“No battle plan survives first contact with the enemy”
Helmuth von Moltke, Prussian Field Marshal – 1871
Financial Planning, as a service, is an amorphous term. It has been used to describe the process of selling financial products to consumers, legal and accounting work, and investment management. However, doing ‘real’ Financial Planning (as we see it) requires a comprehensive scope, a team approach and a long-term commitment. The CFP Board, which administers the CFP® (Certified Financial Planner) designation, has developed standards of practice for its certificants to follow when rendering this service. These standards have recently changed, partially in response to some differences in the way these services are offered. In part, this update highlights differences in how financial planners do their jobs, and re-affirms for us the way we at PFA do ours.
After 25 years in this industry, I’m still working on a non-clumsy response to the question “What is it that you do?” I call myself a ‘Financial Planner,’ but even people I’ve known for some time, when pressed to describe what I do, will say things like “stock guy”, “broker”, “Investment banker” and “finance guy”.
This is largely, no doubt, the result of the term ‘Financial Planner’ being used by a lot of people in a lot of contexts. There actually exists no actual formal training or certification necessary to hold oneself out as a ‘financial planner’. As such, the ‘title’ has been used by anyone from tax professionals to insurance salesmen and stockbrokers.
The CFP Board and its Certified Financial Planner® designation seek to set a standard for the industry so that consumers looking to receive financial planning can access resources that are held to some measurable standards. Beyond a requirement that they have at least a bachelor’s degree, Certified Financial Planner® professionals undergo rigorous training in 72 areas of financial expertise. These areas fall into categories of Professional Conduct and Regulation, General Principles of Financial Planning, Education Planning, Risk Management and Insurance Planning, Investment Planning, Tax Planning, Retirement Savings and Income Planning, Estate Planning, and Financial Plan Development. CFP professionals need to accrue thousands of hours of experience prior to earning their certification.
What, exactly, DOES a financial planner do?
Once certified, a CFP® professional submits to routine continuing education requirements as well as an annual attestation that they adhere to the Standards of Practice. One of those standards lays out the financial planning process that a CFP® professional is to follow when they are actually ‘doing’ financial planning. These standards have recently changed slightly. Prior to 2020, the CFP Board’s standard for practitioners engaged in financial planning was a six-step process with the acronym ‘EGADIM’. That stands for:
- Establish and define the client relationship
- Gather client data
- Analyze and Evaluate the client’s financial status
- Develop and Present Financial Planning Recommendations
- Implement Financial Planning Recommendations
- Monitor the plan going forward
As of June 30, 2020, the CFP board began to enforce a new Standard for the financial planning process. It boasts a slightly different SEVEN-letter acronym, ‘CGADPIM’:
- Understand the Client’s personal and financial Circumstances (it’s assumed that defining the engagement from the EGADIM standards happens BEFORE the financial planning process)
- Identify and select Goals
- Analyze the current course of action and potential recommendations
- Develop financial planning
- Present financial planning recommendations
- Implement recommendations
- Monitor progress and update
The reason for the additional acronym letter lies mostly in the separation of ‘Developing’ and ‘Presenting’ of the planning recommendations, a nod to the fact that these two steps are often completed by different people in a financial planning team.
What’s Important to note is the 6th and 7th steps in the Standards are actually NOT required. Rather, whether or not ‘Implementing’ and ‘Monitoring’ a financial plan is going to be the responsibility of the CFP® professional simply needs to be established with the client. Many advisors provide financial planning services that involve a single engagement to create recommendations. Often these are hourly or fixed-fee engagements, and as such, they end at a specific time – typically at the ‘delivery’ of a financial plan (most often a paper or electronic document that contains the analysis and recommendations).
We think IMPLEMENTATION is important.
I’ve been unable to find hard statistics, but my guess is that much of the advice that emerges from a financial plan is never implemented. There are a number of reasons for this:
- Steps to implement are often numerous and complex
- Clients may be skeptical about the advice (especially when the advice is to purchase financial products or services from the advisor)
- Inertia often kicks in, making the first steps more challenging
- Objectives and priorities often change once the client sees the output of a financial plan
Regardless the reason, unimplemented advice amounts to a waste of the time and money allocated to obtaining that advice.
We think MONITORING is important.
Whether or not planning advice is implemented, the fact is that situations change, sometimes drastically, over time. I’ve occasionally had clients bring out a nicely published financial plan we prepared 20 years ago. Inevitably, I’m humbled by how useless that plan is after two decades. Markets change. Tax laws change. Objectives, priorities, health, marital status, kids, parents, tastes… none of these are static factors. The best of financial plans starts to become obsolete as the ink dries on those very plans.
We like to think of our role as financial planners being akin to the ‘Chief Financial Officer’ of the household. A corporate CFO may not do the actual accounting or investing work for the company, but rather oversees and coordinates these functions in a way that best serves the organization. Most companies don’t hire a CFO as a one-time, limited engagement. The CFO’s job is to provide advice and guidance to the executives and directors, to ongoingly oversee and facilitate implementation of that guidance, and to monitor, report, update everything routinely.
Ultimately, we feel the best advice is that which remains current and which has a high probability of being implemented. Often, recommendations we deliver are implemented months or even years after they were originally dispensed. While that may be the result of several factors, I’ve often heard that our clients simply need time: Time to become comfortable with the advice, time to challenge and question it, time to revise the recommendations as situations evolve.
We think hourly fees may create headwinds to achieving a successful outcome as clients become hesitant to re-engage for more and more paid hours in the process of assessing options and making good decisions. We feel affordable, one-year planning commitments result in better outcomes and better value for our clients, and that’s how we deliver our financial planning services.
 For more information, visit the CFP Board’s Practice Standards at https://www.cfp.net/ethics/code-of-ethics-and-standards-of-conduct#practice-standards-for-the-financial-planning-process