Michael E. Kitces is the director of research for Pinnacle Advisory Group, a private wealth-management firm located in Columbia, Md., that oversees about $1 billion of client assets. He is the publisher of the e-newsletter "The Kitces Report "and the blog Nerd's Eye View through his website, as well as on AdvisorOne.
Kitces, MSFS, MTAX, CFP, CLU, ChFC, is also one of the 2010 recipients of the Financial Planning Association's "Heart of Financial Planning" awards for his dedication to advancing the financial planning profession. Follow Kitces on Twitter at @MichaelKitces.
Today I ask and Michael (right) answers what I hope are Five Good Questions.
1. In your view, what are the difference and the significance, if any, in terms like wealth manager, investment manager and financial planner?
While the exact meaning of these terms is somewhat debated, I do believe that they describe substantively different services, and require different knowledge and skills to execute effectively. And while some of it is semantics, I believe the distinctions are important – how we describe ourselves and hold ourselves out to the public matters.
I would characterize an investment manager as someone who is focused solely on investment management – the service delivered is managing the pot (or pots) of money, and the expectation is to create value in the investment management process.
A financial planner and a wealth manager, however, provide a broader range of services, typically incorporating advice regarding a broad range of financial issues, which may or may not include the hands-on investment management aspects as a part.
As I wrote recently on my blog, the emerging factor that is distinguishing a financial planner from a wealth manager is the wealth level of the target client. This is more than just using lofty terms; the reality is that the body of knowledge needed to serve the ultra high net worth market – as a private wealth manager – is different than the knowledge needed to serve the rest of the public.
Over time, I expect that we will increasingly differentiate between the two; an early glimpse of this is the curriculum being developed by IMCA (Investment Management Consultants Association) for their new CPWA (Certified Private Wealth Advisor) certification, which has only a limited overlap to the CFP certification curriculum.
2. Is the "4% rule" still an appropriate rule of thumb?
I find the "4% rule" continues to remain relevant today. The reality, as I recently wrote, is that such safe withdrawal rates are based not on average returns, but the worst return sequences we've seen in history – environments where balanced portfolios don't even generate 1% real returns for 15 years (the entire first half of retirement!).
Accordingly, if real returns on bonds stay low and the S&P 500 merely makes it back to its old high by the middle of next decade – truly a horrible return environment – we're merely looking at results that are similar to the exact returns the 4% rule is based upon in the first place.
Ultimately, I am a little skeptical about whether those who retired in the year 2000 will ultimately violate the 4% rule, as market valuations back then truly reached levels of distortion never seen in our market history, even leading into the Crash of 1929 and the Great Depression.
However, today's market environment, while still overvalued, looks relatively similar to numerous other overvalued market environments throughout history, so while the year 2000 retiree may be at risk (although recent follow-up research by Bill Bengen has shown that actually the year 2000 is still reasonably on track!), this does not raise the same concerns for today's retirees, as market valuations today are far less egregious.
On the other hand, market valuations are still high on a long-term basis, so I wouldn't necessarily recommend clients significantly raise spending above that benchmark, unless they have a higher tolerance for risk and a potential need to reduce spending in the future.
3. Do you think the barriers to entry to and/or the education and training components of our profession are too low?
I do believe that the educational and training requirements for financial planning need to rise, for it to become a bona fide true profession – and I don't believe financial planning has reached the status of true profession yet, because of this.
It should require more than what is essentially "just" half a dozen undergraduate-level courses in personal finance, and should have a more formalized training process than just unleashing newly educated practitioners on the public to earn their experience without necessarily being supervised (and coached and trained) in the advice being delivered.
Although it will be a long time before we get there, I expect financial planning in the future, as a profession, to have both a deeper body of knowledge, and also a great deal of additional focus in trust, communication, and how to help clients actually change their behavior (to implement the advice).
Ultimately, significant training and educational requirements do effectively become a barrier to entry as well, which some have been critical of, but that's part of the natural progression in the development of a profession.
If the public doesn't have a clear way to distinguish between the trained and untrained professional practitioner, it's not a profession, and more importantly you can't protect the public.
