Financial Planning

Insurance planning, risk management, Estate Planning, and retirement planning are all essential aspects of personal finance that you shouldn’t take lightly. You need to calculate how much you’ll need to retire and be sure that the amount you come up with will allow you to maintain your standard of living. Next, you must define your risk tolerance and put together an investment portfolio you’ll stick with over the long-term. Finally, you need to define how much insurance you need to take care of loved ones and existing obligations. This is why so many individuals decide to work with a financial planner, one who has a solid track record of performance and one who can provide a tailor-made solution to achieving an individual’s personal goals. Unfortunately, while there are benefits to working with a financial planner, there are also several potential pitfalls. What are these pitfalls?

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Pitfalls of Using a Financial Planner

• Commissions: Financial planners make money regardless of the performance of individual plans. Their compensation is rarely, if ever, tied to the performance of the investment portfolios they put together for their clients. Instead, that compensation comes from commissions earned on the investments you purchase, investments pushed from multiple financial institutions and banks. Regardless of whether it’s investing in stocks, mutual funds, guaranteed investment certificates, and the like, the financial planner makes money no matter what. In essence, it’s a numbers game and it’s easy to get lost in the shuffle.

• Inability to Provide Proper Portfolio Management: While it’s important to stay committed to long-term goals, it’s equally important to regularly review your portfolio based on current market conditions. This lack of vigilance is costly and was especially problematic during the 2008 financial crisis, a crisis where a number of investors lost heavily as investment portfolios and personal assets plummeted. Large financial institutions collapsed, worldwide stock markets declined and the everyday investor saw their housing values erode.

• Investments that Don’t Meet Your Criteria: While each of these aforementioned issues are concerns, the worst outcomes derive from working with a financial planner who pushes investment options that don’t meet your long-term goals and risk tolerances. Because compensation is often structured around pushing certain investment vehicles, a financial planner can easily be influenced by short-term commissions, instead of your long-term goals.

On the Plus Side

Independent financial planners can represent a variety of different companies and therefore choose from a vast “menu” finding the right services for you while still earning a commission. If you are worried about the conflict of interest issue, there are also “fee-only” financial planners who don’t work based on commission but on a fee basis.  Many financial planners use management companies that monitor your portfolio and “rebalance” it regularly, perhaps monthly. Financial planners bring experience, knowledge, and another set of eyes to the table and are thus valuable members of your financial team but you must be prepared in order to get the most out of the relationship.

How Can You Protect Yourself?

First, understand your own risk tolerances. These are yours and yours alone. Ultimately, you must be comfortable with how your money is invested. This includes understanding upfront fees, backend fees, and withdrawal penalties on every one of your investments. If something doesn’t feel right, it probably isn’t. Second, do your research; understand who you are working with, and make it a point to understand how your financial planner is compensated. Third, ask how often your portfolio will be reviewed. These are your investments and while the financial planner has the experience, you must retain the control. Finally, don’t go outside your comfort zone; insist that you have the final say on how and when money is invested and when those investments are redeemed.

There are plenty of good financial planners out there, ones who are honest, trustworthy, and committed to helping you attain your own financial goals. However, there are others who push their own initiative and ones that are easily influenced by the big payday. Remember, that financial planner may have hundreds, if not thousands of clients. It’s important to ensure you get the personal attention you deserve.

See Also:

• High-Performance Savings Accounts
• College Savings Accounts
• Term vs. Whole Life Insurance – What Should You Choose?
• The Wealthy Buy Assets, the Poor Buy Liabilities, and the Middle-Class Buy Liabilities Believing They Are Assets

Photo Credits: by Victor1558  Financial Planner