial plan choices need to be made all the time, adventures need to be chosen and they need to be chosen within the guidelines set in the first couple of steps of the process.

That is why a plan must be monitored constantly. Sticking with the analogy of "choose your own adventure", the planner plays the role of the reader making choices for the main characters, which are the clients. If the idea of that frightens you, then maybe you have the wrong planner choosing your "financial adventures."

At Kobren Insight Management, we assist investors in navigating through the financial planning process. We are particularly focused on the sixth step; the monitoring. We put a premium on remaining in touch with our clients as their lives evolve, to ensure that their financial plans evolve with them.

-- Joshua Pierce, CFP
   Vice President, Account Manager, Kobren Insight Management



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