Many investors think financial planning should be free. For years, major firms provided some degree of planning at the start of a relationship. It served to get to know you better and also to identify needs one of the firm’s products could address. This can become a problem when a firm’s product range is limited. Financial planning can also be bought as a stand alone service. Is this a good idea?
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The advice is independent. The financial planning community has emphasized the fiduciary aspect of the relationship. People view lawyers, doctors and accountants as fiduciaries, hired to represent the interest of their client. A stand alone financial plan is not prepared with the idea of selling certain products.
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The plan is portable. In theory, the plan is a stand alone document. The investor can implement the plan on their own, return to their financial advisor with plan in hand or interview financial advisors. In practice, many investors develop a relationship of trust with their planner, much like they do with their family doctor. They feel the planner understands their unique situation and they would like the planner to also serve as their financial advisor. Many firms are set up to make this transition possible.
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The plan can be customized. Financial planning tools are available online. The concept is not that difficult to figure out. You can make the case why it can be a do it yourself project, like assembling Ikea furniture. This might be fine if the person’s situation is simple, like a younger person in a salaried job working for a major company and living in a rental apartment. If you add in factors like caring for a special needs child or estate planning that includes children from a previous marriage, then customization by qualified experts is important.
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Plans need follow up. When you join a gym, one or two sessions with a personal trainer are often included. One objective is to teach you how to use the gym equipment without injuring yourself. Another is to learn about your objectives and make the case for ongoing training. Plenty of people take the free lessons, concluding “Now I know how to use the equipment” and say goodbye to the personal trainer. This is similar to an investor completing a plan, making some investments and ignoring the plan, focusing only on their portfolio. Needs and objectives change as you get older.
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Plans should be dynamic. Now imagine the gym member injuring themselves skiing, yet returning to the gym thinking: “This really hurts, but I will just work through it.” A bad injury can become a serious injury if it is not addressed. In the financial realm, a person might lose their job and simply pull money out of their portfolio, regardless of tax consequences. Alternatively, a few good years may get an investor thinking: “I am so fat ahead, I do not need to make monthly contributions anymore.” Plan reviews with a professional keep you on track. So do annual physicals.
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More money means more problems. You might think financial planning is important for people who have no money and want to get some. That’s true. It is also very important for people who have lots of money and want to keep it, ultimately passing it down to the next generation. The government is happy waiting for their money if you can prepare for your retirement in the process. When you are no longer in the picture, they are ready to take a large share unless you have done some planning years beforehand.
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Planning gets you to buy things you think you will never need. When you are young and healthy, long term care insurance seems like something that is important for other people, but not for you. Unless you get hit by a bus or perish in a skiing accident, the time will come when you are unable to live independently. Assisted living can be expensive. A financial planner can make the case why you want to buy this coverage when you are still young and premiums are low.
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Budgeting. This can be the biggest benefit, but one that gets overlooked because it does not ring an advisor’s cash register. Many people are hopeless at saving money. Our culture delivers the message to have fun, you must be spending money. It also promoted immediate over delayed gratification. People need to learn how to pay themselves first. The budgeting aspect of financial planning can address this need.
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Liability management. Many people simply go into debt when they want to buy something they cannot afford. Credit cards and home equity lines of credit make this easy. Many people have no idea how much interest they are paying on borrowed money. Meanwhile, credit card companies are “rewarding” them with higher credit lines. Planners can help investors get this under control.
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Charitable giving. It is fun to be cultivated. When you have money, many worthy causes ask for your support. They often prefer money to be given immediately, usually be check. Other charities sign you up as a donor using automatic debiting, eliminating the need to ask you to renew annually. A financial planner can help you consider the full range of donor options, both during your lifetime and after your death.
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Creating a legacy. Some people would like their wealthy to live on after them, continuing to do good. Traditionally, this has been done through a foundation. Endowments and trusts are other vehicles. Financial planners can help set this up and explain the tax benefits.
Many people associate financial services firms with selling investments and collecting fees. Financial planning is a worthwhile service to purchase because it can help address many aspects of your life that are not immediately associated with buying and selling stocks. It is money well spent.
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