One size does not fit all in Financial Advice

Going on what I am seeing online, even when planners take the time to make a fact find for their client, solutions are frequently very linear in thinking.  I think that this this is due to 3 important factors:

• Lack of real world experience on the part of the planner – the industry has an influx of younger planners moving into it, and their solutions are often learned in the classroom rather than through life experience.
• Over dependence on technology. Technology is a leverage tool, and there are aspects of it that are critical to scale any practice.  However, there is an over dependence on solutions that offer the full plan, rather than ones that enable the planner to observe and make recommendations. There is a big difference between an account consolidation tool and a plan generation tool.
• The fear of losing the endorsement of a popular fiduciary trademark is greater than the desire to act as a true fiduciary. Planners are scared to think outside of the box for fear of liability and loss of income.

Let’s look at some of the pillars of Financial Planning:

• An Emergency Fund
• Life Insurance
• Estate Planning Documents

Go to any planner and its very likely that after a consultation and some ‘number crunching’ they will inevitably find a way to squeeze all of these into your plan.  Don’t get me wrong here. this is good, sensible advice. What is overlooked though, is that each of these recommendations comes with a real opportunity cost.  Indeed, for many of the new generation of client, simply engaging a planner can come with opportunity costs that cannot be recaptured.

Introducing Planning 2.0

This new wave of planners is promoting their younger, more in touch, planning approach – they’re rad, they’re hip, they’re not your parents planner.  But what are they really offering?  Is it just the same old advice with a tech package on it?  I saw one planner who will explain a Roth with you for about $500-600, and you can stay in touch with email… that ain’t nothing new, and it sounds pretty exploitative to me. The next thing you see from them is advice that people in their 20’s need an estate plan.

Sure you do, everyone should have an estate plan, everyone should also have an emergency fund, a trust, and disability insurance. But at what cost?

Maybe I just don’t understand what a financial planner is supposed to do… is it to dole out advice from a textbook that will create a certain degree of safety, or is it to help a person understand the big picture of their finances, and help them make the right financial decisions?

Here’s the reality:

• Emergency Funds cost money.  I’m 38 years old and I have never needed one If I was to take say $10,000 from the age of 21 and invested it instead, it would have grown to over $25,000 today at 6% interest. I have never needed an Emergency Fund. I’m not alone, check out this poll on BogleHeads…
• Life Insurance Costs money, I have not needed it, as I have not died yet, though I have felt close some mornings.
• Disability Insurance costs money, I have not needed it, though I have been ‘disabled’.  It is important to understand that not all disabilities will prevent you from working, even though they will qualify for disability payments.  By which I mean if you look at disability statistics it doesn’t mean you couldn’t get things done if you had no coverage.  This is where you need to be aware of how you earn money.
• Financial Advice costs money.. if you are paying out $600 to learn what a Roth is, and are also advised to put your money into Emergency Funds, Life Insurance, Disability Insurance and Estate Planning lawyers, you wouldn’t have anything left over to put in the damn thing anyway!

Conclusion

There is a lot to be said for the safe, traditional approach to planning, and to getting everyone on the ‘right path’ but it is important to note that while everyone can benefit from having these traditional components of plan, many people can suffer from them too.  I do advocate for Emergency Funds in the right situation, as I do with the other tools mentioned here.  However, the basics can be done with ease, including a basic estate plan.  Here’s a post I wrote on how to set that up simply, and for free.

H/T TheRivler in the Forum.  We are discussing Emergency Funds and while I disagree with some of the comments in the thread, I do agree that a lot of traditional advice perhaps isn’t the best.  The main consideration I would advise people of, is that if they eschew traditional methods, they acknowledge that throughout their plan, so that they don’t get nasty surprises should things go wrong.