When I was a little girl, I was fascinated by a TV show called “Queen for a Day” where contestants made their case for being selected as a 24-hour queen and granted whatever they had wished for themselves or their family. I spent many hours imagining what I would ask for at my coronation.
My fantasy more or less came true when I was recently asked by a reporter for the one thing I would change about my profession as a financial planner if I could just wave a wand or wield a scepter and automatically make it so. That the answer came so instantaneously to my mind was proof that queenship was a role I have been perfecting subconsciously for many years now.
My royal edict? That consumers might understand, for once and for all, that financial planning is NOT just about investing. How I wish I had a tax-deferred dollar for every time I have introduced myself as a financial planner, only to have the person I’ve just met on the elevator or train ask me what fund they should be using in their 401(k). My answer – “it depends” – rarely impresses them, but it is absolutely the smartest and indeed the only answer an ethical financial planner can give. What they should be investing in depends on so many non-investment factors such as their life goals, age, health, other family members, the type and quality of their assets, their tax bracket, their income, the security of their job … the list goes on and on. It usually takes a CFP® professional an hour or two of an introductory meeting to ask all the right questions, followed by more hours of analysis and research, before coming up with the best answer for any given client.
Financial planning is so much larger than just investing, involving a wide range of topics such as education and retirement planning, tax planning, estate planning. The operative word here is planning, which involves all the preliminary steps before implementation – or taking decisive action. When it comes to investing, however, many consumers take a “Shoot, ready, aim” approach. What’s the best investment, they ask, without pausing to consider what may be best for them.
So during my 24-hour reign as a financial planning queen, I would also mandate that everyone have an investment plan, before they have investments or a portfolio. Like a GPS system or map, the investment plan is a navigational aid. It should specify an ultimate destination, with possible stops along the way – in other words, the short and long term goals of investing. It should articulate how you plan to get there by specifying the asset classes and security types you will use. It should establish the “rules of the road,” such as frequency and size of investment transactions, thresholds for rebalancing, need for a given amount of liquidity, to name just a few.
For investors with long and complicated journeys – such as large sums to invest or multiple goals – the investment plan might also specify the roles and responsibilities of a CFP® professional or investment advisor. In such a case, the investment plan should also:
- Articulate the advisor’s investment philosophy. Does the advisor believe in market efficiency, thereby favoring passive investing? Or does he believe in opportunistic investing? What factors does the advisor believe are major determinants of return: timing, valuation, interest rates, business cycles? Is she a value investor, a growth investor or an adherent of GARP (growth at a reasonable price)?
- State the advisor’s investment policy. What asset classes and security types will be used in the portfolio? Will hedging, leverage, or derivatives be used? How frequently will changes be made? In addition to asset allocation, is asset location taken into account – i.e. does the taxable status of a given account determine the types of investments used in that account?
- Define the advisor’s decision-making authority. Does the advisor have discretion over trading in the accounts, or will the client be consulted before any trading takes place? Does the advisor vote proxies?
- Specify any constraints on the portfolio. Constraints may be advisor-imposed or client-imposed, such as no individual stocks, or only investments meeting certain socially responsible criteria.
- Make clear whether the advisor will transition an existing portfolio into the recommended portfolio. Some advisors will only accept cash to invest; others may be willing to take on existing positions with a view to selling those deemed undesirable and retaining those that meet the management parameters. If the latter, the investment plan should make clear how and over what time period this will be done.
In the short time remaining to me as financial planning queen, I have one final mandate. All investment plans must be written down. As with all goals, committing the plan to writing gives it authority, making it more likely to be implemented. Carry it in your head and your investment intentions are too easily shouted down by all the noise of market movements and stock-picking pundits who have no idea, nor care about, where you are coming from and where you are going.