MONEY TALKS - In contrast to my previous column where the actual steps in the financial planning process were discussed, this week’s column is about the subject areas and concepts involved. Financial planning, as defined by the CFP® Board, is the process of determining whether and how an individual can meet life goals through the proper management of financial resources. While the Board does not detail the mechanics of the process, it does offer some guidelines on the basic subject fields that should be included. The fields covered in the financial planning process typically include, but are not limited to:
- Financial statement preparation and analysis (including cash flow and budgeting) - Reviewing where your cash comes from and where it goes will help you to best structure your assets and liabilities to meet your goals. Understanding the difference between good debt and bad debt should help you to control your spending. And creating a cash reserve will provide you with security in case of emergency.
- Insurance planning and risk management -
Determining how much coverage you need, where you should buy, and how much you should pay are important to your overall security. Identifying the gaps in coverage and how to mitigate them are critical to minimize the impact of a tragedy on you and your family.
- Employee benefits planning - Employee benefits are a major part of your overall compensation plan. Understanding your benefits is critical because they may be a determining factor when evaluating your employment options. Knowing how to interpret your life and disability insurance, sick and vacation time off, stock purchase plan and profit sharing options, as well as retirement benefits is essential so you can fairly evaluate your benefits and maximize those being offered to you.
- Investment planning - Investment planning should reflect your risk tolerance, tax status, time horizon, and investment objectives. Each investment in your portfolio should fulfill a specific function that is appropriate for you and your situation. Developing an investment policy will help you understand the risks, goals, and limitations of your portfolio and should help to ground you from making any rash decisions during adverse times.
- Income tax planning - Income tax planning is designed to reduce your overall income tax liability. There are strategic ways to reduce your taxable income such as deferring income to a later year, bunching deductions, and investment tax planning. These strategies help to minimize your tax burden freeing up money for other financial goals.
- Retirement planning - Retirement planning involves preparing clients for life after their working career ends. While knowing if you have enough money is critical to any financial plan, there are also lifestyle choices such as how to spend time, where to live, and whether or not to pursue a second career that have tremendous effects both financially and personally for retirees. Optimizing your Social Security, pension, and other retirement benefits are the keys to long-term success.
- Estate planning - This process involves gathering and reviewing the client’s estate planning documents such as wills, trusts, financial and medical power of attorneys, living wills, and HIPAA privacy policies. Although the planner cannot provide legal counsel or advice, they can help you to understand the estate planning documents you alrieady have or might need. They can also ask you questions to better ascertain your intentions to help ensure that your estate plan is consistent with your planning goals.
Now that you understand more about the financial planning process, it is important to know what to look for when searching for a financial planner. The first questions you should ask yourself when you’re evaluating a financial planner are, do I trust him/her and am I comfortable working with him/her? Clearly it would be nice if we all knew someone in the industry who we like and trust, but not everyone has that luxury. To evaluate an advisor you don’t already know I recommend scheduling a preliminary consultation to find out more about one another. If things go well, ask for 3 client references. If not, move on until you find someone with whom you’re compatible. Don’t be afraid to trust your gut instinct; if it doesn’t feel right, it wasn’t meant to be.
If the references check out, don’t be afraid to ask for the advisor’s credentials. The CERTIFIED FIANNCIAL PLANNER designation or CFP® is the gold standard in the financial planning industry. A CFP® certificant has studied the essential areas of financial planning, passed a rigorous examination, and worked for a minimum of 2 years in the industry.
Finally you should ask how they are compensated. I strongly recommend working with a Fee-Only planner. Some advisors are compensated based on the products they recommend and sell which can create a conflict of interest. Fee-Only advisors are not compensated on product sales. These advisors are compensated by you and have a fiduciary obligation to do what’s in your best interest. For a list of Fee-Only advisors in your area visit the National Association of Personal Financial Advisors (NAPFA) website (www.napfa.org).