This can be a very general topic or very succinct, so let’s explore it both ways. One very short and sweet definition I read was that financial planning “is the process of making plans to achieve monetary goals” (www.wisegeek.com). I kind of like how they distilled it down do the key element of planning for a goal (that related to your money of course).
Another definition that I found online that I like defines financial planning as “an ongoing process to help you make sensible decisions about money that can help you achieve your goals in life”. This was from the UK site called www.financialplanning.org and I’m a bit ashamed to say that the US website for CFP’s really didn’t even have a definition available on their website. Sadly their organization’s website was more interested in helping you find a CFP (Certified Financial Planner) rather than letting you know what a financial plan is.
A key word that hit me in previous definition is “ongoing” which is great to remember because your financial plan at age 25 is going to be different than when you are 35 or 55. It will change if you have kids or if your spouse decides to work (or not work), but rest assured that your plan will need to be an ongoing, ever-changing process that you have to check against your goals.
I firmly believe that everyone should have a financial plan and that everyone’s plan will be slightly different because everyone’s goals and life circumstances are different. The key is to determine what your financial goals are and then take action to pursue them. If your goals change, that’s fine. If you make mistakes, that’s fine too. I think it is critical though to take a full-spectrum look at all the aspects related to finances in your life and get them all pointed toward the same goal. And the best way to really do this is to consult a professional (financial planner or financial coach) to help discuss and walk you through the process to get a plan that works for you.
Your Planner/Coach Should Let You Do Most of the Talking
Bear in mind though that a financial plan is rarely focused on which specific equities or bonds to invest in. Any financial planner or coach that really has your best interest at heart should spend considerable time getting to know you and your specific goals and situation. They should open questions and really just listen and take notes to understand you and your goals better. If they just talk about how they can make you a certain return or that you must invest in a particular stock or bond, turn around and leave. No one can guarantee returns (plus it’s illegal to do so). So much of the success of carrying out a financial plan is emotional, not technical.
The planner/coach needs to understand your emotions and discuss ideas and possibilities that can help you feel better about your path forward (your plan). Picking actual stocks/bonds/mutual funds can be done by many people and there are countess options available to you, but having a good discussion with a planner or coach who can listen and give you feedback on ways to achieve you plan, is very valuable. They can help you through the pros and cons of various investment vehicles (401(k), IRA, Roth IRA, 529 Plan, etc.) and the long term ramifications of each as it pertains to your specific goals. Then you (the customer) can determine what is best for you. Your planner/coach should not force or coerce you into any investment. Most financial coaches don’t sell investments but it is quite common for financial planners to be investment advisers as well and they may have an interest in selling you a product. If you don’t feel right, tell them, and a good planner should be OK with that.
Is it possible to create your own financial plan? Possibly. If you are student of the field of personal finance and investing and are in tune with the latest investment vehicles and laws surrounding them, then yes, you may be able to effectively make a financial plan. Some people (like myself) enjoy this field and have been studying it for many years and dig in to know all they can. That’s probably not how the majority of people are, so most folks will need to take some time to sit down with their financial planner or financial coach to get a plan started.
There are Many Different Ways that Planners and Advisers Can Charge for Their Services
Does you planner need to also do your investing for you? No. They certainly can do you investing for you if they are a registered investment adviser and the majority of the industry has chosen this type of arrangement. I’m likely not the first one to break it to you, but financial planning doesn’t come free (big surprise, right), but it shouldn’t have to cost an exorbitant amount either. The industry’s most common pricing model is that you turn over your assets to the firm and in return they provide you with financial planning advice and they also do your investing for you. In return they traditionally charge +/- 1% of the total assets under management each year. So, if you have $500,000 in assets, they would charge you $5,000 each year to manage your investment accounts and also provide you with a certain level of financial planning services. If you have $1,000,000 then they will charge you roughly $10,000 per year. These type of advisers will call themselves fee-only because they are not changing you a commission on investments, and instead are charging you the percentage fee every year.
What if you just want a financial plan and are OK to do the investing on your own? There are a growing number of people where this is a good option. Plus many firms won’t even take on a client if they don’t have a certain amount of assets that they could manage (typically $500,000-$1,000,000). So where does someone go to get advice when they don’t have enough assets for someone else to manage, but still want some advice on the right path to take? That is where a different type of fee-only planner comes in.
Another type of fee-only planner charges a flat/fixed fee or an hourly rate for their services. They should typically not charge based on your net worth, but keep in mind that a plan for someone with a $1,000,000 net worth is going to be different than a client with a $100,000 net worth and likely take more time and effort to accomplish the same task, so charges may differ. But, the point here is that there are some planners that will just work with you on a plan that you then execute.
My personal belief is that there need to be more of these types of planners. The financial planning/advising industry is so focused on the assets under management model where they can charge a percentage fee every year that they are missing a huge segment of the population who needs advising services.
Don’t get me wrong, I’m not bashing on the advisers that charge by the assets under management structure. There are definitely people who want and are willing to pay for someone to take their assets and invest them for them so they don’t have to worry about it at all. I get it. But I’ve seen some statistics that say 1 in 20 Americans have a $1 million net worth, so what about the other 19 of 20, where do they go to get their financial planning and advising done? In fact I would even back up a bit and say there is an even greater number of people that need financial coaching. Of the 19 out of 20 people I mentioned the majority of them could first benefit from some financial coaching which is broader than just dealing with investments. You have to have money to invest first to be concerned about investments. There is a massive segment of US population that needs guidance on topics like budgeting, debt elimination, living below your means, and then getting into wealth building after that. Once they hit the wealth building phase, the investment advising topic becomes much more relevant, but until then seek out a financial coach who can also get you going on a financial plan. (Full disclosure, I am a Financial Coach).
I have a feeling that many people rely on their company’s 401(k) representative to advise them on what to do and how to invest. Some companies have investment advisers that can offer basic advice or rules of thumb but to truly understand your goals and objectives, you’ll really need to get some time discussing it with a professional who has your best interests at heart (not theirs or their fund company’s interests). The term for a person who advises you with your best interests in mind is called a fiduciary. Seek a planner/adviser out that is a fiduciary and not conflicted by getting a commission or wanting you to have more assets under their management just so they can get more fees from you.
The financial planning and advising industry has gotten some black eyes in past years (deservedly so), but not all planners are bad. In fact the overwhelming majority are great and want to see you succeed and help you reach your goals. Do your due diligence and talk to you prospective planner/adviser to determine for yourself if they are the right fit for you.