Issues in Comprehensive Personal Financial Planning

Abstract Increasing numbers of firms within the financial services industry continue to organize around the concept of delivering comprehensive personal financial planning (PFP) services. PFP delivery models reflect the desire to control client relationships and realize economies of scope. In this article, we argue that the need for comprehensive PFP is well grounded theoretically, although research to guide the appropriate application of the theory remains lacking. Comprehensive PFP is not without its potential costs, including risks associated with lessened advisor diversification at the client level, reduced transparency, and agency problems. To address these risks, consumers likely will turn to credentials as a proxy for quality and trustworthiness. © 2002 Academy of Financial Services. All rights reserved. JEL classification: D11; G11; G20 Keywords: Personal financial planning; Modern portfolio theory 1. Introduction As academics, we must portray our ideas as new and convince editors that they are. For invited articles, we enjoy some relief from the second requirement, but readers bind us to the first. We offer readers three ideas to consider in this article. Each is delivered in a conceptual framework. Each cries out for empirical investigation, largely lacking at present. Finally, each matters to individuals, bringing the article into the aim and scope of the Financial Services Review. First, we step back from the contemporary financial trends to examine the theoretical foundation of comprehensive personal financial planning (PFP). There are several reasons for this analysis; the most important of which is that the PFP field has evolved largely devoid of a theoretical foundation. Although PFP has been recognizable for decades (Black and Black, 1987), the continuing omission of conceptual underpinnings is hindering the development of PFP as a distinct profession. Borrowing from modern portfolio theory (MPT) and considering net worth in a broader context, we argue that comprehensive PFP is theoretically supported and conceptually necessary. Second, assuming that comprehensive PFP connotes consolidated delivery (or, at least, oversight), we offer our thoughts about the costs and benefits of applicable delivery models. Consolidated delivery offers the potential for economies of scale, including reduced search, monitoring, information, and transaction costs for clients. The potential downsides of consolidated delivery have received less attention. We examine two in particular: the client's lack of diversification at the level of the advisor and greater opacity. Rigorous research is lacking on all of these matters, again, with negative implications for the PFP profession. Third, we examine how consolidated delivery affects financial service credentials, another topic begging for research. We argue that the credential of the advisor closest to the client (generically, the planner) will have special significance. Credentials address information asymmetry, and the largest gap is between client and planner. As to other advisors (generically, the specialists) the client might engage, the relevant information asymmetry is between the planner and the specialist. While specialist credentials will still have value in signaling competence to planners, they will be less relevant to clients. 2. The underpinnings of comprehensive PFP 2.1. The theoretical need Few disciplines achieve recognition and respect without a strong theory base, particularly within higher education. We believe that PFP will prove no exception. Thus, unless PFP can articulate a conceptually sound basis on which to build, its study will remain largely outside mainstream academia. The consequences of this exclusion cannot be forecast with precision, but they would seem to be negative. We know of no respected profession without academic underpinnings and recognized academic standing. …