Many people are unsure about whether or not they should hire a professional financial adviser and pay for a financial plan to be done. Objections like “it’s only for wealthy people with large investment portfolios,” or “why should I pay a fee to an adviser on top of investment commissions?” are common. I would like to debunk some of these myths about financial planning and explain why everyone should complete a financial plan. The most important reason for having a plan is that people who have a written financial plan are far more likely to achieve their financial goals than those who don’t have one!
What is financial planning and why is it important?
Financial planning is a 6-step process that involves asking questions about an individual’s entire set of goals and objectives, as opposed to only her investments. To put it simply, financial planning is the process of determining whether an individual will be able to achieve life goals with her total financial resources. The plan helps people manage their assets as well as the risks to those assets so their money lasts as long as they do.
The 6 steps in the financial planning process are:
- Establishing and defining the client-planner relationship
- Gathering and articulating client data and goals
- Analyzing and evaluating the client’s current financial position
- Developing and presenting recommendations to the client and/or alternatives
- Implementing the recommendations
- Monitoring the recommendations *
In addition to knowledge about investments, financial planners are also experts in the management of risk. This means they have a core competency in insurance needs analysis and insurance products, tax, retirement planning and estate planning. A comprehensive financial plan covers all of these potential risks to an individual’s assets.
Perhaps the most critical time to consider consulting with a financial planner is when you are close to retiring or already in retirement. Taking too much money out of your assets on a yearly basis, particularly when your assets have declined in value, could leave you without enough money to last your entire retirement. And with longevity increasing dramatically, planning is even more important.
Current actuarial studies show that men who reach the age of 65 have a 49% chance of living to 86, and a 26% chance of making it to 92. Women have a 49% chance of living to 89 at 65, and a 23% chance of living to 95. In some cases, people’s money may have to last as long as 40 years.
Finally, Certified Financial Planners – those who have the CFP® designation – agree to follow the Certified Financial Planner Board of Standards. These standards outline a code of care which include putting their clients’ interests first, acting in utmost good faith, and providing full and fair disclosure. These standards represent important consumer protections.
To find a Certified Financial Planner in your area, try the Financial Planning Association’s PlannerSearch on the FPA’s website.
* Michael Dalton, et. al. Personal Financial Planning Theory and Practice, 5th ed.
Nancy Tommaso Coatrieux
NT Financial Services
