Investment Planning is not Financial Planning

I recently posted on social media my humble honor of being asked to be one of the faculty for the Financial Planning Association’s 2020 Summer Externship. The Externship is designed to provide hundreds of students around the country (over 500 as of today), with a replacement for their internships that have been cancelled due to structural or budgetary issues caused by the current healthcare crisis. Specifically, I was asked to present on the subject of Investment Planning within a larger curriculum of Financial Planning topics. Now, the reason I was asked to speak on Investment Planning is not that I’m god’s gift to investment management, but because I’m a subject matter expert in the area of constructing portfolios for clients on the basis of fiduciary due diligence, both as an Accredited Investment Fiduciary and as someone who for the past two years has assisted in the construction of the examination for that credential and its subsequent accreditation. It’s a pretty neat responsibility for a CFP® Professional in Longmont, CO, if perhaps a bit on the nerdy side.

While it was flattering to be asked to speak on Investment Planning, I had a difficult time with deciding on what content to provide to students and how I would answer the questions in an interview portion designed to help students understand investment philosophy and methodology. My largest concern here is a classic error that new students of Financial Planning and the general public often make: Confusing investment management for Financial Planning, when in fact Investment Planning is not Financial Planning. Now this is no one’s fault, Financial Planning is well tied into investment management, and many people get into Financial Planning thinking that they are going to be day traders or portfolio managers. More importantly, the public is often told that investment management is Financial Planning. But how does that happen?

Simply put, a client will go to a broker or investment adviser and tell them they need help with something financial. Quick to provide a solution, the broker or investment adviser will gather data about the client’s total financial life, make some comments and critiques regarding their overall financial situation, and then will present them with a very polished analysis of their portfolio, how it has issues, and how they can provide the solution for this client. In a matter of an hour or two, a client goes from uncertain and unclear about their overall financials to being told by a financial professional that “here’s the path going forward and the investments to do it”. While that’s all very important, investment only makes up 17% of the CERTIFIED FINANCIAL PLANNER™ curriculum, yet they get confused for THE plan because they often represent the most easily or regularly measured part of a financial plan. If the plan is to retire or send kids to college, watching a portfolio grow feels like a measuring stick. “We had $100,000, now we have $180,000, and we need half a million, so we’ve gone from 20% to 36% of the way there!” While that can feel like a valid way of measuring the success of a plan, it’s confusing Investment Planning for Financial Planning.

So if Investment Planning is not Financial Planning, what makes up the difference? Well, the way I put it to the students and the thing you should keep in mind is this: Investment Planning only cares about the efficient accumulation of additional financial assets while Financial Planning cares about the accomplishment of life goals. While the former is a very deep area full of technical and fundamental issues that one can spend a lifetime mastering, it is agnostic to the “who” in the question of “why”. A stock portfolio is a stock portfolio, and is not inherently tailored to any particular individual beyond a target of risk and reward balances. A financial plan on the other hand is agnostic to the construction of a portfolio, only considering it important insofar as it is a tool to accomplish the task of living one’s best financial life. Summarily, while I spent a decent chunk of time in the interview explaining my investment philosophy for the students, over and over I had to reinforce: Investment planning is important but it’s one of the last things you do for a client. This is because both for the public and for a novice financial planner, it can be exciting to skip right to the “Money Making” part of financial planning and to forget the rest. But what good will an investment portfolio do for someone who is unable to work and has to spend the portfolio down as a replacement for their lack of disability insurance? What value does a hyper efficient low cost index strategy provide for someone who isn’t concerned with retiring but instead wants to provide an education for their children? How does any collection of real estate, stocks, bonds, or mutual funds stand up in comparison to someone saying “I have what I want and I have what I need and that makes me happy?”

Make no mistake, Investment Planning is an important part of Financial Planning. It simply isn’t the zenith or the be all end all of the Financial Planning process. What I hope I imparted to the students in the Externship and to you here, is that you cannot mistake the accumulation of wealth for the accomplishment of life goals. We’re not dragons, we don’t sleep on piles of gold and we don’t make it our life’s ambition to swim around in pools of money. Money and investments by their nature are simply tools of the trade in living your best life, and financial planning is the map by which we do so.