Assets under Management (AUM) ‘Fee Only Planning Compensation’ Conflicts - Part I

Assets under Management (AUM) ‘Fee Only Planning Compensation’ Conflicts - Part I

(low saliency pricing ((disclosure-jds))…. can be positive for (the personal financial planner’s businesses by) making it more comfortable and less of a slap (seeing what they are paying each month/quarter?-jds) in the face for the consumers who purchase the business’ bona fide goods and services’

From A Financial Planner’s Blog

            Really???

            So less reminder –frequency -of what the client pays – is a good thing for the client, less ‘salient’?

            Really???

I still await the definition of saliency from the writer.

            But the synonyms for salient are: most important, relevant, significant, leading.

            And so ‘low saliency’ (low importance) in personal financial planning compensation is:

·         Rationalization and justification for low or no transparency of compensation (fool) disclosure

·         Disguised protectionism (anti trust activity at the least – violation of trust at worst) for personal financial planners’ compensation

·         And or paternalism at its worst

The question for this entry is the inherent problems with assets under management (AUM) compensation method of fee only personal financial planners. The bigger question is: is this method of personal financial planner compensation (consciously or unconsciously) conducive and consistent with the practice of integrative comprehensive personal financial planning or really just an asset gathering marketing by asset managers in personal financial planner clothing?

Behavior is a function of its consequences – we continue to do what we are rewarded for and avoid, extinguish the behavior that have negative consequences or lack of reward.

Yes, there are inherent potential problems with all methods of fee only personal financial planning compensation. In particular:

·         Hourly: a license to be inefficient and often negative reinforcement relative to the client calling the planning (especially before the fact) as the client is concerned about the clock ticking on each and every 5 minute call.

·         Flat retainer: from the planner’s standpoint this can lead to over utilization of his services while for the client, he or she wonders if the price monthly or quarterly is worth it.

·         AUM: Asset under Management Percentage (with the emphasis on ‘under’): As Maslow said, if all you know is a hammer, everything will look like a nail.’ The other areas of personal financial planning process - asset protection (e.g. insurance against capital depletion etc)), asset conservation (e.g estate planning, ever income conservation (e.g tax planning) have a tendency to become second class citizens – orphans overlooked – as asset accumulation (AUM) compensation pays the bills. (Note: assets under management is typically the highest valuation method to maximize the value of the personal financial planning firm upon sale – not that that would have an impact on the choice of compensation method.)

·         Percentage of Income against a Percentage of Net Worth whichever is greater. (Relatively few planners use this method – which probably has some value for high income low net worth individuals – professionals – doctors –athletes).

·         Percentage of Net Worth (not including house and personal property): The positive the planner pays attention to facilitating the closed held business owner becoming financially independent  of his independent business  The negatives: most planners, have little business planning skills (and don’t even have a business plan for themselves) so the planner would be way overpaid without these type of skills.)

·         Bracket fees (both for initial plan) and an ongoing planning (monthly retainer). The positive – clients won’t hesitate to call before the fact and know what their maximum cost will be. Instead of the compensation derived from assets under management and the focus thereof, the planner is managing goals instead of an inherent focus accumulation in the assets under management compensation method. The negatives: first, the planner will have to know his planning process to not be over utilized. Secondly, with the client writing a check monthly or quarterly (rather than just being taken out of the Schwab account ‘painlessly’), the planner has to continue to establish his value – relative to goals being made or maintained (poor baby!)

Ok- it’s obvious, I prefer the bracketed fees method of compensation. And yes, it is my opinion, that assets under management compensation – is but a soft commission and inherently a Trojan horse for gathering assets rather than personal financial planning. And yes, with its inherent focus on assets under management more, more, more becomes accumulation (which may or may not be necessary, managing assets INSTEAD OF managing goals) becomes the aim..

Cases in point (and not isolated) of AUM’s focus shortchanging to the detriment of managing goals?

• AUM planners overlooking Long Term Care risk (which if incurred would have cannibalized the retirement goal)
• AUM planners forgetting about replacement value by ordinance on home owners insurance (cost about $30)– which resulted in one homeowner this writer was informed of having to come up with $30,000 even though he had replacement value on his Florida property).
• Complaint ratios? (closed complaint ratio on homeowner and auto insurers)  “That’s my clients frequency of bortzing about their spouses,” one AUMer said to me. (And the AUM planner wasn’t kidding). Schwartz’s law on insurance: What good is a Mercedes (great financially strong company), that is the shop all the time (high complaint ratio), and if it has no gas (lousy policy)? All three elements are necessary: financial strength, low complaint ratio, excellent policy terms.
• The worst: AUM planners (SUB PRIME AUMers?) telling clients to maximize their mortgage (instead of paying it down or paying it off which would lower their slow down or retirement goal need) and instead put the money into the market to get higher returns (as well as leveraged higher returns on their home). How did that turn out, Bunkie? (Over and over again from planners I heard this old saw (rationalization)– and each in  case the ‘so called’ planners were compensated on the basis of AUM! .The risky desire for PREMATURE ACCUMULATION RESULTED IN PREMATURE DECUMULATION PRIOR TO DISTRIBUTION or Personal Financial Planner Ejectile Dysfunction.
•  Despite disability insurer UNUM being downgraded 13 times, AUM planners of my acquaintance didn’t move their client’s disability coverage (even when there was no insurability question) as ‘the insurance guy is on top of the situation.’ (Meaning don’t bother me, I have assets to manage – that’s my job.)

 

Yes, fee only planners compensated on the other methods could have made the same mistakes. However, especially on the mortgage situation, the other methods did not have the incentive to leverage large mortgages increasing the planner’s asset base of compensation for the planner’s compensation benefit.

Part II will focus on the Bracketed Initial Plan and Flat Fee Retainer as well as judging the planner’s success relative to goals (not assets under management).

So much for ‘saliency.’

Seneca & Schwartz (Not A Detective Duo)

No man is crushed by misfortune unless he has first been deceived by prosperity

Seneca, 4 BC – AD 65)  Roman Stoic philosopher, statesman, dramatist

No man is crushed by misfortune unless he has first, last and always been deceived by MORE

Schwartz, Professional Provocateur

Eesh ha kol – I have all – Yaakov

Enough?

Eesh ha rav – I have much – Esau

Much? More?

More, more, more, what are we all morticians? – 

e.e. cummings

Henry Ford & The 'My Planner' Fallacy

You can have any car you want as long as it is black

Ford

There is custom, custom tailored, and accustomed.

            Most planners talk custom (designed) when the plan, at best being very generous in evaluation, is  custom tailored. The reality is most personal financial plans are what the planner (consciously or unconsciously) is accustomed to – to the detriment of the client.

And yet, the initial fault for this lies with the client!

How so?

While one can outsource the planning function via substitute reliance, the client cannot and should not outsource. The client must manage the planner – or in Reagan terms ‘trust but verify.’

            There is no parasite (the accustomed ‘Moreon’ planner) without a Moreon host.)

            The planning relationship of  ‘do it for me’ and if it doesn’t work ‘you’re at fault’ (even if I didn’t follow the plan because you were not persuasive enough) sets up failure to begin compounding the foolishness of ‘how did I do relative to the Dow’ (rather than how am I doing relative to each objective.) (1)

            Accustomed ‘moreon’ planner + ‘do it for me’ outsourcing moreon client = recipe for personal financial planning acri-money.

            Do it for me results in you did it to me.

            Thus, real personal financial life planners should be planning resources rather than planning guru leaders of the flock (2)

            Trust but verify.

           

            Planning whether personal financial and or business planning is a process which out of cost necessities is custom tailored. (Custom is very expensive). Given the aforementioned, without managing the planner – the result, too often will be what the planner is accustomed to – rather than custom tailored or customized. The management of the planner and planning process falls on the client. Just saying to the planner, ‘here tell me what to do’ is a prescription for just avoiding responsibility and setting up the victim blame game .

            In corporate planning, here is an axiom: planning cannot be done for a client, it is done by the client or it is just another pretty book up on the shelves

I’ve grown accustomed to your face

My Fair Lady

            Planners need to stop talking customized when what they are doing is what they are accustomed (we personalize, you can have any car as long as it is black). By the same token, personal clients must manage the process (holding the planner accountable per goal as defined by criteria with a minimum of quarterly review.) How did we did relative to the S&P is an asset management; how we are doing relative to the goal(s) that is the relevant personal financial planning question(1).

In corporate planning (especially since the outside or inside planner has no power) the process must be transferred and done by the corporation itself. That means the planner facilitates and transfers the skill transference to the individuals in the corporation who have the power to make the plans happen. Planning relative to corporations should be a self liquidating engagement (not an annuity) – as corporations should not become ‘accustomed to your face.’

You can have any car you want as long as it is black – only results in black eyes in planning.

1. As personal financial planner manages goals (per your criteria); an asset management manages assets – don’t confuse the two. PS and if assets under management is how the personal financial planner is paid – what will take precedence ‘the goals’ or making ‘more’ regardless of the risk involved?
2. The guru planning leader of the flock – usually results in the planner being defrocked.

Personal Financial Life Planning & Ethical Wills II

Personal Financial Life Planning & Ethical Wills – Part II

            From Part I, the first pass at the WITSEC, Yom Kippur, & Mission-Vision exercises should have already been completed. The following is an outline of an ethical will (with one example: Lessons I Have Learned)

1. Philosophy of Life
2. Values I Hold Dear
3. Defining Moments
4. Lessons I Have Learned (example from my Ethical Will)
5. Legacy – 1^st Attempt
6. Those I Don’t Wish To Thank (herein you’ll find values you distain – by answering why?)
7. Those I Wish To Thank (herein you’ll find values you admire – by answering why?)
8. Values I Hold Dear (second attempt)
9. Legacy (pass #2) – what you have will have left behind for loves ones and others
10. WITSEC exercise – second pass & refine
11. Yom Kippur Exercise – second pass & refine
12. Mission/ Vision Exercise – second pass & refine

Once finished, here is the final exercise: Action Plan.

Given the above, what steps will you now take living? Per each action step delineate in sequence in writing:

·         The Action Step

·         Start

·         Finish

·         Who is needed

·         Cost

·         How to prevent or minimize the action step going wrong?

·         Contingency if the action step goes wrong

By doing the Ethical Will – you will have a living mission - blue print to exercise your will now – so get started!

And of yes, here is my example of Lessons I Have Learned:

Lessons I Have Learned Part 1

Here’s a few of the things I’ve learned with the help of my dogs:

• We are here to continue to complete the incompletions of our character and soul (‘the soul curriculum’ – Alan Morinis’ phrase). This life is a ‘character pit stop.’ We are NOT YET – that’s why we are here but if lucky, we are NOT YET in the company of dogs during classes.

• We each have a chalek (portion) to develop – which is an inside out job/an inner scoreboard – not a comparison race with others

A story about the great Rabbi Zusha relative to chalek: "When I pass from this world and appear before the Heavenly Tribunal, they won't ask me, 'Zusha, why weren't you as wise as Moses or as kind as Abraham,' rather, they will ask me, 'Zusha, why weren't you Zusha?' Why didn't I fulfill my potential, why didn't I follow the path that could have been mine."

• When the game is over, both the pawn and the king go in the same box. It’s all about character.

• Forget certainty, continuity and permanence – except for the love of one’s dogs.

• The meaning OF life is a flawed pursuit better to find the meaning IN one’s life.

• ‘Be your message,’ as Gandhi said and ‘better done than said,’ as Franklin wrote (besides your dogs can smell a 14kt phony)

• No good deed goes unpunished – but do it anyway for inside out reasons (chalek) and you won’t be disappointed. Remember God and your dog(s) know!

• Be fruitful and add/multiple is about procreation – not just of progeny but what you leave behind, influenced and developed ‘inside out’ of yourself (Tikkun Atzmi). I would not be who I have become and aspire to be (‘a man of dog’) without Moolah, Buddy, Ricki, Nicki, Max, Elle, Moses and yes, even Rolling Thunder Goodie.

• The longer the stain sits, the harder it is to get out (even with Resolve ® or Simple Solution®). Re-member the 4 Rs: early recognition, regret, resolve, and even more critically -restitution – making it right – works. Merely saying I’m sorry is a 5 letter word that falls between sniffles and suffering succot(h)ash in the Daffy Duck Dictionary.

• Clothes don’t get clean without an agitator in the washing machine. “Where there is no man, be a man” (Talmud) and “don’t stand idly as your neighbor bleeds” (Torah) or your dog(s) are over vaccinated. PS “Rebellion to tyrants is obedience to God,” Franklin and ‘the wicked flee (escape) when none pursue’ (Proverbs).

• The only people that like change, per Don Robinson, is wet babies – so expect  being called ‘difficult’ and the following sequence, ‘being ignored, then rebuked, and finally, having not only the idea accepted but claimed with ownership by those who ignored and rebuked you.’ It don’t matter, God and your dog(s) know.

• Forget impact on 100’s, 1000’s or millions saving the world, if you save a life, you save the world (Talmud) – one dog at a time (Schwartz)

• More, better, now becomes less, worse, later (except for dogs – subject to noise restrictions, laws, and ability to love and provide proper care).

• Money is a means – ‘enough to live on, enough to live for’ and to buy premium raw dog food, toys, and the best of care for your dogs

• Even though both great Rabbis Hillel and Shammai agreed that man should not have been created (though Hillel said, ‘well, he’s here let’s work with him’) gam zu la’tovah (this is for the best). Besides God created dog as an apology -So--- ‘make your lives new again, as they use to be’ Lamentations 5:21 (get a dog!)

• Dog is God’s echo – and I’ve been blessed with 8 so far - and if you are lucky enough to have been in their company now (and hopefully again) you have been touched by the divine – now go give them a cookie.

• If all else fails, you’ll understand when you are older – but in the end ‘In God & Dog I Trust.’ (‘plus tendons’ barked Goodie with paws on my shoulders licking my face.).

Jewish Tails (With A BITE): The MORE response©

Jewish Tails (With A BITE): The MORE response©

There are many so called ‘responses’ not the least of which are the following:

• The Relaxation Response (made famous by Dr. Herbert Benson): a group of physiologic changes that cause decreased activity of the sympathetic nervous system and consequent relaxation after stimulation of certain regions of the hypothalamus. (In others, this response de-stresses one).


• The Fetch Response: the repetitive happy presentation of object (in particular, tennis balls by Her Majesty Goodie) to retrieve after toss or soulful eyes presentation of ball engendering Jewish guilt so as to continue More throwing the retrieving process ad infinitum if she had her way – as this never Enough fetch.

• The Kfetech Kevetch Response: bortzing, complaining, whining but particular by this Jewish companion animal guardian (reality – serf) for Her Royal Highness’ incessant unending (if allowed) desire for fetch and yet he continues to give in. (She loves fetch, he must love kevetching better than the relaxation response.)
……………………….

Goodie, Elle and I would play fetch in the backyard twice a day – the first time, in the morning and secondly late afternoon.
(Moses, my faithful chevrutah, still prefers being first on the chair with me when I study to ball).

I would throw three to four balls. And invariably Goodie, still without success, tries to put two rubber balls in her mouth. And even when she has a rubber ball in her mouth, the one Elle is fetching looks better – MORE .

I can only wonder through osmosis if the proclivity and preference towards MORE has been transferred in domesticating our dogs, as Goodie, with tennis ball already in her mouth, would go after Elle’s ball in a ‘burning bush’ because it might better.
………………………

Announcing (drum roll please), now for the first time - alluded to but unnamed here to date is for your personal financial taxonomy classification: The MORE response©

The MORE response©: Stimulated/motivated by the delusional quest to overcome inevitable extinction of the physical (which one identifies as ‘himself’), the The MORE response©, is a derivative of acquisition (Cain), which seeks to gain THE permanent, THE certain, and THE continuous thus, overcoming the inevitable physical extinction (a delusion) or at least palliating oneself in the interim.
Practitioners (whether consciously or unconsciously, lay or professional) of The MORE response© are affectionately referred to as MOREONs.
The MORE response© masquerades and is exemplified as follows:

• If only, if only, if only, if only, if only
• But what if, but what if, but what if
• Yes but, yes but, yes but
• I’m too busy getting more so I’ll have enough (which I don’t have time to calculate)

The MOREON response©:

1. Sacrificing what one needs for what one doesn’t need
2. MORE, Better, Now…

The MOREON response© ReBUTTal:

1. MORE, Better, Now… which typically becomes LE$$, worse, later.
2. “The More fat, the More disease. The More possessions, the More worry. The More wives, the More rivalry. The More maids, the More frivolity. The More butlers, the More theft.”
Rabbi Hillel, Pirke Avot 2:8

The ENOUGH Response ©:
Enough to live on; Enough to live for

The ENOUGH Irony©

WITSEC, Ethical Wills & Personal Financial Life Planning

Healing Personal Financial Anxiety:

WITSEC, Personal Financial Life Planning & Ethical Wills – Part I

The origin of the ethical will  is said to be verbal from a  dying Jacob gathering his sons to give them  blessings with the request they bury him in Canaan (to be Israel – Jacob/Yaakov’s other name sake!) not in Egypt (Mitzrareim – restriction, limitation.) “”Genesis 49:1-33. Another ethical will example is when Moses instructs the Israelites to be a holy people and teach their children (Deuteronomy 32:46-47)

            Annually on my birthday, I revisit my Ethical Will.

            Today, the writing of an Ethical Will (Zevaoth in Hebrew) once a Judaic tradition is an anachronism except for a few revival attempts just like the practice of writing one’s mission/purpose statement on Yom Kippur (the Judaic day of atonement/at-one-ment. Ironically while the ethical will is to be read upon one’s proceeding underlining one’s legacy, and the Yom Kippur mission statement is to remind one’s his purpose today, both practices refocus on the question of ‘why am I?

Exercise #1 WITSEC

            A valuable exercise to start one’s mission/ethical will is hypothetically considering one had to enter the WITSEC program (Witness Protection administered by the Department of Justice featured in TV Show In Plain Sight).

Per the witness protection program protocol, tomorrow you will lose your present identity, be relocated, and not allowed to contact anyone past or present who knows you. The challenge given this clean slate – how will you reinvent yourself – in particular in vocation, and mission in life now – and 20 years from now looking back?

Clean slate – no baggage – what will you be when you grow up this time, what is your ‘why am I?’

It’s only your life – In Plain INsight     

Exercise 2: Mission/ Vision

            Recycle this exercise twice: first, relative to mission – what can be; secondly, relative to vision should be and then see if you can reconcile mission and vision.

            Note: You must define ‘the is not’ as well as ‘the is’ otherwise all you get is ‘snot’ (vague motherhood Obamaesque slogans – all hat no cattle - like ‘hope and change’ type statements that result in ‘self hoax and chump change.’)

What (and what not – you can’t do the same vocation)

Why (and the whys you won’t pursue)

How (and how’s that are not acceptable)

Where (and where not).

It’s only your life – In Plain INsight.

Exercise 3: Yom Kippur Assignment

(You Die / Proceed Today)

(name), age ,died yesterday from.

He  is survived by  

He was a member of 

He will be remembered for:

He will be mourned by

The world will suffer the loss of his contributions in

He always wanted but got:

The body will be .

In The Future (10 or 20 or 30 years hence)

(name), age ,died yesterday from

He  is survived by

He was a member of 

He will be remembered for:

He will be mourned by

The world will suffer the loss of his contributions in

He always wanted but got:

The body will be .

            The above become the foundation for an ethical an outline of which will be illustrated in the next blog…

Never Enough: The Korach Within

 Never Enough: The Korach Within 

Isn’t it enough that the God of Israel has distinguished you from the congregation of Israel, drawing you near to Him, to perform the service  of God’s Tabernacle and to stand before the congregation, to be their ministers?

Moses to Korah: Pashas Korah 16:9

            (Note: (Note: The above is not to be confused with pulpit Rabbi admonishing the former envious SINagague congregational president who still wanted to be on the Bimah next to the Rabbi at Saturday services a position given only to the current congregational President .)

           

            Never enough.

            Goodie still in futility daily during ball to get both her and Moses’ (oh, the irony) ball concurrently in her mouth – as one tennis ball isn’t enough.

           

Never Enough!

            Let me cut off my brother’s head so I can be taller

            Never Enough!

            To paraphrase Mencken, ‘(I happy) as long as my sister’s husband makes $100 less a week than my husband.’

            Never Enough.

            All the personal financial goals funded – ‘I need a cushion just in case’

            Never Enough.

            Okay, I have the cushion – but ‘I finally got the means to the ends and now I want to move the ends (again)’

            Never Enough: Is MORE - The Korach Within.

My dog’s faster than you dog

My dog’s bigger than your dog

My dog’s better cause he gets Ken-L Ration

My dog’s bigger than yours

Ken-L-Ration commercial 1963

Never Enough goes back to the snake tempting Eve as well as the story of Cain (acquisition in Hebrew) and Abel. Whereas Abel offered ‘the first yearlings’ to God because God was Shaddai (God, God Almighty, God All Sufficient, Enough), Cain, whose idea the sacrifice was, didn’t offer ‘the first/best yearlings’ keeping the best ‘More’ for himself as Shaddai wasn’t enough.

            Even though at Passover we sing the song Dayenu (Enough) where each lyric line begins (prior to the melody) with ‘it would have been enough (dayenu).’

            The day after, the 42” plasma TV isn’t enough – we need a 50” screen chamatz TV.

            Never Enough: MORE - The Korach Within

            It is said that in the punishment is in the sin: Never Enough (The Korach Within) – aka more, better, now has a habit of becoming worse, less, later. Still – even experiencing the aforementioned, we repeat sacrificing what we need for what we don’t need (MORE). 

The relative external comparison ranking amongst men is the idolized god. And the name of this faux deity ‘If Only.’

Never Enough: The Korach Within – If Only.

CHEWish (if only) On This©