Wednesday, September 30, 2015

The Blemished Premise: AUM Compensation More Aligned with Client’s Interests

Blemished Premise:
AUM Compensation More Aligned with Client’s Interests

            The base premise & promise of personal financial planning is the hoped for alignment of client resources with their desired goals.
            Accumulation is a tactic in meeting some (i.e. education, transition slow down, retirement)  – but not necessarily all of the personal financial goals
            In contrast to the premise and promise of personal financial planning, the underlying assumption of asset management is for accumulation, preservation, and or distribution of assets i.e. be it for education, slow down, retirement etc)
            Now two behavioral assumptions:
1.      From Maslow: if all you know is a hammer, everything will look like a nail
2.      Behavior is a function of its consequences

Per columnist Bob Clark (in defense of asset under management ((AUM) compensation) summarized those defending AUM in a recent post, “Financial planning may be what people need, but more money is what they want what they will pay for.”
If personal financial planning is what is needed AND is what is sold, but asset management (accumulation, preservation, distribution etc) is what is paid for, then this ‘personal financial planning’ is merely a Trojan horse for asset under management compensation and one could argue double dipping the client. (1) Furthermore, per this premise, the ‘asset manager’ in planner’s clothing’s hammer focuses on the nail making more (asset accumulation, distribution, preservation etc) while the client’s other objectives (i.e. asset protection (income replacement due to disability, capital depletion minimization due to long term care, disasters, creditors etc), estate conservation (income adequacy to spouse, disposition of assets per desires, liquidity etc.) In effect, the other objectives become second, third class citizens – reviewed in the initial planned, winked at at best or ignored at worst thereafter to the client’s detriment. Why? Behavior is a function of its consequences - these other goals aren't continually compensated in AUM.
            Yes, all forms of compensation have inherent conflicts – some more than others and Clark tries to preempt the objections to AUM – but on the basis of a false premise – that personal financial planning is asset management. Thus, the premise is incorrect and therefore the arguments fall apart (arguing the wrong thing very well). Thus, in effect, AUM compensated personal financial planning is the wolf (asset management) in sheep (financial planning clothing) a bait and switch complicity between the asset manager in planner clothing and the client who says they want personal financial planning but really will only pay for asset management.

(1) The double dip in asset management: i.e. paying the mutual fund, etf  (asset manager) .5 basis point, 1% whatever, and then another 1% to the asset manager in personal financial planning clothing.

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