(A Email To Ms. Joyce Hanson relative to her featured front page story about Merrill Lynch's Wealth Management's "Goals Based Planning" in Investment News - A weekly Crain Publication)
Subject: John Thiel & Merrill Lynch's Wealth Management's Goals
Based Planning & AUM An Oxymoron & Inherent Conflict of
If all you know is a hammer, everything looks like a nail - Maslow
monetizing business model of both investment firms with asset
management divisions and personal financial planning firms (actually
asset managers in personal financial planning clothing i.e. a Trojan
Horse) is assets under management (with the emphasis on under in
reality). The amount of assets under management monetizes the value of
the asset management/personal financial planning Trojan horse firm - way
more than fees (be it hourly, bracketed, flat fee etc.)
the cofounder of NAFPA (from which I resigned though I was their Fee
Only Personal Financial Planner of the Year in 1985), author of two
editions of ENOUGH(sm), blogster (which updates More vs Enough --
healingfinancialanxiety.blogspot.com) AND RETIRED from planning, assets
under management personal financial planning compensation is not only an
oxymoron to fee only planning but an inherent conflict of interest.
financial planning is first, second, third about managing goals NOT the
primacy of managing assets. (Managing Assets is just a tactic).
When one is compensated for managing assets this has the inherent conflict between managing of goals.
And here a couple of examples.
how many planners said - keep the mortgage - don't pay it down - and
invest in the market? (Think 2007). Well the mortgage - even after tax
increases the amount of the goal (be it slow down, ed, or retirement).
One is playing leverage (for the planner as well) which goes both ways.
In the meantime, the planner has more assets under management to get his
or her 1% annually on....
2) sometimes - especially
with those with 'enough' (even with a cushion 'just in case') they need
to take less risk (however you define it) which usually means a lower
rate of return - but less volatility and potential for loss. This means
less revenue from assets under management lowering the monetized value
of the firm.
The 'managing goals'
Trojan horse is not new. Yes, now it is for assets under management. But
do a little historical investigation - and the first attempt I believe
was Connecticut General's Living Planning - which was on the death side of objectives versus assets - a ruse for the sale of 'viola' more
insurance needed. (Who woulda thought?)
I have personally
seen where 'planners' - being compensation primarily via assets under
management constructively make planning 'the second class citizen of the
firm' (the dimini? of the firm). For example, neglecting the potential
of long term care needs (when life coverage was available and not even
discussing it with these clients) and I could give other examples.
while many can argue that there are conflicts in all compensation
methods - transactional, fee, etc - holding out 'goals based planning'
as planning when it in reality (and I wonder compensation formulas for
planners) an oxymoron. In perspective, there is a difference in degree
between going 65 in a 55 mile per house zone and going 120mph. Goals
based planning when the compensation is overwhelmingly from assets under
managment is 150mph - qualifying it for Fast and Furious 7. So the
(im)moral equivalency argument doesn't hold STP The Racer's Edge.
realize Investment News' readership is primarily those whose
compensation is transaction based or assets under management. That said I
hope you, Crain and your editor see it fit to give the same front space
to an examination of planner compensation and mutuality of clients'
interest. And please, understand, I know there is client amnesia (I
wrote a piece by that name.) I also know there is no parasite without a
host - wanting 'more, more, more' relative to others seeking external
validation by more (more, better, now has a habit of becoming less,
worse, later). But as fiduciaries - kicking and screaming - recognized
in law or not - but in fact - leadership is by example