A Huge Problem with the Financial Planning Industry

While I readily defend the financial planning industry of which I am a part there is a glaring hole that is probably only getting larger.  I saw a great post from financial blogger, Daniel, over at Sweating The Big Stuff  where he was helping out a buddy create a cash flow and debt plan, and it got me to thinking about how his “subject” was part of a larger undeserved demographic.  Daniel’s buddy,

…lives in New York City, has a stable job at a fortune 500 company paying $60,000/year, and we have very similar educational backgrounds. Except that he has $117,000 in student loan debt, $1,300 in credit card debt (maxed out the credit card and is paying 13.99% APR), and a 5 year old $4,000 debt that is in collections. Oh, and -$23 in his checking account

As back office support in a wealth management firm I not only review legal documents to look for errors and omissions, I am also very hands on with most client’s balance sheets, cash flow estimates and tax returns.  I help 60+ planners do exactly what Daniel did for his client, however, it annoys me that most planners with a stable practice would not spend the time necessary to not only map out a plan, but help monitor it as well.  This is not the planners fault.

There are a couple ways to get paid in the financial planning industry, and none are conducive to helping Daniel’s Buddy who is just getting started with a $60,000 a year salary in NYC (a terribly expensive place to live with average rent at $3,000 or put another way, half his salary…thankfully he is only paying $1,000 according to the article).

What do I mean by “ways” a planner gets paid?

The Way Most Financial Planners Get Paid

Most planners get paid through a combination of the following mentions:

  • Sale of an insurance product – I think Daniel mentioned that he was single and young, so life insurance is likely out.  Chances are he is covered by some disability insurance at work as it is a Fortune 500 company, but likely could use more (although the debt in this particular case should be eradicated first).
  • Sale of an investment product – Planners will often make money on the sale of a mutual fund (A, B or C Shares) or possibly charge through some type of calculation of the AUM (assets under management).  In this case there is a ton of debt that needs to be taken care of.  Maxing out his 401k up to the match, as Daniel mentioned is fantastic if there is more than that being saved it is likely should be to a roth since he isn’t really paying taxes right now and hopefully will be in the future.  Notwithstanding, it isn’t going to be much of an investment on a monthly basis, so the planner wouldn’t be taking the case for the money most likely.
  • Fee Based – Often touted as the holy grail of financial planning.  Where a sale of an investment product might be a way for the planner to make money slow and steady, do you think Daniel’s buddy would pay even $500 to get things in order? Or is it more likely that he thinks to himself I could do this myself – and then never does?.  Then you have the question of whether there is a planner that would take the case for $500 with no other form of income coming in? Maybe, but how often is he going to meet with the buddy to monitor the progress?

The point of the case is not to make his buddy feel bad (who will likely never see this article anyway), but rather to point out the reality of this underserved market.  I do have hope with the new crop of 2.0 Planning Sites that may be a low cost solution that is on the way, but to be quite frank I do not have any experience with those sites yet.

Random Thought how to Fix the Problem

Just thinking aloud here could be an opportunity for a company to create a 2.0 type site that provides a planner with a snapshot (think more business like than mint.com – so a planner can see investments as well as cash flow…I have access to one such program at work), and then a once a month phone call with a single planner for a nominal amount.  Of course there are short falls in this model.

  • Some broker dealers aren’t set up to handle this type of relationship.
  • What is nominal?  $100 a month (along with the incoming investment and insurance income) for example would motivate some planners if they had a good amount of clients…but someone just starting in the business isn’t going to be able to pay their mortgage for a long time.
  • Also, if there are a ton of clients needed then the obvious question comes up as to whether the personlization would be lost.
  • What if that $100 or $200 a month could be better used to pay down debt?
  • What if the client just disappears?  Should there be a contract?

I think my idea would work nicely for an already established planner who is comfortable with technology that can migrate his or her clients to a monthly or quarterly call for an hour or so.

Notwithstanding, my idea, I think the point that should be taken away is there is underserved market that actually would benefit for talking to a financial professional or even a CPA.

One Response to A Huge Problem with the Financial Planning Industry

  1. I think you only touch on a small part of the many problems of the financial industry. DSC’s, Front load, and all high MER’s need to be reduced and in many cases eliminated completely. Disclosure of fee’s and long term effect examples need to be explained to all clients before money is taken and invested by any of your. In Canada our “suitability standard” is simply a joke.

    You’re in the industry so you may not agree with me, but the fact remains high fee’s have huge long term effects on clients returns. Just a difference of a 1% MER from a 2% MER over the course of 25 or 30 years can mean a $350,000.00 less return for a client but would be eaten by fees. This would assume no front or rear load charges that would make that number worse. This also assumes the client lucks into at least a semi-reputable investment broker and does not fall into the trap of getting suckered into an MLM style investment model.

    Maybe suggest a service like “Shareowner” https://www.shareowner.com/index.html to “Daniels buddy”. That gives you active management for a reasonable cost.

    Those are my points.

Leave a reply


6 + 9 =