The financial industry is constantly evolving. For many years, people turned to stockbrokers for money matters. Then, insurance agents entered the picture. Stockbrokers are now called financial advisers and insurance agents are sometimes financial planners.
There are independent financial planners, fee-only money managers and you can even have your accountant invest your money for you at some accounting firms. It can be difficult to know what you are really dealing with. Most people start by acknowledging they need some help with their money. That much we know for sure. What is less certain is what sort of help they need.
To make things simple, help falls into two categories: financial planning and money management.
Financial planning is valuable and important. The key elements of good financial planning are retirement forecasting, tax analysis, insurance analysis and estate planning. Note that I didn’t say investing. We haven’t gotten to that yet.
When you usually meet with an investment advisor, they will have assumed your goals are set and their primary function is to create alternatives and make recommendations specific to those financial goals.
A certified financial planner is a ‘financial psychologist’ who understands the life you want to create for yourself in the future and the life you currently live today. A certified financial planner will look at your current cash flow and expenditures as well as your net worth and be able to tell a great deal about you not only financially, but personally. Under the financial planning process, the certified financial planner continuously directs and monitors specific goals that you have. The investment advisor is only going to monitor the performance of the product, but not connect it into the specific plan that was associated with the goal-setting process developed by the certified financial planner.
When you initially meet with a certified financial planner, you will find that some of the questions will not be financial. For example, when you are talking about financial independence and/or retirement the certified financial planner might ask you things like:
- How do you spend your time?
- What would you really like to do if you were financially independent?
- How will you stay motivated if you don’t do the type of work you do now?
- How will you react to not having a job?
- How would your family be affected by your retirement and health issues that may have to be considered within the plan, such as your personal life expectancy due to previous disease or family history?
The certified financial planner is really the quarterback or facilitator of the architectural plans created for your present and future. In essence, what separates an investment advisor from a certified financial planner is the certified financial planner receives training in what is referred to as the six step financial planning process:
Step one: The certified financial planner works with you to clarify your present situation by collecting and assessing all your relevant financial data such as lists of assets and liabilities, tax returns, records of securities transactions, insurance policies, wills, pension plans, etc.
Step two: The certified financial planner will help you identify both your financial and personal goals and objectives as well as clarify your financial and personal values and attitudes. These may include providing for children’s education, supporting elderly parents, or relieving immediate financial pressures which will help maintain your current lifestyle and provide for retirement. These considerations are important in determining your best financial planning strategy.
Step three: The certified financial planner will identify financial problems that create barriers to achieving financial independence. Problem areas can include too little or too much insurance coverage, or a high tax burden. Your cash flow may be inadequate and may need to be reviewed. These possible problem areas must be identified before solutions can be found.
Step four: The certified financial planner will then provide written recommendations and alternative solutions. The length of the recommendations will vary with the complexity of your individual situation.
Step five: A financial plan is only helpful if the recommendations are put into action. Implementing the right strategy will help you reach your desired goals and objectives. The certified financial planner will assist you in the actual execution of the recommendations, and in co-ordinating their implementation with other knowledgeable professionals, if necessary which might include investment advisors and insurance agents.
Step six: The certified financial planner will provide you with frequent reviews and revisions of your plan to assure that your goals are achieved. Your financial situation should be reassessed at least once a year to account for changes in your life and current economic conditions.
The problem I have with the investment firms or insurance agencies that pretend to provide financial planning is that there is little connection between the financial plan and the investment decisions.
A financial plan is an important ingredient to success, but it is not the only tail that should be wagging the dog. Whether or not all these plans come true is almost entirely dependent on whether or not money is saved and invested wisely.
If you are shopping for a financial planner, take heed of one important fact. If your choice of planner works for an insurance company, the plan will conclude that your best investment strategies are the insurance and mutual fund products offered by the insurance company.
If your planner works for a brokerage firm, you should know in advance that the plan will conclude with a recommendation that you get rid of your current investments and buy some new ones at the brokerage firm. This is not merely a cynical observation on my part; it is how financial planning courses are taught in the real world.
I once read a popular financial planning course book that actually closes a chapter on presenting results to a client with the instruction to, “… and then explain why your insurance policy/annuity/ mutual fund/managed account program will best serve the client’s future needs.” The esteemed authors of the textbook apparently saw no irony in suggesting that the most appropriate investment strategy depends on who wrote the plan and what they are selling.
If you are about to search for financial advice of some kind, take a moment to consider whether you are looking for a new plan, or for the fulfillment of your existing plan. If you are still working and need to know how much to set aside for the kids’ college and for your retirement and whether you can afford a vacation home, then a financial plan is probably a good idea.
Just keep in mind that financial plans are generally written by people that then want to also manage your investments. You will need to decide if the planner that you chose is also the best person to manage the actual dollars.
If you are nearly or already retired, I doubt that a plan is the key to your success. If the fulfillment of your expectations is what you really want, then perhaps you should be shopping around for the best investment advice you can get.
The best plan in the world is just a plan. Entrepreneurs and business people understand this intuitively. The key to success is not the plan; it is in the execution of the steps to reach the goals.
I once read an interview with Warren Buffett, founder of Berkshire Hathaway Inc., and someone I believe is the world’s greatest investor. The interviewer asked Buffett if he was willing to share any of his personal investment strategies. Buffett laughed and said that everyone knows his strategy and his plan. It’s been public knowledge since the beginning. He said that the reason he and his company are successful is that they execute the day to day details so that their plan becomes reality.
I am regularly asked; why should someone employ a certified financial planner? Why can’t they simple study the fundamentals and execute their own financial plan by using the tools that are readily available? These same questions could be asked of professionals including doctors, lawyers, engineers, and accountants.
Today there is very little human knowledge that can not be found in a book or on the Internet, awaiting those that have the time, interest and desire to learn, however, no one person can understand and successfully apply the total of this knowledge. The person who is sick might die before they find the information that can cure their illness. While a trained doctor, through specialized knowledge and experiences can recognize your symptoms and cure you within a matter of hours or days.
A Certified Financial Planner can provide you with sound information and effective advice to ensure your financial health. Life is to short too find the right financial way through trial and error. Most people do not notice the symptoms of their financial illness until it is too late for them to affect their financial health.