|
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.
|
LTC Insurance: Compare the top companies, and
get the best quote for your needs.
|
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.
Back
to Top
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.
Back
to Top
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.
Back
to Top
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.
Back
to Top
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.
Back
to Top
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.
Back
to Top
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.
Back
to Top
Common
Mistakes Consumers Make When Approaching Financial Planning
- Don't
set measurable financial goals.
- Make
a financial decision without understanding its effect on other
financial issues.
- Confuse
financial planning with investing.
- Neglect
to re-evaluate their financial plan periodically.
- Think
that financial planning is only for the wealthy.
- Think
that financial planning is for when they get older.
- Think
that financial planning is the same as retirement planning.
- Wait
until a money crisis to begin financial planning.
- Expect
unrealistic returns on investments.
- Think
that using a financial planner means losing control.
- Believe
that financial planning is primarily tax planning.
Source:
CFP Board Licensee Survey
Back
to Top
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.
Back
to Top
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.
Back
to Top
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. |
