What Should Come First . . . Process or People?
Continued . . .
Why You Need A Financial Plan
by Austin R. Dutton, Jr.
These days, having a comprehensive financial plan is more important than ever. Business is good these days for financial planners. Families shaken by the terrorist attacks of September 11, the faltering economy and the Enron scandal are entering into the financial planning process in order to put their financial houses in order. Do-it-yourself investors, burned by the declining stock market, are also turning to financial planning and their financial advisors to evaluate their investment portfolios.
In the past families have held back from professional help, by thinking, "Why should I hire a financial advisor for something I could do on my own, with the aid of a computer or the internet?" This is no longer the case. Here are some reasons why more and more people seek the advice of a qualified financial advisor when creating a comprehensive financial plan.
Financial planning is more than about money. At its core, financial planning is about effectively managing financial resources so that individuals can lead happier, more fulfilling lives today and tomorrow. One of the very first steps in a financial planning relationship is to help clients define their life goals. Do you want to start your own company, have more time to volunteer, change careers, live somewhere else? How do you balance competing goals, such as saving for retirement while putting children through college and help out elderly parents?
Take the example of the financial advisor who asks of all her new clients, "If you could create a perfect world, what would it be?" When she asked that question of a local university professor, a man known for his sour, depressed mood, he told her he wanted to live on a farm, far from where he was teaching. The more he talked about it, the more excited he got, and the more that he, his wife and the financial advisor realized that with the proper planning it was a dream he could potentially make a reality.
In a good financial planning relationship, the financial advisor and the client periodically reassess the client's goals and strategies already in place to achieve those goals, especially as life circumstances change. No financial planning or investment software program can effectively come up with those kinds of questions let alone provide the right answers.
Financial planning sees the whole, not just the parts. There are many financial specialists that provide valuable services to people for a specific financial need, such as buying property and casualty insurance or drafting a will. However, a financial advisor can help coordinate the financial planning process and can typically provide an overview to make sure the various parts are working in harmony and not against each other. For example, one professional's strategy to save income taxes may undermine another professional's investment strategy. A computer might provide investment advice (though usually not well tailored to your individual needs), but a financial advisor can help you find ways to free up additional money for investing. It also is the financial advisors who might discover that your computer-designed investment plan could be seriously undermined your financial security by not considering all facets of your financial affairs. For example, it may ignore potential risks of not having adequate life or disability insurance or health care coverage.
A financial plan motivates. Sure, you probably know you need a will, better insurance, a budget, a better handle on your investments and assessment of a host of other financial issues. Perhaps you could do some of it adequately on your own. But there's nothing like having a comprehensive plan to provide the motivation to finally take the actions you've been procrastinating. For example, a recent retirement study by TIAA-CREF Institute found that people who planned more thoroughly for their retirement experienced fewer financial "surprises" when they actually retired.
Financial advisors provide checks and balances. Beyond the financial plan and the motivation to take action, the financial advisor can provide a much needed objective perspective. Financial advisors can filter out the financial "noise" that so often clouds financial judgment. This independent perspective is especially critical when a family is under stress such as from a job loss, divorce or a major market decline.
Ideally, it's better to create a financial plan before a crisis occurs. One of the greatest benefits of financial planning is its ability to prepare you to better handle the inevitable financial roadblocks thrown up in life that can detour you from achieving your life goals.
This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Austin R. Dutton, Jr. Senior Vice President with Boenning & Scattergood, Inc. In Langhorne, PA.