Fixing the alignment

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The reason why the financial planning process works so well is because it aligns you and your clients.

The plan puts you on the same wavelength; you tend to work far more efficiently together. And here’s a real biggie…. there are far fewer trust issues to deal with, than if there is no financial plan in place.

Let me ask you a question: Have you ever had a successful relationship when there were trust issues, financial or otherwise? I’m going to say NO to that.

Here’s another question: What would you say, is a major problem that has plagued the financial services business for as long as I can remember? Trust.

Trust issues

In my opinion, a lot of people don’t trust their advisors, to what degree varies. Why don’t they trust their advisors? Because often the interests of clients and advisors are not aligned properly and this, my dear Watson, breeds all kinds of problems.

(Now I was about to go off on a tangent about advisor compensation and how half the advisors in this business are scared to tell their clients how they are compensated but I’ll save that for another day. I want to stick with the bigger issue here, which is why a planning based model aligns the interests of all parties involved.)

When a financial plan is not used, it signals to me that the relationship may not be for the long-term… which is Ok sometimes. But in many of these cases, brokers (or advisors) are interested in writing a piece of business and generating a commission. These ‘commission based’ advisors have no real future concerns for the clients; this is where the alignment problems begin.

Committed to the process

I believe planning based advisors are far more committed to, and involved in, the clients future. When I take on a new client, my expectations are to have these clients for as long as I’m involved in this business.

(I have warm relationships with all my clients and many are friends. In fact, I just played tennis at lunch time with one of my clients. Unfortunately, I aggravated an already tender hamstring that’s gonna keep me ridin’ the pine for a bit.)

Another BIG part of why planning based relationship keep client and advisor aligned is how most (not all) planners tend to be compensated. Generally speaking, I charge a flat percentage of the assets I manage for my clients. When you charge a flat percentage, you have aligned your interests with those of the client. Here’s why?

If the investments grow, you as the advisor get the same percentage of the higher asset base, a pay raise of sorts. If the investments go down, you as the advisor get the same percentage of a smaller asset base, a pay cut of sorts.

Profit sharing

In essence, you are rewarded for doing a good job and penalized for poor performance. In my book that is the way it should be… that’s fair. There is transparency here, the client is not suspicious of your motives, there are far fewer trust issues.

This process is not dissimilar from a profit sharing business model, which generally produces highly motivated employees that are eager to work hard for the company and themselves… this breeds a higher likelihood of success, much like planning does.

Problems of trust in my business almost always involve MONEY. With many commission based brokers, you get hit with an upfront sales fee or a backend penalty or high commissions on the way in and on the way out of a trade. Its hard to know why your broker wants to speak to you, to make commissions or really help you… there’s a tremendous amount of ambiguity there.

My business is plagued with all kinds of conflicts of interest, and money and greed are at the heart of it… too many clients don’t fully trust their advisers and sadly they probably shouldn’t.

Although a good financial planning based relationship doesn’t bulletproof you from having problems, it is the best game in town…

Tags: Advisor Compensation, Financial Planning Retirement and Now!, Psychology Behind Financial Planning