As many of you probably know, the financial industry is constantly evolving in the effort to generate profits for their shareholders. In order to gain or keep their edge in an extremely competitive business environment, financial companies are always creating new products and services.
More often than not, these products and services are created with the intention of increasing the profits of the corporation, not necessarily to improve their clients lives. This declaration should not be taken as an absolute, however the most recent financial crisis (the Great Recession) exposed many flaws in our financial industry.
In contrast to the biased sale of financial products and services in the primary effort to increase corporate revenues and sales commissions, true financial planning has the client’s interests at heart. The following distinctions between financial advisory companies, help define the true financial planning difference.
Money as a Means to an End
The creation of a financial plan is often confused as a “plan to get rich”. While creating and implementing a financial plan can enable you to become financially independent, gaining material wealth for its own sake should not be the sole objective of a financial plan.
A true financial plan will utilize the creation of wealth as a means to an end. It is my opinion that money is just a tool, its only exchanged for the things we need (food, water and shelter) and want (entertainment, hobbies, etc.). Money is a universal bartering instrument, not an measurement of one’s worth or wealth.
Viewing material wealth as an life enabler and not the primary objective, focuses on improving the life of the client, not the advisor. This is an important distinction between financial advisory companies.
The Sale of Financial Products
As mentioned above, many financial products and services are created out of the drive to increase corporate profits, not to improve the lives of current customers. This is usually the case with commission based financial service models.
Years ago, financial firms began to create new and subsidiary companies to help them sell their products while looking like an unbiased financial services provider. These are many of the well known financial advisory companies you see in big media advertisements today.
Many of their commission based compensation models are designed to reward the advisors who sell the financial products the firm wants to, not necessary what the client needs. The products may not be the best for the client, however they will most likely still be recommended.
In contrast, true financial planning is not limited to certain financial products and services that it can recommend. This reduces, if not eliminates, the bias towards recommending the right financial products and services for its clients.
In addition, a true financial planner will charge a flat fee for services rendered, not a commission. This also eliminates the incentive to recommend products and services that are not needed.
As you can see there are a couple of major difference between a true financial planning firm and its commission incentivize competitors. While these difference are subtle to the consumer of financial products and services, the impacts to your financial plan and life can be dramatic.