Financial planning

Living Money, My resources

Why conventional financial planning is wrong

The conventional financial planning process does not make sense, as I have been arguing for over two decades. Financial planning, especially when carried out to the currently defined professional standards, omits much of the life which our money is there to serve. And even when an element of life is brought in when goals are discussed, there is little training for planners in the coaching skills required to assist clients in this way. Financial planning remains firmly committed to money and avoids dealing with client’s lives, which is why I and a few others advocate a different approach.

Start by watching my introductory video below (click on the bar under the video to read the full text). Then spend some time on self reflection and further reading.

Why conventional financial planning is wrong

Welcome, Living Money members. Its Jeremy here to introduce this month’s topic which is about financial planning, life planning, how we do it and how we should do it – if we do it at all, that is.

How to provide financial planning to clients is a question that has occupied me for over two decades and the answer is, I suppose, why I am here now.

As members of the Living Money community it is a question that should concern you, I feel. If it sounds a bit of a dry subject, then believe me its not; its actually exciting and revolutionary. And as members of of the community, it should be of real relevance to you because, if you understand where we are coming from, you will get far more from being part of Living Money.

So what is financial planning anyway? Good question!  Well, the Certified Financial Planner Board (the authority when it comes to regulating financial planning) defines it as;

‘The process of determining whether and how an individual can meet life goals through the proper management of financial resources.’

The Board goes on to state the importance of the planner ‘determining a client’s personal and financial goals, needs and priorities’.

And this is where we come, in my view, to financial planning’s fault line.

Yes, the client’s personal and financial goals, needs and priorities are important. However, the Board’s practice standards give little guidance on how that is to be achieved. And note in passing the wording: the planner is the one who determines the client’s needs, not the client.

Determining a client’s personal goals is no easy task even for the client let alone for the planner. Most of us have a very hazy idea of our ‘life goals’ and its no easy task to not only express them in the concise manner that the CFP expects of its practitioners but to quantify them in a way which enables them to be slotted in to a financial spreadsheet.

Furthermore, if you delve deeper into the CFP Board’s practice standards you will find that the emphasis remains firmly in the financial arena.

This is why the conventional financial planning process is wrong, in the words of George Kinder.

I’ve know George since 2004 and been trained by him. He is someone I respect and he has certainly been a significant influence on my professional and personal life. For me, he was the kick in the butt I needed to do something about the unease I already felt all those years ago with this fault line in financial planning.

So what is the alternative? Kinder (regarded by many as the father of financial life planning) will tell you its not so much about the money, its our relationship with money that is important. Its about building a working relationship with our money that enables us to meet our life goals (or aspirations, values, interests and personal projects as I prefer to call them). We are talking here about emotions (and money can be deeply emotional), about behaviours, about deeply held (and probably false) beliefs about money instilled in us from childhood.

Now I became a Certified Financial Planner in 1999 when financial planning was in its infancy. It didn’t take me that long to realise that the emphasis on money actually put me at a massive disadvantage. I continued to define my clients by their money, not by themselves as individuals. It was George Kinder who  helped me to redress the significant skills gap in my portfolio. After all, how can you expect a financial planner qualified in investment, pensions, insurance and tax to know how to connect deeply with their clients, to tease out their life goals and ambitions and to help them overcome the personal, practical and financial obstacles to achieving this goals.

And here is another concern: The CFP has set out a defined and very comprehensive methodology for delivering financial planning. Its a six step process but not one of those steps deals with overcoming the obstacles that, by definition, prevent clients from achieving their goals. George Kinder, however, has made this a central part of his life planning process.

In overcoming obstacles we transform our lives, and it is this transformational character of financial life planning that makes it, in my view, much more attractive than the more transactional conventional financial planning.

Personal Financial Planning (as it correctly called) does have three parts to it: the personal, the financial and the planning. My view, and the reason I am here now (and I suspect why you are with me here) is that I recognised many years ago the importance of the first element – the ‘personal bit’.

And for this of course you do need a very different skill set, one that is more akin to coaching or counselling than financial planning.

Can you separate the two? Yes, probably but each should be the prerequisite of the other. Whenever I talk to therapists or coaches they speak about their frustrations at not being able to deal with the financial hurdles that so often impede their client’s progress. And as a financial planner, is it really acceptable to plan a client’s finances to achieve ‘life goals’ without having made sure the goals are in place and the obstacles dealt with.

We are seeing a convergence. Kinder and a few others, including me, have made real advances in this area. Unfortunately there are very few of us and that is the main reason that I have hung up my financial planner’s calculator and trained as a coach, and why I have developed Living Money to use the  internet with its potentially far greater reach than sitting in front of clients on a one to one basis.

Its worth thinking about this in some depth. And of course it relates strongly to last month’s topic about the true meaning of wealth. Extrapolate that to goals and ask whether its money we really crave, or meaning.

A consequence of this approach is that, as members of the community, you should expect to spend as much or more of your time working on yourself as on your money. But I hope thats why you joined in the first place! And looking forward to next month, we will explore the concepts of self-awareness and self-reflection

I’ve provided some articles to read below. Tim Maurer’s is a recent article worth highlighting as it encapsulates much of what I will achieve for you. I’ve also reposted my own article on  financial coaching and financial planning

And in the usual self reflection bit I ask you to consider Kinder’s assertion summarised in Maurer’s article that you can’t solve a qualitative problem with a quantitative solution.

You’ll have noticed by now that I tend to end everything with am exercise in self-reflection. Its a powerful tool. You may also have noticed I don’t use ‘Why?’ questions. Asking ‘Why?’ achieves very little. Instead I ask you to ask yourself ‘What?’, ’So what?’ and ‘What next?’. This helps us to focus on moving forward and dealing with the future rather than trying to analyse the past. And self-reflection and its effects will be our topic for next month.

Thats it – enjoy and learn

Reading and reflection

Tim Maurer

This important article by Tim Maurer about the pitfalls of conventional financial planning and what to do about it is well worth reading.

In summary, Maurer believes too much emphasis is placed on the ‘what’ and the ‘how’ of financial planning through the quantitative analysis of a client’s financial framework, when planners should first be considering the ‘why’ of a client’s life through less structured (and more difficult) qualitative analysis. After my own heart, and watch this space for my forthcoming webinars and courses doing just that.

(if its easier, read my ad-free, text only version of the article on Evernote).

Jeremy's article

Jeremy’s article takes as its starting point the principle that money is not an end in itself. It is a means to an end, that end being life itself. He argues that those seeking help around money should therefore start by looking for something deeper and more creative than financial advice or planning. He reviews the different forms of financial help available and summarises the deep differences between so called ‘Traditionals’ on the one hand and ‘Freeformers’ or the ‘New Economic Order’ on the other and consider who is most likely to benefit from the various forms of help. Finally, he argues that financial coaching should be an integral part of life coaching and a precursor to taking financial advice.

Self-reflection

In the usual self reflection bit I ask you to consider Kinder’s assertion summarised in Maurer’s article that:

You can’t solve a qualitative problem with a quantitative solution.

Avoid the use of ‘Why?’ questions. Asking ‘Why?’ achieves very little. Instead I ask you to ask yourself ‘What?’, ’So what?’ and ‘What next?’. This helps us to focus on moving forward and dealing with the future rather than trying to analyse the past.

Post script – 21 Feb 18

I picked up this headline from the financial pressures this morning:

Lloyds targets pensions and financial planning as part of three-year strategic plan

This illustrates the point that financial services are still all about shifting financial product, even if camouflaged as ‘financial planning’