The allegory that follows is presented to all practicing financial planners in the hope of furthering the discussion of professionalism introduced in the April 2008 issue of Financial Advisor magazine. The cover of that issue asked a key question, namely, "What makes a profession, and will we ever meet that standard?" Nearly every other professional field of endeavor has asked the same question and arrived at an affirmative answer. The time for financial planners to do the same is at hand. Understanding the relationship between engineering and physics can provide a guide to help financial planners make the journey from occupational effort to professional standing.
The Engineer
One of mankind's great desires has been to build structures that will last beyond the life of individual builders. The quest to create something greater than oneself is a human trait that can be traced back to the earliest of times. Consider the yearning to build public projects for the benefit of communities. From the most primitive of mankind's days, people turned to experts to help them build homes, bridges, dams and other structures that have as their ultimate outcome the improvement of well-being.
Most structures built by early humans-even those designed by experts of the time-failed to last. Time destroyed what these people created. But a major change occurred several thousand years ago as they attempted to build longer-lasting structures. Certain groups of people with an inclination toward construction began to examine the past for building concepts and methods that produced meaningful results. Soon, these individuals were seen as experts in their field. They were no longer simple builders of things, but engineers. As engineers these people were expected to thoroughly know the fundamentals of building and to exemplify traits of prudent conduct. Today, it is possible to see and touch the results of this engineering transformation by visiting marvels around the world.
Basic engineering approaches and building processes as developed through the ages, changed little over the millennia. Engineers, as the holders of building knowledge, passed down certain principles and techniques to young apprentices. The largest structures in the world up to the late 1880s were designed and built in basically the same way the great pyramids in Egypt were constructed-using elements from the earth, including stone and mortar.
While engineers assumed that they held the ultimate knowledge of building, this limited outlook actually hampered the development of engineering processes. Although engineers had been the ones to first grasp the principles of construction, they failed to appreciate the underlying theoretical and mathematical underpinnings of the building process. It was not until new technologies such as high-density glass, steel, aluminum, etc. came about through the study of physics that engineering made an unprecedented leap in history, and became what is known and practiced today.
The Professor
Enter the professor. Though the engineers had learned how to create lasting structures, it was now realized that their results were based on fundamental physical laws. Successful building projects had emerged from the recounting of and adaptation to countless failures of past engineering attempts. But the occupation of engineering had failed to progress beyond the basic limits of recognized human knowledge until physics emerged as an academic endeavor, led by people who were more likely to revel in theory than in the actual building process. In short, it took the development of theoretical models and the testing of conceptual approaches with physical objects in a laboratory to help shape engineering into a profession.
Stated another way, it is now taken for granted that physics is the underlying theoretical basis for all engineering. Every trained engineer in the United States has been immersed in the dynamic physics underlying the building process. Much of this training is mathematically based. So much so that the most successful engineers of 200 years ago might possibly fail basic engineering courses taught in universities today! Without a strong grounding in the theoretical and methodological structure of physics, very few of the achievements of modern man would exist today. There would be no skyscrapers. No solar panels. No electric cars. No satellites.
The Planner
Now, shift mental gears for a moment and consider the state of the financial planning field in the 21st century. It is common for financial planners to view themselves as financial engineers in the lives of their clients. It is natural for planners to want to construct plans and strategies that will stand the test of time. To do this they are likely to ask other practitioners, "What works?" This question is akin to a novice engineer three hundred years ago asking an experienced builder, "What should I do to make sure that this building will stand?" That is, what works? Of course, there are answers to the advisor's question. Clients can develop a budget. Clients can attempt to save money. Clients can do many things that appear to "work." Much of the knowledge of what works comes from what other practitioners and experts have done in the past. This process is akin to the apprenticeship method used in the engineering field in early times.
Unfortunately, professions are not built on simple outcomes alone. True professionals value higher education and the pursuit of advanced knowledge as a way to make larger global impacts on the well-being of the wider population. Sometimes the pursuit of knowledge takes researchers into realms that have no obvious "what works" outcomes. This does not mean, however, that theoretical modeling and testing of theoretically based frameworks are of little use. Again, consider the profession of engineering. It took theoretical modeling in physics laboratories to fully understand the multidimensional stressors and reactions of materials to changing elements before advanced building could ever be accomplished in the field.
The same holds true for the practice of financial planning. Practitioners take for granted that they know what works with clients, and this is, today, a significant assumption. It is more certain that few practitioners fully understand the interactions at play between financial concerns and other factors in clients' lives. The practice of financial planning is based almost entirely on the value of professional judgment. Practitioners are just as likely to base recommendations on hunches as they are on clinically proven tools. Unfortunately, it is a problematic practice to establish client plans on a hunch. Using an engineering metaphor, planners are attempting to build skyscrapers based on principles of brick and mortar construction. It will take basic theoretical research combined with clinical application of theory before planners will be able to truly call themselves professionals in the sense of building financial plans that can stand the test of time.