Industry News

Time to rethink financial planning

Let’s say you were a financial planner in 1926. Of course, there was no such discipline as financial planning in the Roaring ’20s.

Let’s say you were a financial planner in 1926.
Of course, there was no such discipline as financial planning in the Roaring ’20s, or at least no recognized formal approach to assessing an individual’s financial status and offering guidance about investing, saving, taxes and life goals.
But let’s say financial planning existed and you were working within the environment of the times.
First, consider how you would think about some basics.
Most Americans didn’t obsess over the safety of their savings accounts or the money in their checking accounts (if they had them) in the 1920s, even though there was no federal deposit insurance; people didn’t recognize that such protections could exist.
Similarly, the way people thought about mortgages was entirely different. The self-amortizing 15- or 30-year mortgage was relatively rare in the 1920s. Most mortgages were renewable one- or five-year loans.
Only railroads and relatively few other large corporations offered pensions in the 1920s.
Retirement itself was a nebulous concept. You worked until you could no longer work, and then used up whatever savings you had accumulated or depended on your children and other family members.
Investing, of course, was becoming popular, as the stock market captured the public’s imagination.
There had been a real estate boom in Florida, but that bubble burst in October 1925 and crashed after a hurricane in 1926.
Our hypothetical Roaring ’20s financial planner probably would have suggested a diversified portfolio of stocks and bonds, and building a cushion of cash in a strong local bank.
But had a ’20s -era planner continued to offer the same advice in the ’30s and ’40s, he or she would have been considered eccentric at the very least — if that adviser still had any clients at all.
Sure, if someone bought into equities at the nadir of the Depression, they would have seen terrific long-term gains — but remember that it took until 1954 for the Dow Jones Industrial Average to return to its 1929 level.
I think we are entering an era as different from the ’80s and ’90s as the ’30s and ’40s were different from the ’20s.
That’s not to say we’re headed for a depression or world war, but with federal moves as sweeping as those of the 1930s, it’s safe to assume that big changes are coming, and those changes are likely to undermine many of today’s planning assumptions.
For that reason, financial planning has to change. Wiser heads than mine should question and reassess the assumptions planners make about future stock market returns, tax rates and medical costs.
Maybe our definitions of “developed” and “developing” countries have to change. Certainly, the role of real estate in one’s portfolio and appropriate retirement withdrawal rates need a good review.
Clients and potential clients will be wondering what to do in the new environment that is unfolding. To give them the appropriate guidance, it’s time to put the financial planning model under the microscope.