Sunday, February 2, 2014

The Inherent Conflict of Interest Between Asset Under Management Fin. Planner Compensation & Personal Financial Planning

(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 Interests

Ms. Hanson

                     If all you know is a hammer, everything looks like a nail - Maslow

The 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.)

As 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 -- 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.

Personal 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.

1) 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.

And 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.

I 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

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