Lynn Hopewell, one of the pioneers of the financial planning profession, once said, "Rules of thumb are for people who want to decide things without thinking about them." Chuck Jaffe (a columnist at MarketWatch) recently wrote an article titled, "Seven Rules of Thumb That Make Little Sense." He was referring to the blanket advice that is often given to consumers, such as: subtract your age from 100 to determine the percentage of stock in your portfolio; plan on spending 75% of your current income during retirement; purchase five times your annual income in life insurance; save 10% of your income while you are working. I'm sure that we are all familiar with these and other rules of thumb and, hopefully, none of us use them in our practices.

There are, however, some "rules" that some advisors use in dealing with their clients that I may categorize as "rules of dumb" because they may dumb down our profession and, as Hopewell observed, may not require much thinking. Among some of these rules are:

A safe withdrawal rate is 4% of your portfolio improved by inflation each year.

While this rule has created many fine articles and discussions, it is our experience that it is extremely impractical to implement when one is planning for the future. To begin with, how does one calculate inflation? Do we use the CPI? Most of the research that I have seen does so.

The problem is that, while the CPI (as controversial a measure as that is) measures price movements for the country, it probably has little effect on our clients. The inflation they experience is unique to their own circumstances, and if one is to use an inflation factor it needs to be the only one that matters to our clients-the increases in their standards of living. Has any advisor ever received a call from a client to request a rise in their monthly withdrawals to coincide with the exact percentage change in the CPI? If not, why do we use this as a rule? Planning for each individual's situation and reviewing it on a regular basis is the only rule that we believe should be applied when determining what a safe withdrawal rate is.

Wealthy people don't need financial planning and middle-class people can't afford it.

I recently read an article written by a journalist who has extensive experience and has covered our profession for many years. In this article, he stated that there was a paradox for financial planners. He claimed that the people who need it, the middle class, cannot afford to pay advisors for planning. Those who can afford it, the "wealthy," don't need it. I must disagree with him on both counts. There are many fine financial planners who bill for their services hourly and specialize in middle-class clients. One need only look at what the Garrett Network has accomplished.
To suggest that wealthy people do not need planning is simply to not understand what planning is. Apparently, some advisors believe that financial planning is retirement planning and that those who have accumulated large sums of money don't need to plan for their current and future cash flows. However, the wealthier the individual, the more complicated his or her issues are. Assuring that clients' estate plans, tax plans, investments, business plans and other issues are coordinated and reviewed periodically is extremely important to clients with wealth. To assume they don't need financial planning is, in my opinion, ludicrous.

High allocations to fixed income reduce risk.

I suppose that depends on how one defines risk. At our firm, we define it as running out of money before you run out of life. If a major allocation to fixed income will produce returns that virtually assure that a client will deplete his portfolio in his lifetime, how can one define that as a low-risk portfolio? Adding the appropriate allocation to equities may create more fluctuation, but it could reduce the risk of running out of money. Before allocating a portfolio, one must not only measure our clients' "risk tolerance," but the return necessary to achieve their goals.

Be sure and harvest tax losses at the end of each year.

I can never understand why some advisors postpone their tax planning until December of each year. Are tax losses that one can harvest more valuable in December than they are in January? And, of course, a tax loss in February may not exist in December if the market has rebounded. Tax losses are windows of opportunity and need to be seized upon when they occur. In volatile years, we may tax harvest for some of our clients several times. We did so in 2008 and early 2009 and, as a result, many of our clients still have substantial loss carry-forwards and will not pay capital gains taxes for several years.

Everyone retires.

Asking a client, "When do you plan to retire?" is, in our opinion, very presumptuous. There are people, including me, who have no plans to retire. But so much of what is promoted as financial planning assumes that everyone wants to retire at some point in their lives.

So we ask the question, perhaps get a superficial answer, and go about the business of projecting what that might look like and what the client needs to do to accomplish a goal that she may not even have. We prefer asking each client, "How do you visualize your life in your 60s, 70s, 80s and beyond?" If retirement is in the client's plans, she will tell you.

Accumulating wealth is the major purpose of financial planning.

While wealth accumulation may be a desirable goal for many of our clients, the primary job of a financial life planner is to help clients answer the question: "For what purpose?" As we have written on several occasions, we need to remind our clients that money is a wonderful servant and a poor master. While most people understand this intellectually, their actions are often in conflict. Also, the media does not help with its "stock of the week" mentality. As planners, we need to take the time to truly understand our clients' goals and wishes and help them develop and follow a plan that gets them to where they want to be. Accumulating a large estate to leave a legacy may be what they want. But to assume that everyone wants to die rich is not financial life planning and if that is what we do, we should label ourselves, "wealth accumulators," not "financial planners."

We prepare financial PLANS.

From time to time I am asked by advisors who don't know me very well whether I prepare a financial plan before investing a client's money. As we discuss this, it becomes obvious to me that many of these people see a financial plan as something they prepare only once before they start managing a portfolio.

People do not need financial plans, they need financial planning and that implies an ongoing process with regular meetings and updates to assure that they are on target to achieve their goals, and that changes in their circumstances are factored in to their planning. It is a lifelong process.

Monte Carlo simulations are accurate predictors of clients' odds of success.

While Monte Carlo simulations are valuable tools in financial planning, they are appropriately named. When a planner tells a client that he has a 90% chance of achieving his goals and states that with certainty, that planner may be unknowingly deceiving his client. When one projects 30, 40 or more years into the future, it is impossible to make accurate predictions about what may happen. There are so many variables, such as the return on the portfolio, the timing of returns, spending patterns, income, unexpected expenses and many other things, that relying on a favorable percentage can create a false sense of security for some of our clients and may lead to behavior that sabotages the attainment of their goals. We need to communicate the uncertainty of these Monte Carlo simulations.

Those of us who use them regularly will attest to the fact that the odds of success can change substantially from year to year. If one plays poker or blackjack, we all know that the odds of winning or losing changes each time a new card is dealt. I know that the simulations we did in early 2009 looked significantly different than the projections we did in 2007. While we may all know this, it is extremely important that we communicate the uncertainty of these simulations to our clients so that they don't see them as accurate predictions of their future finances.

The list is not meant to be all-inclusive, and there may be other rules and shortcuts advisors choose to use in their practices, but nothing can replace a thorough discovery process, advice that is unique to each client and periodic reviews and updates. Financial planners are smart, and they don't need to be guilty of using rules of dumb.

Roy Diliberto is chairman and founder of RTD Financial Advisors Inc. in Philadelphia.