"financial decisions are becoming more complicated and more important to one's well-being at the same time. Traditional pensions are disappearing while self-directed 401Ks are on the rise. Businesses, salespeople and politicians twist, bend and contort economic statistics to sell you products or ideas. How can we tell fact from fiction?"
It is in that vein that I'd like to spend a few posts on something close to me, financial planning.
"What is financial planning exactly?", you say, "and isn't that what a stockbroker or investment advisor does?". Great questions; thanks for asking. Let's start with a definition: Financial planning is the long-term process of intelligently managing your finances so you can achieve your goals, while negotiating the financial barriers and decisions that inevitably arise in throughout life1. Put a little differently, it is the process of managing your financial life.
One very important take away here, is that financial planning is a process, not a product. In fact, we have a standardized process that begins with understanding a client's goals and progresses through collecting and analyzing data, forming a plan of attack, and implementing that plan as follows:
Notice the last step is that of monitoring and adjusting. This circular aspect of the process is essential. After all, lives change and not always in predictable ways- people get married, have kids, get divorced, receive inheritances, get ill, sell their business or cope with setbacks. The original "financial plan" may not be valid after a number of years, but financial choices must be made nonetheless. It is the ongoing coaching and guidance which can add tremendous value to one's financial success.
Delving deeper, what sort of things does "managing your finances" entail? The obvious one which most people think of first is forming investment strategy and managing investments. Indeed, this is a large part of what I do. Just as important are things like budgeting, risk control (largely insurance- home, auto, life, health, long-term care), estate planning, education planning (plan on paying for the kids' college, do you?), charitable giving and of course retirement planning. Considering that time share in the mountains? Want to know whether you should pay your mortgage off faster? You see, proper financial planning is not just about investments. It is about maximizing your total financial picture.
Of course, not everyone needs advice or help in all these areas. Budgeting for example, is something I only occasionally do with clients in great detail. Each client situation is different, with each emphasizing different concerns and requiring different solutions. This is why proper financial planning is a customized solution, not something output from a software package (although many, many planners do just that). This is also why a true financial planner begins with planning, not with selling investments or insurance. In fact, I would be remiss if I didn't point out that one should always understand how a financial professional is compensated. Despite the myriad of required legal disclosures, ALWAYS ask how they make money, for you will immediately uncover their conflicts of interest. Do they earn commissions for selling you something like mutual funds or insurance? That's ok, just remember they have an incentive to sell you such things, the more the better [for them]. Or are they paid by the hour or another method? To the extent you can, try to have their incentives line up with yours.
Which brings me to "stock brokers" and other related professionals. A "broker" is usually not a financial planner, though they may try to sell you on the concept. Brokers traditionally only facilitate investment transactions. Their role has evolved over the years and some are in fact real financial planners. Check their credentials, find out what they actually do for/with clients. If it doesn't mirror the process and services described above, then they aren't financial planners. Depending on your needs, a broker or insurance professional may be right for you- just don't expect them to guide you through life's financial decisions.
Don't hesitate to ask questions. I have only scratched the surface of this topic (though I plan more sometime).
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1Definition adapted from the Financial Planning Association, of which I am a member, at www.fpanet.org. You can learn a lot about financial planning from the FPA.
A friend and collegue of mine who uses a variety of compensation models [expectedly] gave me a bit of grief for this post. He wanted to point out that you can pay too much if someone charges hourly too. Of course overcharging can occur in any circumstance, so it is always a good idea to get an estimate of what something might cost. The same goes for accountants and attorneys who charge hourly or piecemeal too. That said, aligning the advisor's interests with yours to the extent possible is always a good idea.
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