Many financial advisors claim to be financial planners. But a closer look reveals most are giving financial planning lip service at best. Rough drafts of financial projections, constructed with incomplete information and estimates, are a far cry from comprehensive plans. Not to mention that financial planning is a constant and ongoing process, not a one-time exercise to be presented and thrown in a drawer to collect dust. Here are seven signs your financial advisor is doing real financial planning.
Helps you define your goals and objectives – Every plan requires an endgame. “I want to have $5 million by the time I retire” is not a financial planning goal. That’s an investment goal and a completely arbitrary one at best. Most of us don’t know what we are trying to accomplish with money other than not running out of it. A good financial planner will ask clarifying questions to help craft measurable goals and objectives. One of my favorite questions is, “If money were no object, what other goals might you add to this list?”. I am also a fan of using Kinder’s Three Questions for a true emotional deep dive into what matters most.
Gathers details on ALIE (Assets, Liabilities, Income, and Expenses) – The four main components of a financial plan are assets, liabilities, income, and expenses. Gathering data on your investment accounts is not sufficient. A real financial planner will ask about all assets, including real assets such as properties. But no balance sheet is complete without understanding the liability side, including loan balances, interest rates, and term structure. A planner needs to know all sources of income, both now and in the future. Expenses are often the biggest unknown in a financial plan, but a good planner will help craft assumptions about how expenses will change throughout life.
Confirms your Social Security Benefits – Social Security benefits are an important factor in almost every financial plan. The maximum monthly benefit today is pushing $4,000/month after several years of supersized cost-of-living adjustments. A dual-income couple with max benefits could collect up to $96,000/year at that rate. But deciding when and how to file for Social Security isn’t always cut and dry. Widow(er)s, and ex-spouses have specific benefits, as do minor children who lost a parent. The decision to file early, at full retirement age, or wait until 70 is also complicated. A good financial planner digs into these details, rather than using a blanket assumption, or none at all.
Requests last year’s tax return – Requesting your most recent tax return is a sure sign this planner means business. Prior year tax returns are a treasure trove of information that can help a planner form valuable recommendations. Understanding the nature of your income sources and tax deductions is vital to providing comprehensive planning advice. If someone claiming to do comprehensive financial planning doesn’t ask for your tax return, you should wonder why not.
Reviews HR benefits at work – Many employees fail to maximize their benefits package at work. Signing up for the 401k plan and selecting a healthcare plan is just the tip of the iceberg. A comprehensive planner will want to dive into the details of disability coverage, HSA-eligible healthcare plans, and 401k after-tax contribution options. This is especially critical if stock-based compensation is part of the deal. Deciding when and how to exercise stock options can have major tax implications.
Asks for copies of Estate Planning Documents – Estate planning and financial planning often go hand in hand. A good financial planner will request copies of all trust documents, wills, POAs, medical directives, and entity operating agreements. These documents become stale faster than you think, as you and your family evolve and the laws constantly change. The rule of thumb to update estate documents every five years is easily overlooked but often critical. Plus, investment recommendations will differ for trusts with different tax horizons, tax implications, and beneficiaries. It is not uncommon for investors to execute estate planning documents and fail to fund trusts or other entities with assets, negating the intended plan. A financial planner who requests and reviews these documents can catch such critical errors.
Makes Investment Recommendations in Service of Your Plan – Investing without a financial plan is like driving with a cover over the windshield. You can’t see where you’re going. How does an advisor know when you will need to access the funds in your portfolio without completing a comprehensive plan first? To do that, he’ll need to complete most of the steps above and understand the timing of important events in your life. When will your children graduate from high school? When will you scale back at work and earn less income? When do you plan to sell the family home and downsize to a condo in the city? Of course, these goalposts are moving targets, and plans will change. But without completing this exercise, there’s no way to know how to invest in the portfolio. One warning sign to watch for is an advisor focusing solely on investment performance with little attention to tax and cash flow planning. A true comprehensive planner always starts with the end goal in mind when making investment recommendations.
Why, then, do so many financial advisors claim to be comprehensive planners, when, in reality, they barely scratch the surface? The unfortunate truth is that “financial plans” have historically been used as loss leaders to sell investors expensive products; such as annuities and permanent life insurance products. Planning may also be used to justify fees in an environment where the cost of investing and advice has been declining for decades. Traditional brokerage employees still view planning as a necessary evil. Clients request it, so there’s a person on staff willing to perform it, all in service to maintaining the investment product part of the relationship.
Luckily, the industry is slowly moving in the right direction. Demand for quality financial planning grows as clients retire earlier, live longer, save and invest more, and need comprehensive advice. Professionals are stepping up, earning credentials, and expanding their services. If you need comprehensive financial planning advice, look for a planner who performs the majority of the seven steps listed here.
