Pedagogical Financial Advisers Leave Classical Advisers in the Dust
Financial advisors are often seen as, more or less, glorified money managers who focus primarily on investing. The financial advisor was a “new professional” born in the late 1960s, it is said, to deal with the ever increasing complexity of financial products and the compartmentalization of the financial industry at that time. While I think that the profession of financial planning is likely not necessary in a developing economy, an economy of scale makes my profession pretty much a necessity.
For the purposes of my explanation, I generally regard the terms “financial planner”, “financial consultant”, and “financial adviser” (or “financial advisor”) to be fundamentally the same. It is interesting to note that prior to 1969, the former two professions were not in existence. The latter, “financial adviser”, was used very loosely around that time, and really designated product salesmen more than someone who was a true adviser.
The concept of a “financial adviser” really gives you a clear picture of what the role of the profession ought to be, despite the fact that it is largely something entirely different. The problem is that improper, non-objective, definitions were and are being used to create an arbitrary profession.
Depending on who you ask (and this includes industry professionals and professional organizations), a financial adviser’s job is to help people invest, or save, or budget, or manage money for clients, or help clients reduce taxes, or you fill in the blank. None of these so-called definitions really defines what the adviser’s job is. I think this, in part, is responsible for many of the schisms within the financial planning industry, why the profession openly admits to having an identity crisis, and why people are often confused as to why they even need a financial adviser or planner (unless they already have money to invest).
What is the manner by which financial advisers are to help individuals? The default answer seems to be “by helping them invest their money”. A very close second cleverly uses the profession in the definition “to provide financial advice”. These definitions are what typically stick out in people’s minds, but they do little to clarify what a financial adviser is supposed to be doing to help them.
Financial advisers and the financial planning industry at large have promoted very vague definitions through advertising. Many of these are more or less slogans which have been made up to try to consolidate the apparent disorganized nature of financial professionals working as stock brokers, life insurance salesmen, and mutual fund salesmen. With the addition of fee-only advisers and registered investment advisers, the industry seems to be trying to “glue” together independent businesspeople into a cohesive profession.
This is definitely a case of a needed profession being created for the wrong reasons. The “need” for consolidation and uniformity doesn’t create a profession, and yet this was the initial justification for the creation of the financial planning profession.
Without spending a lot of time discussing epistemology, or the science of knowledge, I will tell you what I think the profession of financial planning is and ought to be based on existing definitions for the concept which have apparently been lost, forgotten, or have never been discovered.
The concept “financial adviser” really is a subcategory of the concept “adviser”. “Financial” simply denotes the kind of adviser one is referring to. The 4th edition of the American Heritage Dictionary gives us 2 definitions for the term “adviser”:
-
One that advises, such as a person or firm that offers official or professional advice to clients.
-
An educator who advises students in academic and personal matters.
While the term does not exclusively refer to a teacher in the strictest academic sense, there is-in the very definition of the word-a pedagogical nature to anyone engaged in the business of being an adviser-financial advisers included.
It is very unfortunate that most, I would say better than 90%, financial advisers are really nothing more than product salesmen. And, among those who are fee-based planners, I would again say that most of those planners are focused around keeping their knowledge of financial planning proprietary and instead selling financial plans and giving recommendations.
This approach to financial planning does prove to be very lucrative for the financial professional, but leaves the client somewhat in the dark about the nature of financial planning and ignorant about the processes used by the adviser to come up with their recommendations. As an analogy, it would mean the difference between a math teacher who makes children memorize multiplication tables as versus teaching the children the principles behind why multiplication works, its relationship to addition, and so on. The children may appear to understand multiplication through a process of memorization, but it’s superficial knowledge and more like parroting than anything else. This “parroting” happens consistently in the financial planning profession.
When an individual pays someone for advice, they are paying them for their knowledge. The adviser can take one of a few approaches in dispensing advice-which is a topic for another blog post-but they are providing advice, nonetheless.
At this point, I want to clarify the difference between providing advice, and telling people what to do. What the Securities and Exchange Commission regards as “advice” is really just the adviser replacing the judgment of the client and, in effect, telling them “you should invest in this particular stock or mutual fund or…”. I wouldn’t regard that as giving advice. Again, let’s turn to our trusty dictionary and look at the definition of “advice”:
-
Opinion about what could or should be done about a situation or problem; counsel.
-
Information communicated; news. Often used in the plural: advices from an ambassador.
While both definitions can be consistent with an individual’s requirements for survival, the first definition is somewhat ambiguous. Ultimately, the decision as to what to do with the information provided by the adviser must come from the client because each individual can, should, and must rely on his or her own judgment in order to survive (which is why I generally discount the first definition as it assumes that one can relinquish one’s conceptual faculty to another).
Advising someone to buy a particular investment presupposes that they already have the knowledge necessary to understand the investment and are looking to their adviser on how to apply the knowledge they have. Of course, a financial adviser can provide advice on investing in general, or information about a particular business (though the latter is rare).
So, it would seem clear that a financial adviser or financial planner’s job is really to educate clients, provide them with information, and guide them towards finding rational solutions to their financial problems. It is important to keep in mind that a financial adviser is there to help the client to become independent-not dependent. The client, ultimately, must make their own decisions. However, the specific information and education that a client is supposed to receive from the adviser ought to be developed as a science-like any other profession.
_________________________
July 2nd, 2012 | by David | No Comments
