What Do You Get In A Financial Plan?
Financial plans used to be
forbidding, book-length tomes that, not surprisingly, no one read. These days, a
plan tends to be more of an outline, spelling out goals and the means for
achieving them. But whatever a plan looks like, its purpose is the same. It is
the connection between the parts of your financial life. It coordinates short-term
needs with long-term goals, and when a change in one part of your life puts
other things out of whack, the financial plan restores the balance.
One way to think about a
financial plan is by holding up your hand in front of you; your fingers
represent retirement, tax, and estate planning, investment management, and
insurance. Your financial plan is like the space between your fingers. It's
what makes each finger work together with the next one.
Each part of your financial
plan can help you get where you want to go, and each can operate separately. You
could create a college savings account, for instance, without looking at how
that would affect your retirement plan, or use a simple rule of thumb to decide
how much life insurance to buy rather than considering what would be needed to
replace your income, pay for your children's education, and help your spouse
retire comfortably. But it makes sense to use the whole hand, because all of
these things are interrelated.
Suppose, for example, that
you struck it rich during the 1990s' bull market. Maybe you used some of your
gains to pay off your mortgage, and that freed up more of your earnings to put
into your retirement plan. But your income taxes went up because you lost your
mortgage interest deduction, and your expanding net worth meant that estate
taxes could also become a problem.
To create a financial plan, an
advisor first must probe the details of your financial situation. What are your
objectives? How do you feel about risk? If stock investments plummet, will you
stay the course or sell out? How old are your children, and where do they want
to go to college? What kind of pension or 401(k) plan do you have at work? Are
you hoping to leave an inheritance for your children, or are you willing to
exhaust your savings in retirement? And so on.
Once your needs are
understood, a plan is put together that connects the dots. Your investment plan
takes into account your risk tolerance and is designed to fund your current and
long-range goals. Those objectives, in turn, are based on what it will cost for
college, the income you'll need in retirement, the amount you want to leave to
your children. The plan stipulates how much insurance will be required to
protect your family if you die prematurely, and whether insurance should be
part of your estate plan.
But no financial plan is a
once-and-done document. It's part of an ongoing process of checking progress, making
adjustments, and getting back on track when life derails your best-laid plans. If
you have another child, receive an inheritance, lose your job, or get divorced,
a good financial plan, like a helping hand, should be able to pull things back
together again.
Myths about financial
planners…
Myth #1. Financial planners are the same as stockbrokers or
other financial salespeople. The primary function of a stockbroker, insurance
agent or other financial salesperson is sell financial products. The main
purpose of a financial planner is to help clients crystallize their goals and
effectively manage their personal finances in order to achieve their goals and
financial independence. This may or may not involve the purchase of securities,
insurance or other financial products. While many financial planners are
licensed to sell certain financial products, true financial planners put the
interests of the client first, not the sale of products.
Myth #2: Financial planners
are primarily investment advisors. Financial planners counsel clients in many
aspects of their financial lives: determining goals, cash flow, taxes, retirement,
college, business planning, estate planning and insurance, among others. Investing
can certainly be an important part of these areas, but it is not the only part
and it usually is not the primary focus of a planner. Think of the financial
planner as a football coach designing a financial game plan and seeing that it
is properly executed, often with the help of outside specialists such as
attorneys, stockbrokers, insurance agents and CPAs, in the best interests of
the client.
Myth #3: Financial planners
only do “big plans.” Financial planners frequently assist consumers with a
single issue, such as saving for college, developing a realistic budget, rolling
over a retirement account or helping them through the financial aftermath of
the death of a spouse. Yet good planners provide this focused advice in the
context of a person’s overall financial goals, needs and situation, so that
recommended actions don’t undermine other aspects of their financial life.
Myth #4: Financial planners
serve only the affluent. While some financial planners work exclusively with
affluent clients, many work with modest-income clients.
Myth #5: Financial planners
aren’t worth the “expense.” Naturally, financial planners charge for their
services just as do attorneys, doctors or any other professionals. But think of
it as an “investment” rather than an “expense.” That’s because any good
financial planner should save and earn you far more money than what you pay the
planner in fees or commissions. This “investment” might be accomplished by
improving cash flow through better budgeting, reducing your tax liabilities, boosting
investment returns, or even preventing a costly financial catastrophe through
the application of insurance or other defensive measures. This is to say
nothing of the intangible
Myth #6: Legitimate
financial planners charge only fees. Financial planners charge in a variety of
ways, including hourly fees, fees based on clients’ invested assets, annual
retainers and commissions from the sale of financial products. Some planners
offer a choice of compensation, depending on the services. Each type of
arrangement has its advantages and disadvantages. The key is that the planner
fully discloses how he or she charges, that you understand the pros and cons of
each form of compensation, and that the arrangement best fits your needs.
Myth 7: Most people don’t
need financial planners. During the heyday of the bull market, the prevailing
attitude among consumers was to “do it yourself.” As many have painfully
learned recently, they could have used the expert advice and objectivity of a planner
to keep them financially diversified, flexible and focused on their long-term
goals during a soft economy, growing unemployment and bad markets. A financial
planner is someone to “lean on” in this complicated financial world and during
troubled personal financial times.