The Problem

The term "financial planning", "financial plan" or "financial planner" is absent from any industry publication. Not even the Certified Financial Planning Board's Standards of Professional Conduct lists a definition of "financial plan." It is simply missing.

What you will see are hints or suggestions made by professionals of what these terms might mean or should mean based on the particular line of work that the adviser happens to be in. For example, an insurance salesman will consider financial planning to be heavily focused on life insurance and annuities. A stockbroker will consider financial planning to be heavily focused on stocks, bonds, maybe mutual funds or other investments. Ditto with investment advisers. Fee-only planners focus on giving advice as to how much one should save and invest as well as where one should direct one's savings.

Usually there is some talk of goal setting. But, digging beneath the surface reveals that such goals are superficial and based on arbitrary notions of achieving a lifestyle divorced from purpose. In other words, the financial planning industry does not seem to recognize that the purpose of an artist would be very different from the purpose of a mechanical engineer. Yet, the goals for both are often treated as though the purpose is the same. Talk of "retirement" and "rules of thumb" for insurance and savings rarely, if ever, change from person to person. What goals should an artist pursue? This isn't something the industry really gets into. It's difficult, and qualitative. It can't be "number crunched."

I disagree with the arbitrary notions and "rules of thumb" that say you need a certain percentage of your income when you retire for this very reason. How, exactly does an adviser know this? And, how does the adviser come to the assumption that retirement is necessary or even desired among a wide range of individuals? The best arguments the industry has are deductive in nature.

In regards to retirement planning, the profession starts with the assumption that you will retire. It argues that you will get old (which is true). It uses statistics and data sets to argue how much money you'll need to live on, and what percentage of your savings you can withdraw when you get old (a term which is also arbitrarily defined as occurring about or around the same time you would begin receiving Social Security payments). All of it is very convincing until you realize that there is no real basis for the term "retirement." It's something that was arbitrarily invented by the German Chancellor Otto Von Bismarck as a way to implement social insurance programs.

Will people retire? That depends on whether they want to live off their savings. Is it a necessity? Only if you cannot work due to some mental or physical disability. But, even with a physical disability, there are many types of work which people can and love doing. These are questions and issues I rarely, if ever, see addressed by the financial planning industry at large. However, these are critical issues that should be discussed. These are issues that a rational person would be interested in discussing and figuring out. Yet, the assumption is normally that some kind of retirement savings is to be accumulated as a necessity.

The Definition

The financial planning profession has attempted to define what financial planning is. However, the phrase becomes defined by non-essentials. Processes are laid out, and it gets very descriptive in many instances. I think where the individual needs to start is to understand what a plan is.

A plan is a series of steps that are carried out or goals that are accomplished. The descriptive phrase "financial" simply denotes the kind of plan one is talking about. In this case, money-related goals are the central focus.

But, I think it is a mistake to limit oneself to a deductive understanding of "financial plan." How would you arrive at such an idea? Think about why you would ever need to make a plan in the first place. What is a plan? How do men survive in the world? Do they need to think or can they merely act mindlessly? On the most basic level, you must understand how men survive. You must grasp concepts like "time", "production", "savings." You must understand the difference between a hand-to-mouth mode of living, a life of surplus, and a then finally a life of abundance, and what makes all of that possible. You will then eventually understand the concept "plan." You will also understand that plans are always directed to some ultimate end.

These are ideas which must start out as observations, and then further observations must be built on them. The process is continuous. Then, generalizations need to be made after many observations are made. This is the only way to formulate an objective definition and understanding of "plan" and then "financial plan" (presuming one understands "financial" in the same sense that one understand "plan").

After a long conceptual chain, one is ready to ask "what would be the reason I make plans of any kind?" Then, "what would be the reason I make financial plans?"

A plan implies that some thought is carried out beforehand and that there is something you are trying to achieve.Completing goals is, after all, a meaningless endeavor if you just go on with no....no purpose.

A purpose is the ultimate end you are trying to achieve. I think it's reasonable to say that a financial plan is a series of money-related goals or steps that are carried out which are directed towards some particular purpose. If you agree with this, then financial planning is merely the process of defining the purpose, goals and steps to be taken. A financial planner (or adviser) would logically be the individual who helps you make a financial plan by teaching you how the process is done.

You might also like

1. The Fallacy of Faith-Based Financial Planning
2. Financial Planning Begins Before You Are Rich
3. Behaviorism In Financial Planning
4. Is Fee-Based Financial Planning Objective?
5. How To Make The Financial Planning Industry Work For You

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This entry was posted on April 9th, 2011 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Philosophy In Financial Planning