Planning Basics: A Philosophy of Financial Planning

"Personal financial planning, or financial planning, denotes the process of determining whether and how an individual can meet life goals through the proper management of financial resources."--
Certified Financial Planner Board of Standards, Code of Ethics and Professional Responsibility

AUTHOR'S NOTE: I want to start a series of posts about financial planning basics for my readers. My intention is that one post a week will concern these basics and a second weekly post will discuss a more advanced planning concept, a bit of timely news or a particular strategy of interest. The posts relating to basics will be denoted "Planning Basics". That way, if you are an advanced reader you can just skip them or tag them for perusal on a slow rainy day.

Once you read the above statement by the CFP Board, it is blindingly obvious (at least to me) that the emphasis in financial planning should not be the sale of products (such as life insurance, annuities and mutual funds) but the process for helping people meet their financial goals, either through the development of comprehensive plans (preferred) or through the use of a segmented approach for solving discrete problems (if appropriate and practicable). Why all the qualifications in that sentence? Well, sometimes what a potential client asks you to do can be neither appropriate or practicable and it is your job to say "No" even if it means that you won't be earning a fee. These don't have to be illegal (tax fraud) or immoral (abusive financial relationship) but can simply be mistakenly applied concepts or strategies. Or it may be that a client asks for something simple whereupon investigation you discover that the "simple fix" brings too many other moving parts into play. Instead of a fixing a flat tire you find the client needs struts, rotors and ball joints.

So what is that process we are talking about? Well, I don't believe we can talk about that without touching upon the areas of a client's financial well being impacted by the relationship nor of the planner's role in coordinating services for the client in these areas. Here are the key planning areas:

Risk Management Planning
Education Planning
Cash Management, Savings, Debt and Credit Planning
Estate Planning
Retirement Planning
Investment Planning
Tax Planning
Planning for Financial Independence

That's a lot! And that's a lot for one person (your financial planner)to have skills in. Even though a financial planner may understand how all of these areas interact, his/her expertise may only be in one/two or more but fewer than all eight of these critical areas. Hence the need to coordinate the activities of others such as a life insurance agent, tax attorney, estate planning attorney, broker, mortgage specialist, etc. (The act of coordination requires superior organization and communication skills.) As stated, some of these functions and activities can be performed by the financial planner. I would say that it is very desirable that the planner do so. But the more sophisticated planners recognize that in order to best serve their client, many circumstances warrant seeking the professional advice of others. Let's talk about three of them: attorney, accountant and portfolio manager.

Attorney

It's now a given that the legal community casts a rather suspicious eye toward the financial planning community. This is for two reasons. One, the legal community questions the credentials for such a complicated task as outlined above. Two, the legal community believes that the practice of financial planning "encroaches on its turf". Its suspicions are only heightened by statements such as this one, from Practicing Financial Planning (for Professionals) by Mittra, Sahu and Crane (2007) : "In the context of financial planning, an attorney's key function is to certify the legality of a proposal developed by a financial planner and to prepare the associated legal documents." What?! The attorney is someone who merely "certifies" and "prepares" what a financial planner has drafted? The whole notion is mistakenly naive and a violation of an attorney's Code of Ethics and Professional Responsibility. The authors go on to decry these "turf Battles" and "acrimony" between the two professions and then assert that "in [the] role [described]the attorney operates not as an adversary but an integral part of the team of professionals". No, the role described is 1) order taking and 2) ministerial as well as insulting.

Yes, your attorney has a vital and important role in the financial planning process. It is not as described in the above best-selling planning manual, but to provide sound and professional legal judgment through fact assembly and assessment, research, drafting, document preparation and client counseling in those areas of the financial plan that are affected by the law.

Accountant

Accountants and CPAs have traditionally performed two principal functions for the client: maintenance of records and preparation of taxes. However, the profession is often asked to do much more, namely, advice on the tax effects of certain financial transactions including investment purchases or sales or those of business entities. The CPA or accountant often coordinates with the client's tax lawyer in these regards, especially where the act of giving counsel may be interpreted as the giving of legal advice.

Portfolio Manager

A portfolio manager helps design the vehicle that preserves or enhances a client's estate. An attorney may prepare documents that preserve the estate and a CPA may advise as to the existence of Tax Code provisions or strategies that also do so, but the portfolio manager uniquely constructs through use of investment vehicles and products (stocks, bonds, funds, annuities, limited partnerships, real assets, alternative financial products, etc) a portfolio designed to achieve the client's financial goals.

Insurance Counselor and Other Professionals

One important dimension of the overall financial plan is that of asset protection through the purchase of life, disability, property, casualty, professional liability, long-term health care, and other insurances. Aside from the insurance counselor, a planner may need to work with trust officers, real estate brokers,and investment bankers. In working with each the objective of the planning professional is to get sound objective advice in outside areas of expertise such that the financial plan is enhanced by its inclusion.

Summary

We are starting a series on financial planning basics. This is meant as a sort of "30,000 foot view". Today's article touches upon the philosophy of financial planning, and continues with a look at the planner's areas of impact and his/her role as provider and coordinator of services in those areas.