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What You Should Know About Financial
Planning
You may have come across the term "financial
planning" recently and wondered what it means. You may have
decided to start your own financial plan but you're not sure
how. Or you may feel it's time you went to a financial planner
for some professional advice. Whatever your situation, the following
information can help you decide what's right for you.
This brochure explains financial planning
and its benefits. It describes what you should expect and highlights
the importance of your role in the financial planning process.
The answers to some common questions about financial planning
are also provided.
What
Is Financial Planning?
The Benefits of
Financial Planning
Can You Do Your Own Financial Planning?
What Is A Financial Planner?
Financial
Advisers Who May Work With You
Be Sure You're
Getting Financial Planning Advice
The Financial Planning Process
Common
Mistakes Consumers Make When Approaching Financial Planning
How To Make Financial Planning Work
For You
Some Common Questions About Financial
Planning
What Is Financial Planning?
Financial planning is the process of meeting your life goals
through the proper management of your finances. Life goals can
include buying a home, saving for your child's education or planning
for retirement.
The financial planning process consists
of six steps that help you take a "big picture" look
at where you are financially. Using these six steps, you can
work out where you are now, what you may need in the future and
what you must do to reach your goals.
The process involves gathering relevant
financial information, setting life goals, examining your current
financial status and coming up with a strategy or plan for how
you can meet your goals given your current situation and future
plans. Click here for more details on the financial planning
process.
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The Benefits of Financial Planning
Financial planning provides direction and meaning to your financial
decisions. It allows you to understand how each financial decision
you make affects other areas of your finances. For example, buying
a particular investment product might help you pay off your mortgage
faster or it might delay your retirement significantly. By viewing
each financial decision as part of a whole, you can consider
its short and long-term effects on your life goals. You can also
adapt more easily to life changes and feel more secure that your
goals are on track.
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Can You Do Your Own Financial Planning?
Some personal finance software packages, magazines or self-help
books can help you do your own financial planning. However, you
may decide to seek help from a professional financial planner
if:
* you need expertise you don't possess
in certain areas of your finances. For example, a planner can
help you evaluate the level of risk in your investment portfolio
or adjust your retirement plan due to changing family circumstances.
* you want to get a professional opinion about the financial
plan you developed for yourself.
* you don't feel you have the time to spare to do your own financial
planning.
* you have an immediate need or unexpected life event such as
a birth, inheritance or major illness.
* you feel that a professional adviser could help you improve
on how you are currently managing your finances.
* you know that you need to improve your current financial situation
but don't know where to start.
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What Is A Financial Planner?
A financial planner is someone who uses the financial planning
process to help you figure out how to meet your life goals. Click
here for more information. The planner can take a "big picture"
view of your financial situation and make financial planning
recommendations that are right for you. The planner can look
at all of your needs including budgeting and saving, taxes, investments,
insurance and retirement planning. Or, the planner may work with
you on a single financial issue but within the context of your
overall situation. This big picture approach to your financial
goals sets the planner apart from other financial advisers, who
may have been trained to focus on a particular area of your financial
life.
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Financial Advisers Who May Work With
You
In addition to being qualified to provide you with general financial
planning services, many financial planners are also registered
as investment advisers or hold insurance or securities licenses
that allow them to buy or sell products. Other planners may have
you use more specialized financial advisers to help you implement
their recom-mendations. With the right education and experience,
each of the following advisers could take you through the financial
planning process. Ethical financial planners will refer you to
one of these professionals for services that they cannot provide.
Similarly, these advisers should refer you to a planner if they
cannot meet your financial planning needs.
Accountant
Accountants provide you with advice on tax matters and help you
prepare and submit your tax returns to the Internal Revenue Service.
All accountants who practice as Certified Public Accountants
(CPAs) must be licensed by the state(s) in which they practice.
Estate Planner
Estate planners provide you with advice on estate taxes or other
estate planning issues and put together a strategy to manage
your assets at the time of your death. While attorneys, accountants,
financial planners, insurance agents or trust bankers may all
provide estate planning services, only attorneys can prepare
legal documents such as wills, trusts and powers of attorney.
Many estate planners hold the Accredited Estate Planner (AEP)
designation.
Financial Planner
Click here for a description. Many financial planners have earned
the Certified Financial Planner or CFP mark, or the Chartered
Financial Consultant (ChFC) or Personal Financial Specialist
(CPA-PFS) designations. Financial planners can take you through
the financial planning process.
Insurance Agent
Insurance agents are licensed by the state(s) in which they practice
to sell life, health, property and casualty or other insurance
products. Many insurance agents hold the Chartered Life Underwriter
(CLU) designation. Financial planners may identify and advise
you on your insurance needs, but can only sell you insurance
products if they are also licensed as insurance agents.
Investment Adviser
Anybody who is paid to provide securities advice must register
as an investment adviser with the Securities and Exchange Commission
or relevant state securities agencies, depending on the amount
of money he or she manages. Because financial planners often
advise people on securities-based investments, many are registered
as investment advisers. Investment advisers cannot sell securities
products without a securities license. For that, you must use
a licensed securities representative such as a stockbroker.
Stockbroker
Also called registered representatives. Stockbrokers are licensed
by the state(s) in which they practice to buy and sell securities
products such as stocks, bonds and mutual funds. They generally
earn commissions on all of their transactions. Stockbrokers must
be registered with a company that is a member of the National
Association of Securities Dealers (NASD) and pass NASD-administered
securities exams.
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Be Sure You're Getting Financial Planning
Advice
The government does not regulate financial planners as financial
planners; instead, it regulates planners by the services they
provide. For example, a planner who also provides securities
transactions or advice is regulated as a stockbroker or investment
adviser. As a result, the term "financial planner"
may be used inaccurately by some financial advisers. To add to
the confusion, many of the financial advisers described in this
brochure offer financial planning services. To be sure that you
are getting financial planning advice, ask if the adviser follows
the six steps described below.
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The Financial Planning Process
The financial planning process consists of the following six
steps:
1. Establishing and defining the client-planner
relationship.
The financial planner should clearly explain or document the
services to be provided to you and define both his and your responsibilities.
The planner should explain fully how he will be paid and by whom.
You and the planner should agree on how long the professional
relationship should last and on how decisions will be made.
2. Gathering client data, including goals.
The financial planner should ask for information about your financial
situation. You and the planner should mutually define your personal
and financial goals, understand your time frame for results and
discuss, if relevant, how you feel about risk. The financial
planner should gather all the necessary documents before giving
you the advice you need.
3. Analyzing and evaluating your financial
status.
The financial planner should analyze your information to assess
your current situation and determine what you must do to meet
your goals. Depending on what services you have asked for, this
could include analyzing your assets, liabilities and cash flow,
current insurance coverage, investments or tax strategies.
4. Developing and presenting financial
planning recommendations and/or alternatives.
The financial planner should offer financial planning recommendations
that address your goals, based on the information you provide.
The planner should go over the recommendations with you to help
you understand them so that you can make informed decisions.
The planner should also listen to your concerns and revise the
recommendations as appropriate.
5. Implementing the financial planning
recommendations.
You and the planner should agree on how the recommendations will
be carried out. The planner may carry out the recommendations
or serve as your "coach," coordinating the whole process
with you and other professionals such as attorneys or stockbrokers.
6. Monitoring the financial planning recommendations.
You and the planner should agree on who will monitor your progress
towards your goals. If the planner is in charge of the process,
she should report to you periodically to review your situation
and adjust the recommendations, if needed, as your life changes.
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Common Mistakes Consumers Make When
Approaching Financial Planning
1. Don't set measurable financial goals.
2. Make a financial decision without understanding its effect
on other financial issues.
3. Confuse financial planning with investing.
4. Neglect to re-evaluate their financial plan periodically.
5. Think that financial planning is only for the wealthy.
6. Think that financial planning is for when they get older.
7. Think that financial planning is the same as retirement planning.
8. Wait until a money crisis to begin financial planning.
9. Expect unrealistic returns on investments.
10. Think that using a financial planner means losing control.
11. Believe that financial planning is primarily tax planning.
Source: CFP Board Licensee
Survey
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How To Make Financial Planning Work
For You
You are the focus of the financial planning process. As such,
the results you get from working with a financial planner are
as much your responsibility as they are those of the planner.
To achieve the best results from your financial planning engagement,
you will need to be prepared to avoid some of the common mistakes
shown above by considering the following advice:
* Set measurable financial goals.
Set specific targets of what you want to achieve and when you
want to achieve results. For example, instead of saying you want
to be "comfortable" when you retire or that you want
your children to attend "good" schools, you need to
quantify what "comfortable" and "good" mean
so that you'll know when you've reached your goals.
* Understand the effect of each financial
decision.
Each financial decision you make can affect several other areas
of your life. For example, an investment decision may have tax
consequences that are harmful to your estate plans. Or a decision
about your child's education may affect when and how you meet
your retirement goals. Remember that all of your financial decisions
are interrelated.
* Re-evaluate your financial situation
periodically.
Financial planning is a dynamic process. Your financial goals
may change over the years due to changes in your lifestyle or
circumstances, such as an inheritance, marriage, birth, house
purchase or change of job status. Revisit and revise your financial
plan as time goes by to reflect these changes so that you stay
on track with your long-term goals.
* Start planning as soon as you can.
Don't delay your financial planning. People who save or invest
small amounts of money early, and often, tend to do better than
those who wait until later in life. Similarly, by developing
good financial planning habits such as saving, budgeting, investing
and regularly reviewing your finances early in life, you will
be better prepared to meet life changes and handle emergencies.
* Be realistic in your expectations.
Financial planning is a common sense approach to managing your
finances to reach your life goals. It cannot change your situation
overnight; it is a lifelong process. Remember that events beyond
your control such as inflation or changes in the stock market
or interest rates will affect your financial planning results.
* Realize that you are in charge.
If you're working with a financial planner, be sure you understand
the financial planning process and what the planner should be
doing. Provide the planner with all of the relevant information
on your financial situation. Ask questions about the recommendations
offered to you and play an active role in decision-making.
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Some Common Questions About Financial
Planning
1. Who can use the term "financial planner"?
The government does not regulate financial planners as financial
planners; instead, it regulates planners by the services they
provide. As a result anybody can "hang out a shingle"
and call himself or herself a financial planner. The CFP Board's
free brochure, 10 Questions To Ask When Choosing A Financial
Planner, can help you look for someone who is qualified to offer
financial planning advice. The brochure contains questions to
ask during an initial interview with a planner to help you determine
if he or she is right for you.
2. Why should I choose a financial planner
over another type of financial adviser?
Click here for descriptions of different types of financial advisers.
In general, if you're not sure what advice you need, start with
a financial planner. A financial planner will focus on your needs
first before recommending a course of action. Most planners have
been trained to take a broad look at your financial situation,
while accountants, investment advisers, stockbrokers or insurance
agents may focus on a particular area of your financial life.
Always ask a financial adviser what qualifies him or her to offer
financial planning services.
3. What is the best age to start financial
planning?
While it is true that the younger you start the more beneficial
the process will be, financial planning is worthwhile at any
age. Although younger people may have more decisions to make
regarding their financial lives, changing laws and circumstances
can lead middle-aged people and seniors to have to adjust their
financial plans as well. Changes in tax law, for example, may
require many people to revisit certain investments or estate
plans, and adequate disability planning becomes more important
as people age.
4. How are financial planners paid?
There is currently no uniform method by which financial planners
are paid. A planner can be paid by a salary paid by the company
for which the planner works; by fees based on an hourly rate,
a flat rate, or on a percentage of your assets and/or income;
by commissions paid by a third party from the products sold to
you to carry out the financial planning recommendations; or by
a combination of fees and commissions whereby fees are charged
for the amount of work done to develop financial planning recommendations
and commissions are received from any products sold.
5. Do I have to pay a financial planner
for the first interview? How much does a planner typically charge?
Most financial planners will provide you with one free half-hour
or hour meeting to talk about your reasons for wanting to work
with them. During these initial interviews, the planners will
also decide if they can help you and explain how they would work
with you. Like other professionals, the rates financial planners
charge depend on their experience, geographic location, level
of services and your needs. Interview more than one planner to
get an idea of the going rate for financial planning services.
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Copyright © 1998, Certified
Financial Planner Board of Standards, Inc. All rights reserved.
The information in this brochure
is provided as a public service by the Certified Financial Planner
Board of Standards. A nonprofit, professional regulatory organization,
the CFP Board exists to benefit consumers by fostering professional
standards in personal financial planning. This publication may
be reprinted for educational and nonprofit purposes only. Copyright
© 2000, Certified Financial Planner Board of Standards,
Inc. All rights reserved.
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