Flubbed Up Financial Plans
It wasn’t until I became a Certified Financial Planner™ (CFP®) professional did I understand all of the elements of a financial plan. My “ah-ha” moment was when a potential client came in with their 401k statement. He proudly showed me the statement and pointed right to the middle of page one. There was a picture of a sunny day, and the words “you’re retirement is sunny and bright! You can expect to draw $6,000 per month in retirement”. I asked the potential client what that meant. He boasted, “well, I don’t think I need your services because my 401k is awesome! I put my information in and it calculated out how much I can draw and $6,000 is plenty!”.
That was when it hit me. All the online calculators and software programs combined are not capable of replacing a human in the financial planning world. If software could replace humans to build financial plans, there wouldn’t be over 85,000 CFP®s in the US today.1 Unfortunately not all CFP®s are created equal and being a CFP® doesn’t automatically make you a good advisor. No different than being a fiduciary. There are plenty of fiduciaries that are not good at their jobs, and this couldn’t be more obvious than when looking at how firms do financial planning.
Early in my career, I was trained to sell annuities. The firm I worked for had fallen victim to the “double your income, double your time off” promise from a high-volume annuity wholesaler. Free steak dinners and PowerPoint presentations about reducing or eliminating market risk was all the rage. At the time, I really thought I was helping people. Granted, the sales were all suitable and did accomplish SOME of the clients’ goals, but in reality I was selling a product not creating financial plans. As time went on, I started to realize that financial planning software was looking more and more like a sales tool, positioning whatever financial product you wanted to sell by showing a client a gap in their financial situation. Most often, the solution was an annuity or life insurance. Go figure.
According to www.investopedia.com a financial plan lays out the necessary steps to generate future income and cover future expenses while a financial forecast is an estimation of future income and expenses. To go one step further, a financial plan will take multiple financial forecasts and compare them to find the best plan the fits your situation by minimizing taxes, maximizing Social Security, reducing controllable costs such as health insurance, will lay out all the steps to do all of those things, and monitor your progress along the way.
Hence, financial planning software should really be called financial forecasting software. It is up to the human, the financial planner, to do something with that information that is useful. Another example that makes my skin crawl, is bad assumptions. I had someone bring in what she referred to as a financial plan from a big box retail investment firm. I was appalled to see that the concept of effective tax rate was completely ignored, the software assumed 85% taxation on Social Security with a Provisional Income below what would cause that level of tax, zero consideration for how the ACA (Affordable Care Act) would impact the client, and a rigid withdrawal strategy to spend 100% of the non-IRA money first, then 100% of the tax free ROTH IRA money, and then tap the 100% taxable IRAs. Upon a full analysis by my team, we discovered that not only was the plan off by hundreds of thousands of dollars due to improper tax calculations, the client would have left an additional quarter million dollars on the table by simply failing to develop a withdrawal strategy that was efficient.
Bottom line, software is important but it is a tool that must be fully understood and used properly. Software is not capable of making a financial plan, period. Only a human can do that. If you don’t agree, there are over 85,000 CFP®s out there with hundreds of thousands of clients that you could easily replace with the click of a mouse.
1. FA Magazine: Number of CFPs in the US Grew 2.7% in 2020, March 4 2021, FA Staff