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.
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.
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.
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:
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.
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.
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.
The financial planning process consists of the following six steps:
and defining the client-planner relationship.
client data, including goals.
and evaluating your financial status.
and presenting financial planning recommendations and/or alternatives.
the financial planning recommendations.
the financial planning recommendations.
Source: CFP Board Licensee Survey
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:
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.
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.