This is part 3 in a series of posts on Financial Advisors.
Part 1 covered the license designations an FA can and should have. Part 2 covered how FAs should get paid. Part 4 – How to find and vet a financial advisor Part 5 – I fired my financial advisor Today, we’re going to discuss another area of confusion – when you think you want a financial advisor but what you really need is a financial planner. Wait, aren’t they the same thing? All financial planners are financial advisors. But very few financial advisors (FAs) are financial planners (FPs). Most FAs don’t do much but manage your retirement funds. A financial planner incorporates your savings and retirement funds into your overall plan, but only as one of the necessary components needed to help you meet your goals. In other words, your portfolio is not a financial plan! The term Financial Advisor is part of the problem. Most people are looking for a Financial Planner, not an FA. It’s partially semantics, but most FAs seem to be mainly portfolio managers ± commissioned salesmen. Building a proper portfolio and managing it is actually quite simple and takes little time once a year once set up. Really. It boggles me that people are paying someone 1% or more to do this and nothing else. OK, so maybe you don’t understand how to invest (index funds, stocks, real estate, etc.) – you won’t do badly by following a simple portfolio that the Bogleheads recommends or try one of these portfolios until you learn more. Let’s look at it in familiar terms:
- A typical financial advisor is like a doctor who always writes the same prescription to every patient. No history, no vitals, no work up and no follow up.
- A financial planner, on the other hand, never prescribes without a complete history (your money history and habits – your psychology) and work-up. Expect to spend the first several meetings with your FP to delve into you and your goals and then together, develop the right plan for you.
To break it down into more detail, what can you expect when you hire a fee-only financial planner? Here is what s/he will do for you:
- Clarify goals. Sure, we all want to retire at some point but, what about between now and your retirement? What happens after you retire? What does “being retired” mean to you? A financial planner will help you have these conversations and ask the “what if?” questions such as “What kind of lifestyle do you plan in retirement?”, “How much do you plan to save for your kids’ college?”, “Do you plan to work part-time at some point?” and so forth.
- Coordinate your financial decisions with your taxes. A financial planner, especially one who is a CPA, is trained to help you minimize taxes as they include tax planning in your ongoing plan.
- Make sure your assets are PROTECTED. This includes a review of not just your insurance policies but a discussion about other areas in your life that may be exposed, such as side businesses, your legal documents, things your kids may be involved in, property, etc.
- Discuss your cash flow (a fancy term for budgeting). If you find that you and your significant other are having trouble seeing eye-to-eye with your spending habits, having an impartial planner to mediate can help you work on a realistic spending plan. Seeing as many arguments between significant others revolve around money this also will help the longer-term health of your relationship.
- Help you adjust for course corrections. How often does living in the now distract one from their goals? Financial planning is not a report you get once a year. Your planner is engaged in your life so that when you get pregnant, change jobs, buy a new house, move your parents into assisted living, etc. your planner is there to adjust your projections and help you absorb the impact on both your short- and long-term plans. This allows you to make course corrections early when it can make the most difference for the long term. Taking a few extra shifts now or driving your car a couple of years longer while you’re in your 30s and 40s is a lot easier to swallow than finding out you’re way behind on your retirement goals when you’re bumping up on age 60!
- Remind you of your goals when you start to veer off course. Almost all (or ALL?) investing mistakes are due to behavior (selling during market corrections for example) and having an FP there to stop you is priceless. Almost all of us will want to veer off course at some point.
- See into the future! Yes, a financial planner will take a look at how you are spending your money today, your goals, your savings habits, your work habits and your retirement benefits and project your chances of being able to have that bungalow on the beach with the little umbrella drink at age 55. Sure, it’s an educated guess, but having a guide is very motivating.
- You and the FP will create a financial plan that will guide you on decisions. Of course, the plan is dynamic and will change over time. Circumstances and goals change more often than you think.
To sum things up, a good financial planner will go over your financial house with a fine-toothed comb. Real financial planning is not cheap and you must be willing to dedicate time and energy to the process – it is your money and your future, after all! I consider full service financial planning a luxury service. I see a lot of people asking isolated questions such as “Should I max out my 401(k) or pay down my loans?” “Should I pay down my student loans first or buy a home?” This is a symptom that there is no financial plan. They are asking for a temporary Band-Aid instead of a true assessment of their needs and a well thought out prescription or financial plan. A good FP will teach you as well instead of blindly taking care of your finances. You need to have a baseline knowledge base to get the most out of this relationship. Here is a sample start-up agenda that a good FP will go through with you. Next, is the the next part of this series. What do you think? Did you know that financial planners did all this and more?