Peter Lynch on Financial Planning...

(Opening lines from a lecture by Peter Lynch.. circa 2000 or so... Do not have the full talk)

As a whole, the financial services industry has become morally bankrupt and spiritually depleted. We have created a ‘cottage industry’ that feeds millions who make a living within, and on the fringe of financial markets. Nowhere is the illusion more alive than in the allure of the terminology, “financial planning”. Here, millions of investors have assumed that a ‘scientific evaluation’ has occurred.

Before I share why the ‘scientific evaluation’ assumption is inaccurate, let me tell you how I believe the term ‘financial planning’ evolved. In the late 1980s, the financial services industry was deregulated. Up until that time, brokers sold stocks & bonds, insurance salesmen sold life and auto insurance, and banks made credit available. The sales method, employed at the time, was basically universal ‘give the client a headache and then sell him an aspirin’ (identify what was wrong and just ‘happen’ to have the solution in your briefcase).

When deregulation went in to effect, the financial services industry players had to appear to the investing public as all encompassing and, thus, the term ‘financial planning’ was born. It would be a universal sign that your bank teller can now also be your broker and your insurance agent.

One-stop financial planning became the norm. So what’s wrong with this picture?

There is a story that went around about three accountants that were applying for a job. Each was asked only one question: ‘How much is two plus two?’. The first two simply said ‘four’. The third got the job. Why? His answer was ‘What do you want it to be?’. Financial planning is a flawed process. This ‘scientific process’ works in essentially the same fashion as the question above. It is simply guesswork utilizing several significant mathematical assumptions such as interest rates, inflation rates and tax rates. These economic factors are unimportant to some since they always ‘buy low and sell high’. However, I hope that you would agree that they are assumptions that will impact the future. Therefore, since we realise that no one can accurately predict the future, it stands to reason that one or more of these assumptions must be incorrect in the plan, thereby leading to either the plan being reconfigured or a change in financial planners, or the worst choice, ‘doing it yourself’. Also the plan begins with the question ‘how much do you need at retirement?’. Therefore, the ‘scientific process’ is nothing more than smoke and mirrors, which utilizes the correct combination of assumptions to ‘reach’ that goal. The reality is that the assumptions are simply a tool to make a sale. And, at the next ‘consultation’ with another client and on the same day, your ‘Certified Financial Planner’ may use totally different interest, inflation and tax assumptions= for the same span of time!

Unlike many of my peers, I put my pants on one leg at a time. Perhaps this is why, I still have pants while others have lost their shirts (pants, underwear etc) and just as much an expert in being wrong as I am on being right. But remember that we are the sum total of all of our mistakes and smartest person is the one who made the most mistakes and learned from those mistakes. With that said... I will ----

All I ask is an open mind, which is difficult considering that the financial services industry, and supporting media outlets, spends billions on creating an illusion that even Houdini would appreciate.