Where planners (sort of) get it right

Diversification. Risk tolerance. Planners are sounding the right notes, but missing the big picture.

By The Mole, Money Magazine's undercover financial planner

SEATTLE (Money Magazine) -- At the Financial Planning Association's annual convention this week, there is no shortage of lectures meant to help us become more knowledgeable about investing - and, by extension, better salesmen of investing products.

I agreed with a lot of what I heard, but we planners will have to go well beyond these lessons to do right by our clients.

The Mole is a certified financial planner and certified public accountant who, in the interest of fairness, thinks you should know what goes on behind the scenes. Have a topic you'd like him to write about? E-mail themole@moneymail.com.

Take the session I attended that devoted some time to international investing.

I absolutely agreed with the conclusion that we need a good chunk of our stock portfolio invested internationally. After all, we live in a global economy, and investing globally is critical to building a diversified portfolio.

But the argument for international investing was mostly about how the economies of China and India will grow much faster than that of the United States.

It's a great sales pitch. But that China and India are growing rapidly is well known and probably reflected in the stock markets there. In addition, it turns out that fast-growing economies don't usually translate into great-performing stock markets.

In another lecture, I heard about how it's important to know a client's risk profile before selecting a portfolio. Couldn't have agreed more.

But then the speaker went on to enthusiastically pitch a short survey a client could take to determine risk tolerance. Surveys do a poor job of measuring how we actually behave. It's one thing to ask someone what they would do if their portfolio crashed in value, and a completely different thing to observe their behavior when they have seen their dreams evaporate.

Perhaps a better way to measure your risk tolerance is to revisit how you behaved under past market conditions. Did you buy tech stocks in the late 1990s thinking they couldn't miss? When the stocks came crashing down, did you sell in a panic?

Then ask yourself if you've learned from history or if you are destined to repeat it.

Part planner, part therapist

I'm of the opinion that it's not the emotions we hope to control, but rather how our clients manage those emotions. The bottom line is that human beings are risk-seeking missiles in good times, and metaphorically hiding under the bed in bad. That leads us down the self-sabotage path of buying high and selling low. A good financial planner can certainly help their client avoid these pitfalls.

Some financial planners do a great job of this by having the client sign investment policy statements and helping them to stick to it. Unfortunately, a recent study found that professional advisors did no better than the general public in keeping our emotions in check. We advisors are just as likely to chase the hot performers, and just as often as the general consumer.

Keep that in mind that next time you get a pitch for an investment that has a lot of buzz around it. Similarly, the next time markets go into a tailspin, you can hope that your advisor will keep a cool head, but you can help by not panicking yourself.

Finally, I heard about how we must become "life coaches" if we want to differentiate our financial planning practice.

I'm all for understanding what motivates my clients and helping them build a financial plan to support their passions. But that's where I draw the line.

I'm still working on my own life. I, along with most financial planners, have absolutely no qualifications to assume the role of life coach.

Planners' conference falls short on ethics

More from the Mole in Money Magazine:

Financial advice: Get it in writing: When making investment decisions, believe what your adviser writes, not what he speaks.

The wrong kind of advice: When your planner steers you toward expensive investments, stop and ask the right questions.

Why 'trust me' makes me nervous: Planners try to make money for clients, but also for themselves. Anyone who says otherwise is trouble.

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