The Rectangle and the Square
Written by
Friday, 01 August 2008 00:00 - Last Updated Friday, 24 April 2009 20:18
One of the more frequently asked questions of a financial planner is, “What does a financial
planner do?” Rarely have I heard a good, thorough and understandable response to this query.
The Rectangle and the Square
Some individuals believe a financial planner is someone who provides investment advice. Others believe a financial planner helps prepare one for retirement. Many believe that anyone
providing financial planning advice generally must be a financial planner. While all of these
items are part of what a financial planner is, none of them fully capture a planner's scope of
service. My goal with this short paper is to lay aside some of the misconceptions about financial
planners and provide a clearer understanding of a financial planner's duties. Recalling the lessons of grade school, many of us can remember the similarities of the
rectangle and the square. One of the most intriguing days in grade school is when the teacher
explains that “all squares are rectangles, but not all rectangles are squares.” The teacher goes
on to explain that the definition of a rectangle is simply a parallelogram with four right angles. Rectangles can have many different footprints, with sizes of sides varying in many ways. The
definition of a square, however, is far more restrictive. In fact, the definition of a square begins
with a rectangle. The definition of a square is a rectangle with four equal sides.
Rectangles
In the financial advisory world a similar scenario exists. There are many professionals who
belong to the financial advisory industry - the rectangles -, but very few of these are financial
planners - the squares. All financial planners are rectangles as well as squares, but all
individuals providing financial advice are not financial planners. The rectangles generally
include anybody providing advice regarding an individual's finances. The financial advisory
industry includes professionals such as insurance salespeople, investments advisors, tax
preparers and financial planners. They may hold licenses or designations such as the Certified
Financial Planner™ (CFP®) designation or the Chartered Financial Consultant (ChFC)
1/4
The Rectangle and the Square
Written by
Friday, 01 August 2008 00:00 - Last Updated Friday, 24 April 2009 20:18
designations. However, none of these titles or designations makes an individual a financial
planner. Some of the designations, such as the CFP®, may require a great deal of education
and provide an individual with many of the tools required to be a planner, but the designations
on their own do not signify an individual’s inclusion in the financial planning profession. This is
because in order to truly be a financial planner an individual must adhere to a stricter definition
than simply providing financial advice.
Squares
There are two items which are added to the financial advisory definition – rectangles - to create
the financial planner definition - squares. Both are vital and equally necessary. An individual
who does not meet both requirements is not a financial planner. It is important to understand
that the intent is not to disparage those who do not meet this definition. It is simply to make it
clear that these individuals are not financial planners even if they provide a form of financial
advice incidental to their true business. They may be tremendous investment advisors or
insurance salespeople, but they are not financial planners.
Equal Sides Definition Part I
The first addition to the rectangle definition is that a financial planner must provide a broad
service reviewing a client's total financial picture. Seven vital financial areas must be included
in a planner's service. These include the following:
1. Helping clients articulate and define their financial goals and objectives.
2. Cash flow review and planning – developing savings or withdrawal strategies to meet
goals, reviewing expenses, spending pressure points, evaluating debt to assets load.
3. Tax planning – reviewing tax circumstances to help minimize the tax effect on the ability
to meet goals and objectives.
4. Investments – providing investment advice to help clients meet asset growth goals within
a given tolerance for risk.
5. Retirement planning – determining savings requirements to meet retirement goals while
accumulating assets and establishing safe withdrawal rates to maintain assets throughout
retirement.
6. Risk mitigation – reviewing all potential risk exposures and helping clients determine
whether they wish to insure, retain, minimize or avoid these risk. 7. Estate planning – reviewing a clients estate to help determine whether important
documents have been executed, whether guardians have been named for children, helping
clients reach their estate goals, helping clients make charitable bequests in the most efficient
manner and reducing the estate tax effect.
2/4
The Rectangle and the Square
Written by
Friday, 01 August 2008 00:00 - Last Updated Friday, 24 April 2009 20:18
If an individual in the financial advisory industry provides service in all these areas, they may be
a financial planner. However, they must go a step beyond simply reviewing each area. They
must be committed to all service areas equally. If the individual has a significantly greater focus
on one or two areas, they are likely not financial planners. It is vital for a financial planner to
weigh each area equally. This is not to say that individuals who focus on one area are not
excellent at their chosen specialty; however, this specialization does not allow them to truly act
as a financial planner. It should also be added that a financial planner can, under certain
circumstances and in agreement with a client, determine that some of the areas may warrant
less focus. This should be the exception for a financial planner, however, not the norm.
Equal Sides Definition Part II
The second addition to the definition of a rectangle is of equal, if not greater, importance. In
order to be a financial planner, an individual must act as a fiduciary and they must believe this is
an absolute necessity of their professional role. To be a fiduciary in the financial planning sense
is to act in the client's best interest ahead of all other interests, including the planner's, at all
times while helping the clients achieve their goals and objectives. The financial planner must also be dedicated to helping clients understand the implications of
various options in financial matters, so the client can make informed decisions. This may at
times require the financial planner take on the difficult position of telling a client they are
mistaken in their thinking, even though this could potentially harm the relationship. In order to
act as a fiduciary, the financial planner must be committed to helping the client make the best
possible financial decision regardless of how this may impact the service relationship.
This fiduciary duty also implicitly extends beyond the immediate client. A financial planner also
has an obligation to serve society in general. A financial planner is the steward of informed and
reasonable financial decision-making to individuals, and by proxy, to people en masse. This
duty is fulfilled by providing service one client at a time, but a financial planner must not forget
her broader duty.
What is a financial planner?
Returning to the original question, “What does a financial planner do,” it is now simple to put
together a meaningful answer. A financial planner provides financial advice to individuals in
respect to their entire financial picture with the purpose of helping clients reach their short and
long-term financial goals. In doing so, a financial planner always places the client's interest first
and helps the client understand the implications of the decision being made. A financial planner
is not an investment advisor, insurance salesperson, tax preparer or estate planner although all
3/4
The Rectangle and the Square
Written by
Friday, 01 August 2008 00:00 - Last Updated Friday, 24 April 2009 20:18
these services are a part of the planner's practice. What sets a financial planner apart from the
vast majority of the financial advisory industry is that a planner views each of these areas
equally and affords the same amount of care to each area providing clients with truly integrated
financial advice and planning. Working with someone who fits the definition of financial planner
allows an individual to gain control of one's financial future instead of barreling blindly toward
whatever lies next.
4/4