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What Is Financial Planning?

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Whether you work with a generalist or a specialist, it is important to have an integrated financial plan. Bonnie Kirchner explains financial planning and the difference between a generalist and financial specialists.
This chapter is from the book

This chapter is from the book

Financial planning is a larger field than you might think. It is actually made up of a number of components, and it is difficult for any one advisor to be an expert in every aspect of it. Relating financial planning to the medical field, you will have advisors who have a broad base of knowledge and might act as a generalist. These advisors very often can work with clients in a holistic manner but might have to find "specialists" in more complex situations. Whether you work with a generalist or a specialist, it is important to have an integrated financial plan. As one of my former colleagues put it, "If you don't know where you're going, any road will take you there." The major areas of financial planning that need to be considered are

  • Cash Flow: This is where it all starts. Without positive cash flow, there are no funding mechanisms for other goals. Unfortunately, our culture has fostered poor cash flow habits. Americans have become far too reliant on the use of credit to feed their immediate desires to the detriment of their long-term goals. The first step to financial planning is understanding what is coming in by way of resources and what is going out via expenses and whether or not there is anything left over in the end. If the cash flow is zero or negative before other goals are funded, budgeting must be addressed.
  • Taxation: It's not what you make; it's what you keep. Proper tax planning can actually create resources to help fund other goals. Tax laws change nearly every year, which is why it is important to review your tax return with your advisor to see if there are adjustments that can be made in order to help save money and/or fund financial planning objectives.
  • Retirement: Financial educator Dee Lee says it in a nutshell, "There are no scholarships for retirement." For most people, retirement seems too far away when they should start saving for it that it gets put off. Throughout my 20-year career, I've seen the retirement picture change drastically. When I first started working with retirees in 1990, it was pretty typical to meet with people whose major retirement resources were Social Security and a corporate pension. Since then, I've seen more and more companies moving from Defined Benefit retirement programs to those of the Defined Contribution type. The difference? The latter puts more responsibility on the employees for decision making in regard to the vehicles for growing their retirement savings and, in many cases, funding. Though corporations do make attempts to educate their employees, efforts are not effective enough at this point and rarely impact the younger workforce. As corporate benefits change and Social Security remains in question, proper retirement planning must become a priority for the vast majority of individuals.
  • Risk Management: This is a fancy way of saying "insurance planning." Insurance is needed for protection against those risks you can't afford to cover with your existing assets and income level. A proper financial plan will analyze what insurances are appropriate and at what levels. Coverage in the areas of life, disability, homeowners, liability, auto, and long-term care should be reviewed as part of the planning process and reviewed periodically. Coverage needs to be changed over time and is dependent on situational circumstances and financial resources.
  • Education Funding: The cost of higher education rises each year at a rate higher than inflation; thus, it is never too early to start building a fund to cover these expenses. The problem with college funding is that it comes in direct conflict with other planning goals. For a lot of people, decisions must be made on how to allocate funds between retirement and education objectives, all the while maintaining the proper insurance coverage to protect the overall financial plan.
  • Estate Planning: Believe it or not, everyone already has an estate plan. If you have assets, it makes sense to put some plans in for "when your case matures." (My estate planning professor, Dr. Robert C. Suter, used this phrase when referring to death.) If you have a spouse and children or elderly parents to care for, it is imperative. If your assets are above a certain level, which will vary from state to state, and you prefer to leave Uncle Sam and your state's coffers out of your will as much as possible, it is important to bring an attorney who specializes in this field onto your financial planning team.

Though not all of these areas will apply to everyone, a well-shaped plan will incorporate all applicable pieces in a way that the whole will be greater than the sum of its parts. The challenge of financial planning is one of conflicting goals. It is not atypical to have limited dollars chasing a number of different financial objectives. In this situation, planning is imperative. Plan preparation should be followed by reviews and adjustments on a regular basis. Just as most people have their health evaluated on an annual basis, financial planning should have the same prerogative. Unfortunately, most people spend more time planning their annual vacations than working on their financial futures. Hopefully, some of the positive outcomes of our most recent financial crisis are that Americans will become more responsible about spending wisely and not over using credit and learn to dedicate more time to planning their finances.

Does each area of financial planning require its own specialist? It depends on how complicated the situation is. Many financial advisers can proficiently assist clients with putting together a plan and helping them find the proper products to use and/or appropriate specialists. Unless the advisor is also an attorney, most people will need a lawyer to prepare legal documents for estate planning purposes in the client's state of residency. Some financial advisors also do tax preparation in addition to planning, though many clients choose to do their own taxes. Regardless of how many advisors are involved and what roles they play, it is important that all parties work together as a team. Frequently, the financial advisor is responsible for coordinating the various components and the individuals involved to keep the financial planning ball rolling effectively and efficiently.

In working with individuals for nearly 20 years, I've come to realize the role of various advisors can be confusing, probably because the lines are not clear cut. Typical advisors include

  • Financial Planner: A financial planner is an advisor who is focused on the big picture and can provide direction in the various areas of financial planning. He might get paid by the hour, a set amount for a particular plan provided, based on a percentage of assets managed, and/or via product sales. In the event a planner is compensated via product sales, be sure she has the appropriate licenses and registrations for the products being provided. A financial planner can be independent or work for a brokerage firm or an insurance agency. How he has chosen to set up his practice might give you clues as to his areas of expertise and even how he gets paid. In other words, if the advisor is associated with an insurance company, she might have more of an insurance affiliation and a background in risk management and estate planning. An advisor who chooses to represent a brokerage house may be oriented toward investments. A financial planner will typically have training in the six areas of financial planning as described earlier in this chapter and is likely to have or be working toward credentials such as becoming a CERTIFIED FINANCIAL PLANNER™ professional or Chartered Financial Consultant. Advisor designations are described in Chapter 3, "The Meaning Behind Advisor Designations and Licenses."
  • Insurance Representative: An insurance representative might be independent and represent a number of companies or affiliated with a particular insurance company. He is likely to be compensated via the sale of products, typically insurance and annuities, though he might also be able to provide mutual funds and other investment products as well. It is important to understand whether the advisor is influenced in any way to recommend particular companies or products when providing advice or if she is able to offer a wide variety of companies and products, helping you to get the best fit for your situation. Be sure the insurance representative is licensed to do business in your state of residency as each state has its own requirements for insurance licensing. If she is also offering investments, make sure she has the proper securities licenses for the products being discussed. Licensing requirements are addressed in Chapter 3 as well.
  • Investment Representative: Like the insurance representative, an investment professional might be independent or part of one particular company. He is likely to be compensated via product sales or assets under management. The representative is most likely to be registered with a brokerage firm or an independent broker/dealer.
  • Certified Public Accountant: More and more CPAs and tax preparers are getting into the financial planning and investment fields. It is a natural fit given that the IRS Form 1040 and its various schedules are some of the most information-packed resources for a financial advisor. However, don't forget that it does take specialized training to provide specific recommendations on investments and insurance, not to mention proper licensing and registrations.
  • Registered Investment Advisor (RIA): An RIA is an entity which manages money for a fee and could be regulated by the Securities and Exchange Commission or the State, regardless of whether or not it has a broker-dealer affiliation. An RIA will typically be fee-only, however some choose to affiliate with a broker/dealer so that they can also perform transactional work and get paid.
  • Investment Advisor Representative (IAR): Performs for fee investment management services as a representative of a Registered Investment Advisor firm.
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