Why Financial Planning?
How you manage your money can determine the quality of your life. By having a financial plan, you can document and keep track of financial income and outflow. A financial plan should help you to live comfortably within your means and enable you to plan for future growth. Just as it will help you pay for certain unexpected emergencies, the plan also should help you save for a comfortable retirement, or that dream vacation.
While a financial plan need not be a detailed accounting of every penny earned and spent by a household, it should serve as a guide. The plan should outline your immediate and long-term goal, how much your household earns or expects to earn over a certain period, and how this money will be spent. The plan should be flexible, but it also should be firm when dealing with the essential day-to-day costs of housing, food, and health expenses.
What Is A Financial Planner?
Under existing federal law (the Investment Advisors Act of 1940), anyone who offers to furnish, for compensation, advice on the purchase and sale of securities is considered an investment adviser and is required to register with the Securities and Exchange Commission (SEC). The states also require the investment advisers to register with the Attorney General’s Office.
Financial planners, generally, have varied backgrounds and may hold a variety of credentials degrees and licenses attesting to their education and expertise. For example:
CFP (Certified Financial Planner):
The International Board of Standards and Practices for Certified Financial Planners, Inc. accredits qualified colleges and universities to teach and test students to qualify for CFP certification. The CFP course, which usually takes from two to three academic years to complete, consists of six sections covering the following subjects: introduction to financial planning, risk management (insurance), investments, tax planning and management, retirement planning and employee benefits, and estate planning. A single comprehensive examination is given after completion of all required courses of study. In addition to the examination, candidates for certification must meet experience requirements in financial planning related work, which vary according to educational background. CFP licensees are also subject to continuing education requirements to maintain their certification.
ChFC (Chartered Financial Consultant):
This program, an outgrowth of the Chartered Life Underwriter course for insurance agents given by the American College in Bryn Mawr, PA, is a correspondence program with eight required courses and two electives. Graduates must have three years of qualifying business experience and meet ethical standards.
MSFS (Master of Science in Financial Services):
Granted by the American College cited above, this degree is awarded to those who complete graduate level courses in financial planning. Degree requirements include thirteen courses and a research paper.
MBA (Masters Degree in Business Administration):
An MBA can be achieved at the graduate level in colleges and universities. Many schools offer courses specializing in financial planning or family financial planning.
Registry of Financial Planning Practitioners:
Sponsored by the International Association for Financial Planning, registry members must have three years of full-time practice as a planner, and have either a CFP, ChFC, CPA, law or business degree. They also are required to pass an examination and meet certain other requirements.
Financial planners who are admitted to the Registry of Financial Planning Practitioners, or who hold the designations CFP or ChFC, or who are members of the National Association of Personal Financial Advisers have codes on ethics, honesty and conflicts of interests which they are obligated to uphold. Violations of these standards may result in the financial planner losing his or her membership in the association, and/or their designation.
Choosing A Financial Planner
A good financial planner should give you objective, reliable advice to help you develop a budget and investment strategy tailored to your individual needs.
Your search for a financial planner might begin with a survey of friends, relatives and colleagues who have had satisfactory dealings with their own investment advisers over a period of several years. Keep in mind, however, the fact that a planner who has worked successfully for another person may not necessarily have expertise in the financial areas in which you have need.
Also, ask for recommendations from your contacts in the financial community: your banker, broker or accountant.
Organizations that accredit financial planners should be able to provide the names of several planners in your geographical area. Look in your telephone book for organization listings.
Once you have the names of several prospects, you should check with:
Your next step is to schedule interviews with the prospects. There is usually no charge for these exploratory meetings, but ask about fees first. Then ask the following questions:
Avoid planners who pressure you to rely on the word of one or two new clients. These short-term clients may be victims (knowing or unknowing) of a Ponzi scheme, in which early investors are paid handsomely in order to lure new investors, who end up losing most or all of their money when the scheme collapses.
Financial planners are categorized by the manner in which they charge their clients.
It is up to you to determine whether a planner is offering sound financial advice or is simply trying to earn a commission by selling a particular product. When you interview prospective planners, ask how they expect to be compensated. If the planner earns a commission, ask whether he or she offers a complete range of investments or sells only a specific type of product.
Similarly, ask whether the planner offers investments from one specific company or from many providers. The answers are your clues to whether the "planner" is acting in your best interest or is primarily a salesperson pushing a particular product.
Finally, ask for an estimate of the planner's bill before you commit yourself.
A reliable financial planner is one who is truly interested in you and your family's future. In order to determine your needs, and provide the best service, the planner should ask you these basic questions, among others:
No matter what kind of fee arrangement your planner uses, if you want comprehensive financial planning assistance, you should expect to receive the following service:
Tips To Remember
Be on the alert for the following "red flags" of financial planning fraud and abuse: