The topic of financial planning has been given a big boost recently, mostly due to a tough economy, a volatile stock market and headline-grabbing scandals, one of which resulted in the coining of an unfortunate new condition—“Madoffed.”
As a result, investors have reacted in a variety of ways. Some simply ignore the whole situation, putting their financial planning on indefinite hold. Others rely on the old adage, “if you want something done right, do it yourself,” and they eschew the help of a professional financial planner.
Perhaps these types of responses are less about troubling economics or scandal and more about a lack of understanding. Financial planning is a journey, not a destination. If you have an established strategic financial plan, it requires continual monitoring. If you don’t have a plan, establishing one necessitates some reflection regarding what you want in life and how much you wish to be involved in achieving your goals. Only then you can select the type of financial advice that will best help you reach your goals.
Here are three basic areas you should explore before getting started on a strategic financial plan or while re-examining your existing plan:
Goals: Before you can begin any journey, you must know where you are going. The first step to financial planning is to establish your goals and then prioritize them. How much will you need to maintain your chosen lifestyle in retirement? Do you wish to retire early and relax or start a new business venture? Will you travel? Pursue a hobby? Own a second home? Provide financial assistance to your children or grandchildren? Which of these goals is most important? Which can you forego, if necessary?
Strategies: Once you know your goals, you need appropriate strategies to help you reach those goals. Will you invest in mutual funds? Do you need life insurance, if so how much? How will you generate monthly income in retirement? Do your strategies align with your personal risk tolerance? Do you want to be involved in the investment details or just oversee the big picture?
Objectivity: Because financial planning is a journey, there will be unexpected bumps in the road. When those events occur, can you remain objective and adjust your plans accordingly or are you more inclined to let your emotions rule?
When you have a basic understanding of these three areas, you are better equipped to find a financial professional who can help specifically hone the details within each area. You could, of course, be your own financial planner, but why would you want to? Working with a professional will add dimensions that you cannot easily replicate. For example, an advisor can help couples balance their conflicting needs or act as a coach when you are tempted to forego planning or chase a hot stock tip.
And, despite occasional headline-grabbing scandals, the majority of professional financial planners do work hard to help their clients. The more prevalent problem is not scandal, but poor fit. So the key is to find a financial professional who fits your needs. Here are some areas to consider before making that decision:
Define your style: Are you interested in a financial advisor who will take charge or one who will act as a co-manager? Once you know your style, you’ll be better able to select the right financial professional.
Do your due diligence: Ask for referrals from friends, family, colleagues or others you trust. But don’t stop there. Interview potential financial advisors to determine their educational background, credentials and experience. Also ask about complaints and disciplinary actions—and double check with your state’s investment advisor registration board and the U.S. Securities and Exchange Commission.
Determine pricing: Your advisor is most likely compensated in one of two ways, commissions or fees. Commission-based professionals are paid when they make transactions within your portfolio. While there may be nothing wrong with this approach, it does provide some temptation to trade unnecessarily. Fee advisors are paid based on the amount you invest with them. For example, one percent, or $1,000, on a $100,000 investment. It’s up to you to determine which payment method makes you most comfortable and provides the best value for your investing dollar.
Consider philosophy: Different advisors have different ideas about social or political effects on investing choices; ask your candidates about this important area. Also ask about the research you can expect from your advisor. Does the firm perform independent research? How much time is spent on independent research, particularly on your behalf? What kind or reporting can you expect? At a minimum, expect annual reports, although quarterly is more informative.
Measure firm compatibility: Some advisors work exclusively with certain types of clients or levels of net worth. If you are a relatively small client, you may want to find an advisor who works with other clients of similar size. Whatever the size of your portfolio, you want an advisor who will deliver the same level of interest and service to all clients.
Evaluate return success: Use historical returns as a guide as to whether a potential advisor has been successful. If you’re shown comparisons with an index, such as the S&P 500, be sure that it’s similar to an investment you’re likely to make. If not, it’s a pointless comparison. Also inquire about back-end fees or penalty charges that can affect your return. You can also ask the advisor if his or her personal investment money has done better or worse and why.
Did you notice that evaluating returns is listed last on this list? While returns are, of course, important, too many investors consider only returns. For example, many Madoff clients looked only at returns, without any thought to context. Exactly how was this advisor making money in the financial markets when nearly everyone else was losing money? A good advisor-client relationship must be based a variety of important traits, not just returns.
Once you select a professional who fits your style, your financial planning journey doesn’t end—it begins. Your advisor should regularly review all aspects of your financial picture. Do you have the best life insurance policies for your circumstances? Because of changing life expectancies, some older policies may be more expensive than newer options. Have you married, divorced, had a child, changed jobs or started a business? Each of these decisions alters your journey. To increase your chances of reaching your destination, you and your financial advisor will want to re-evaluate parts of your plan each time you make significant life decisions.
When you build a solid working relationship with a financial advisor, you can spend less time worrying about the latest headlines because ongoing professional financial management works in every economic scenario.
About the Author:
Alan Goldfarb is the director of Wealth Strategies at Weaver Tidwell Wealth Management. He has been a recognized leader in the financial counseling industry since the early 1970s. Goldfarb, who has more than 30 years experience in estate planning, sits on the board of the Academy of Financial Services, where he serves as one of six directors who work directly with the organization’s 12 officers. His background includes extensive experience in investments, employee benefits, and estate planning. Most recently, he was named one of Medical Economics magazine’s “150 Best Financial Advisors for Doctors.” He was also named one of Worth magazine’s Top 250 Wealth Advisors – the sixth time this publication has identified him as a Top Financial Advisor. He also has been named Best Financial Planner and Wealth Manager in Dallas by D Magazine.
Goldfarb also serves on the CFP Board, the organization that awards the certification mark CFP – Certified Financial Planner – to professionals who successfully complete the CFP Board’s initial and ongoing certification requirements. He also served as director of the nation’s first MBA in Financial Services program at the University of Dallas and the executive director of the Southwest Institute For Personal Financial Education at the University of Dallas. He may be reached at (972) 448-6971 or email@example.com. For more information, please visit www.wtadvisors.com.