What You Should Know About Financial
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.
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 as described by CFP Board, 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
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.
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.
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
- 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
- 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.
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. 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 may set the planner apart
from other financial advisers, who may have been trained to focus on a particular
area of your financial life.
Advisers Who May Work With You
In addition to providing 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 recommendations. 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 and
disclose any referral fees they may receive in the process. Similarly,
these advisers should refer you to a planner if they cannot meet your
financial planning needs.
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 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,
you should seek an attorney to prepare legal documents such as wills,
trusts and powers of attorney. Many estate planners hold the Accredited
Estate Planner (AEP) designation.
Many financial planners have earned the CERTIFIED FINANCIAL PLANNER
certification, or the Chartered Financial Consultant (ChFC) or Personal
Financial Specialist (CPA/PFS) designations. Financial planners can take
you through the financial planning process.
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
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.
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.
|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 be sure that you are getting financial planning advice, ask
if the adviser follows the six steps.
|The Financial Planning
Process Consists of the Following Six Steps
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.
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.
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.
Developing and presenting financial planning recommendations and/or
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.
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.
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.
When Approaching Financial Planning
- Set measurable goals.
- Understand the effect your financial decisions have on other financial
- Re-evaluate your financial plan periodically.
- Start now - don't assume financial planning is for when you get older.
- Start with what you've got - don't assume financial planning is only
for the wealthy.
- Take charge - you are in control of the financial planning engagement.
- Look at the big picture - financial planning is more than just retirement
planning or tax planning.
- Don't confuse financial planning with investing.
- Don't expect unrealistic returns on investments.
- Don't wait until a money crisis to begin financial planning.
|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 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.
About Financial Planning
Q Who can use the term "financial
A The government does not regulate
financial planners as financial planners; instead, it regulates planners
as stock brokers, insurance agents or investment advisers, depending on
the services they provide. As a result anybody can "hang out a shingle"
and call himself or herself a financial planner. 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.
Q Why should I choose a financial
planner over another type of financial adviser?
A A financial planner should 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.
Q What is the best age to start
A 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.
Q How are financial planners paid?
A 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. Be sure to ask the planner how he or she is paid.
Q Do I have to pay a financial
planner for the first interview? How much does a planner typically charge?
A 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.
By viewing each financial decision as part of a whole, you can consider
its short and long-term effects on your life goals.
Financial Planning Online
||CFP Board's Web site, www.CFP.net/learn,
is a comprehensive resource for financial planning, offering useful information
for visitors at every stage of the financial planning learning curve. Interactive
tools provide help for your personal situation, including changing jobs,
managing debt, planning your retirement and more. Join the eNewsletter for
updates and check back regularly to participate in polls and quizzes.
The information in this brochure is provided as a public service by Certified
Financial Planner Board of Standards Inc. (CFP Board). A nonprofit, professional
regulatory organization, CFP Board fosters professional standards in personal
financial planning so that the public values, has access to and benefits
from competent and ethical financial planning.
The U.S. Securities and Exchange Commission's Office of Investor Education
and Assistance has reviewed this publication. The SEC does not endorse
the commercial activities, products or members of this or any other private
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