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The Financial Planner’s Responsibility?

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Are Consumers Losing Ethical Ground?

By Rick Kahler MS CFP http://www.KahlerFinancial.com

Rick Kahler MS CFPSuppose one of my clients has his heart set on using half of his retirement account to buy each of his grandchildren a new car.

Or, a physician-client in a panic over falling markets wants to sell all her stocks and buy gold. What is my responsibility as their financial planner? How far should planners go to try to keep clients from making serious financial mistakes?

Just as with the patient engagement, it’s important for planners to respect clients’ competence and ability to make their own life decisions. Client-centered planners also need to remember that the goal is to help clients get what they want, not what the planner might want or think the client should want.

On the other hand, should a planner stand idly by and watch someone walk off what the planner perceives as the edge of a financial cliff?

Potential Answers?

Part of the answer to this dilemma stems from a planner’s legal obligation. Most advisors who sell financial products have no fiduciary duty and are not legally required to put their customers’ interests first. Fiduciary advisors, which include those who are fee-only, do have a legal obligation to act in their clients’ best interests.

Fiduciary Responsibility

Doctors, clergymen and attorneys are fiduciaries. But, what is the legal responsibility of a fiduciary financial planner who believes clients are about to do themselves financial harm?

Example:

Let’s say I have a client who is about to do something that may be viewed by a court of law as “extreme” or “imprudent.” (An example would be putting all his money into one asset class like gold, cash, penny stocks, etc.) At the minimum, I would need to protect myself by carefully fulfilling my legal responsibilities. This would include making certain I emphasized to the client that, given the research and data available, his actions could hurt him financially. I also would want to be sure the client fully understood and took responsibility for his actions.

***

comedy

***

In terms of the broader aspect of what financial planners owe to their clients, meeting this legal obligation is not enough. In my view, fiduciary planners’ obligation to put clients’ interests first includes an ethical responsibility to do no harm. Sometimes this ethical and legal responsibility requires planners to give clients information they may not want to hear.

As we focus on the clients’ goals and help them carry out their wishes, part of our role is to make sure they have all the information they need. This gives us a responsibility to educate ourselves so the advice we offer is as sound as we can make it. We also need to do whatever we can to help clients hear and understand that advice.

Clients who are hovering on the edge of a financial cliff are typically about to act out of strong emotions such as fear. They often can’t take in financial advice until they are able to move through that fear. It only makes things worse if financial advisors shame clients, bully them, or abandon them to their fears. The challenge for planners is to help clients reach a more rational place so they can gather additional information and make decisions that will serve them well.

Industry Update is Not Good – Give Up the ‘Fiduciary’ Fight

According to industry pundit Bob Veres, so-called Financial Advisors need to face a hard truth – Independent Registered Investment Advisors [RIAs] have lost this round.

But, we already told you so on this ME-P.

Fortunately, there are other better ways to set yourself in the medical ecosystem.

The Certified Medical Planner™ Designation

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With the right kind of support, clients are almost always able to get past the fear that is pushing them to make imprudent decisions. Providing such support by working with clients’ emotions and beliefs about money, perhaps with the help of a financial therapist or financial coach, is well within a financial planner’s ethical responsibility. Our role is not merely to do no harm. It is also to use all the tools we have to help clients act in their own best interests.

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Enter the Financial Advisory Gurus?

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Understanding the Nexus Between Fame and Quality

[By Rick Kahler CFP®]  http://www.KahlerFinancial.com

  • “I see that firm’s ads everywhere.”
  • “His books are best-sellers.”
  • “That advisor does all kinds of free seminars for retirees.”
  • “She’s on TV all the time.”

The Case … For?

When a financial advisor, someone with a radio or television show, or an author of financial books becomes well-known, it’s easy to assume you can trust that person’s advice. This isn’t necessarily the case.

Recently I was selected by an Internet community site called moneytips.com as one of their top 50 “social influencers.” This is a list of professionals in the areas of wealth and personal finance who use social media and other Internet tools effectively.

Among the top three on this list are Dave Ramsey and Suze Orman, whose books and advice include a great deal of solid information to help people get out of debt, manage money well, and provide for the future. Many others in the top 50 are respected financial journalists and advisors.

The Case … Against?

However, the list also includes a few advocates for high-risk investment methods, proponents of dubious get-rich-quick schemes, and purveyors of poorly researched advice. Those who put together the list focused on how well people established a presence on the Internet and used technology to communicate. That’s an assessment completely unrelated to the question of whether the advice or information being communicated was worthwhile.

Financial Planning

Financial planning, just like any other field, has a solid core of practitioners who quietly and ethically serve their clients. It also has its gurus, its outstanding marketers, and its fringe practitioners with extreme ideas. The challenge for consumers is not to assume fame and quality always go together.

Linking Fame and Quality?

Here are a few suggestions for keeping a balanced perspective about famous or familiar financial faces:

1. Knowing about a professional isn’t the same as knowing a professional. Everyone you know may have heard of Noted Local Advisor. That’s not the same as being able to recommend him or her. Get recommendations first-hand, from people who actually are clients of a firm or have used someone’s plan or advice. Ask specific questions about what they’ve done and how it worked for them.

2. Yes, there are shortcuts to building wealth, but they come with very high risks. For most of us, the best ways to build wealth are gradual and even boring: saving part of every paycheck, living on less than we earn, and investing for the long term in a well-diversified portfolio of different asset classes. It’s natural to wish for an easier, faster way, but that desire can make you more vulnerable to high-risk schemes and even scams.

3. Even if a method of building wealth is perfectly legitimate and works for others, it still may not be a good fit for you. If you’re a reclusive introvert, for example, sales is probably not your best path to success.

4. Apply the same common sense and skepticism to financial products or wealth-building methods that you would use anywhere else. For example, you probably don’t assume that a car’s advertised gas mileage is what you’ll actually get under real-world conditions. In the same way, it’s a good idea to assume that your real-world results from a proposed investment or business will be lower than the advertised numbers.

5. Don’t assume every financial guru is a crook. Many reputable professionals can teach you a great deal about money. Your job is to learn the financial basics so you can evaluate them with some educated skepticism.

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And always keep in mind that a product or idea is not the same thing as the selling of that product or idea. The true genius of some financial “experts,” after all, is marketing.

Conclusion

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Are Financial Services “Professional” Certifications Important? [A Poll]

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Often of Murky Respect – Usually Confusing to Clients

By Dr. David Edward Marcinko MBA, CMP™

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[Editor-in-Chief]

There are more than 100 “certifications” which represent the often nebulous field of “financial advisory, or planning credentials” that presently exist in the market place today.

Some of these “professional” designations are awarded to individuals in the financial planning or financial “advisory” space after [some] diligent study, and [often not so] arduous testing; others not so.

And so, are such “credentials” more important to you, or your clients; pleas opine.

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Disclaimer: I am a reformed Certified Financial Planner®, Series 7 [stock-broker], 63 and 65 license holder, and RIA representative who also held all applicable insurance and security licenses.

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A Brief History of the ME-P

Enhancing Health 2.0 Connectivity for Physicians and their Financial Advisors

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Physicians and FAs Dealing with Debt Collaboratively

A Holistic Approach to Financial Health Planning

[By Somnath Basu; PhD, MBA]

Financial Advisers [FAs] often feel helpless in the face of fierce resistance from clients, especially doctors, to rein in their spending, stop living beyond their means and salt away more of their paychecks. Even worse, the financial services industry’s less discerning practitioners are enabling reckless behavior for fear of losing business.

Psychological MoJo

A huge part of the problem is psychological. Look no further than the emerging field of behavioral finance to explain why average Americans of all ages and walks of life feel pressure to keep up with their neighbor. The unfortunate result, of course, is that consumers max out their credit cards, tap equity lines of credit or consolidate loans in pursuit of the American Dream. But, in the process, they often fall victim to over-consumption and under-saving.

Bad Faith Lenders

Unscrupulous lenders are exploiting doctors and consumers with interest-only loans and variable-rate home buying without a down payment – the latter labeled in one recent headline as a car-dealer tactic on the new-home lot. Another gimmick ties a home equity loan to life insurance with the promise of zero premiums, albeit no escape from a lien on equity no matter how it’s sold to an unsuspecting public.

Debt Consolidation Issues

There’s also the issue of determining whether it’s prudent for physicians to consolidate their debt. Many online calculators use the current monthly payment figure as the basis for comparison against monthly payments after debt consolidation, which is erroneous since payments in subsequent periods aren’t compared. This flawed approach is enough to convince unwary people they should consolidate their loans, and in many cases, it justifies a resumption of conspicuous consumption – leading to a vicious cycle.

Need for Discipline

Before a Financial Advisor even gets through a doctor-client’s front door, chances are that the person they’re meeting with might require the services of a psychotherapist and/or credit counselor (or require such a recommendation) to examine the root causes of their propensity for reckless spending and suggest a need for financial discipline.

Wants versus Needs

There must be a clear understanding of the difference between needs (i.e., retiring with peace of mind) and desires (i.e., living the high life), and a willingness to change. It means not eating out five times a week or financing a $75,000 kitchen remodeling makeover, cutting back on entertainment, or making more than the minimum payment on credit card balances. It means not rushing out to buy a house or perhaps finding a local college for children to attend and spare the added expense of housing them in a dormitory. Only then can physician’s and all of us, earmark increasing amounts from each paycheck to build a comfortable savings cushion.

A New Collaborative Approach

What’s needed is a collaborative approach [much like emerging Health 2.0 participatory medicine], since Financial Advisers cannot be the sole catalyst for change. The media too, needs to do much more reporting on the dangers of debt. Politicians need to make difficult choices [a balanced budget, for example] and business leaders need to be more vigilant about adopting ethical practices when it comes to lending, advertising or marketing products and services that feed the vicious cycle of indebtedness.

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The Courage to Deliver Tough Love

Astute Financial Advisers can take on a real collaborative leadership role with regard to helping doctors and other clients avoid or dig out of debt; but the FAs who have the intestinal fortitude tend to have the most affluent clients. So the question becomes, do they have the courage to deliver tough love to their working or upper-middle class, or affluent middle-class clients and prospects?

The Faithful

For doctors to have faith in their FAs, they need to trust their expertise as a financial health practitioner and believe in the power of a diversified investment portfolio. But, they also need to be repeatedly told to stick with their long-term financial plan whenever there’s a downturn in financial markets and not be swayed by fear or the lure of short-term gain.

Financial Advisers who are willing to recognize and treat the symptoms of irrational decision-making, and educate their physician-clients on the follies of making emotion-based decisions, will be able to distinguish themselves in a competitive market. They need to understand investor psychology, as well as identify behavioral biases and offer counsel about the perils and consequences of irrational decisions. They need to know their target physician market-audience, too. This will enhance the results of their long-term planning.

Rethinking Mission

At the end of the day, it’s not just a matter of offering financial planning. It’s as much about life planning as helping get a client’s financial house in order. Just ask Richard Wagner or George Kinder, who describe the movement they created as “the human side of financial planning” and holds workshops that teach advisers client-relationship skills.

But, an even better objective would be to offer financial health planning as part of a more holistic, and arguably, effective approach.

Avoiding Unscrupulous Lending Practices

The best Financial Advisers know how to steer their clients away from unscrupulous lending practices, resist the urge to over-consume and learn financial discipline; but unfortunately they’re a rare breed. Unless the status quo changes, financial planning runs the risk of irrelevance.

How can people possibly expect to amass adequate savings for a home, child’s education and/or retirement if they can’t first dig out of debt? The only possible result will be legions of unhappy clients.

NPOs?

One way to help combat the nation’s difficulty in dealing with debt would be through the creation of a quasi-governmental, nonprofit organization whose educational mission is to better understand the basic issues surrounding the need to borrow money.

But, perhaps the time has come for the some 200 educational institutions that teach financial planning to pool their resources in hopes of becoming a credible watchdog of the nation’s financial health.

Lawmakers increasingly have come to the realization that financial literacy needs to become a higher priority. Advisers should never forget that sound financial health is a necessary condition for good physical and mental health, especially since most married couples argue about money more than anything else and financial distress is a leading cause of depression.

Link: http://www.fa-mag.com/issues.php?id_content=2&idArticle=1640#

Assessment

In the future, Financial Advisers could serve as financial health practitioners in partnership with counselors, behavioralists and psychologists. The very health of financial planning just might depend upon it.

Somnath Basu, Ph.D., is program director of the California Institute of Finance in the School of Business at California Lutheran University where he’s also a professor of finance. He can be reached at (805) 493 3980 or basu@callutheran.edu.

Conclusion

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Take the Hospital Endowment Fund Management Challenge!

Calling all Financial Advisors – Are You CMP™ Worthy?

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After conducting a comprehensive fundraising program, the Hoowa Medical Center received initial gifts of $50 million to establish an endowment. Its status as the community’s only trauma center and neonatal intensive care unit causes it to provide substantial amounts of unreimbursed care every year. This phenomenon, together with the declining reimbursements and an estimated 6% increase in operating costs, leaves the Center with a budgeted cash shortfall of $4 million next fiscal year. Although the new endowment’s funds are available to cover such operating shortfalls, the donors also expect their gifts to provide perpetual support for a leading-edge medical institution.

The Treasurer

Bill, the Center’s treasurer, has been appointed to supervise the day-to-day operations of the endowment. One of his initial successes was convincing his investment committee to retain a consultant who specializes in managing endowment investments. The consultant has recommended a portfolio that is expected to generate long-term investment returns of approximately 10%. The allocation reflects the consultant’s belief that endowments should generally have long-term investment horizons. This belief results in an allocation that has a significant equity bias. Achieving the anticipated long-term rate of returns would allow the endowment to transfer sufficient funds to the operating accounts to cover the next year’s anticipated deficit. However, this portfolio allocation carries risk of principal loss as well as risk that the returns will be positive but somewhat less than anticipated. In fact, Bill’s analysis suggests that the allocation could easily generate a return ranging from a 5% loss to a 25% gain over the following year.

The Committee

Although the committee authorized Bill to hire the consultant, he knows that he will have some difficulty selling the allocation recommendation to his committee members. In particular, he has two polarizing committee members around whom other committee members tend to organize into factions. John, a wealthy benefactor whose substantial inheritances allow him to support pet causes such as the Center, believes that a more conservative allocation that allows the endowment to preserve principal is the wisest course. Although such a portfolio would likely generate a lower long-term return, John believes that this approach more closely represents the donors’ goal that the endowment provide a reliable and lasting source of support to the Center. For this committee faction, Bill hopes to use MVO to illustrate the ability of diversification to minimize overall portfolio risk while simultaneously increasing returns. He also plans to share the results of the MCS stress testing he performed suggesting that the alternative allocation desired by these “conservative” members of his committee would likely cause the endowment to run out of money within 20 to 25 years.

The Polarizer

Another polarizing figure on Bill’s committee is Marcie, an entrepreneur who took enormous risks but succeeded in taking her software company public in a transaction that netted her millions. She and other like-minded committee members enthusiastically subscribe to the “long-term” mantra and believe that the endowment can afford the 8% payout ratio necessary to fund next year’s projected deficit. Marcie believes that the excess of the anticipated long-term rate of return over the next year’s operating deficit still provides some cushion against temporary market declines. Bill is certain that Marcie will focus on the upside performance potential. Marcie will also argue that, in any event, additional alternative investments could be used as necessary to increase the portfolio’s long-term rate of return. Bill has prepared a comparative analysis of payout policies illustrating the potential impact of portfolio fluctuations on the sustainability of future payout levels. Bill is also concerned that Marcie and her supporters may not fully understand some of the trade-offs inherent in certain of the alternative investment vehicles to which they desire to increase the allocated funds.

Key Issues:

1. Given the factors described in the case study (anticipated long-term investment return, anticipated inflation rate, and operating deficit) how should Bill recommend compromise with respect to maximum sustainable payout rates?

2. How should Bill incorporate the following items into his risk management strategy?

a. educating the committee regarding types of risk affecting individual investments, classes, and the entire portfolio;

b. measuring risk and volatility;

c. provisions for periodic portfolio rebalancing;

d. using tactical asset allocation; and,

e. developing and implementing a contingency plan.

3) What additional steps should Bill take to form a group consensus regarding the appropriate level of endowment investment risk?

4) What additional elements should Bill add to his presentation to target the concerns of the “conservative” and “aggressive” committee members, respectively?

Assessment

And so, financial advisors, planners and wealth managers; are you up to answering this challenge? We dare you to respond! Visit: www.CertifiedMedicalPlanner.com

Conclusion

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Questions of Secrecy

By a Registered NurseLight Bulb

I attended a retirement planning seminar about a year ago; after the big stock market drop. It focused on annuities along with the “free” dinner. The strange thing was that the host asked that no recording devices be used during the presentation for copyright purposes. I know a bit about annuities and don’t think he said anything wrong, other than using a few common scare tactics. He had virtually no academic credentials and so I enjoyed the dinner and went on with my life.

Personal Invitation

A few days ago I was “personally” invited by mail to a financial planning seminar hosted by a group of attorneys, accountants and estate planners to an extremely prestigious, and no doubt expensive, restaurant. This time, the following warning appeared in writing on the invitation.

“Due to the copyright nature of this material, attorneys, accountants, insurance agents or financial planning practitioners are not admitted without express permission. And, no audio or video recording devices will be allowed.”

Assessment

As a nurse I am not in the dis-invited group, and realize that the “personal” nature of the invitation was bogus. But, I was wondering if this copyright warning was “kosher”, or am I just being paranoid?

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. Is this secrecy standard industry practice? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe to the ME-P. It is fast, free and secure.

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