What is financial planning?

What is financial planning? Maybe you’re familiar with it, maybe you’re not. If you use context clues, you could probably figure it out. Financial planning is the process of gathering financial information, organizing it in a useful manner, using it to create a plan, implementing it, monitoring it, and making changes as necessary. I like to think of financial planning as an individual’s overall financial picture.

What’s involved?

The Certified Financial Planner Board of Standards, Inc. (CFP Board), the nonprofit organization that certifies financial planners, breaks down financial planning into various domains and topics. These topics include investment planning, tax planning, risk management, insurance planning, retirement savings, and estate planning. For more detail about the topics, please refer to the CFP Board. 

Everybody’s financial situation is different, and everybody needs help in different ways.

Some individuals and families have complex financial situations and may need help with all of these areas. Some have less complicated financial situations and may need help with only one of the areas. There’s a lot more that goes into financial planning than just investment management, although that is usually a large and important piece.

Who can help you?

Individuals who hold the Certified Financial Planner (CFP) certification are specifically tested in these domains. That doesn’t mean they’re the most experienced or the best. It means they passed an exam and met certain criteria and qualifications. It’s a starting point, but it's important that you do due diligence. There are many other qualified and experienced financial professionals out there who do not hold the CFP certification but who can help you. The certification brings credibility to an individual but is not the only factor.

The finance industry is highly regulated with the aim to protect individual investors. FINRA, NASAA, and the SEC are organizations that protect investors. Financial advisors must pass certain exams depending on the structure of the organization they work for, and this information should be listed on the advisor’s website.

Financial professionals have different job titles, but the most common are financial advisors, wealth advisors, and wealth managers.

Some advisors specialize in different areas and have different capabilities. Many financial advisors work by themselves, while others work as part of a team. Some work for banks, while others work for registered investment advisors. Furthermore, some organizations are large, but others are small. It comes down to your preferences, what you’re comfortable with, and what you’re looking for. In all cases, trust is extremely important in the decision of who to work with.

Depending on the organizational structure, you can search for registered individuals and firms at FINRA and SEC.

How much does it cost?

It varies. Most financial advisors charge a yearly fee based on assets under management (AUM). This can range from .25 percent to more than 1 percent per year. For example, if you have $100,000 in assets to invest and the fee is 1 percent, then your fee would be $1,000 per year. As the value of your investable assets increase, so would your fee. If the value happened to decline — which it can — your fee would decrease.

Some advisors may charge a commission based on trades. Some advisors may charge a flat fee or a one-time fee. Be sure to ask. The vast majority of advisors operate on the AUM fee model.

Who needs it? Why is it important? When to do it?

Do you have financial needs and goals? If so, you may want to consider working with a financial advisor.

Financial advisors are like coaches. They can help you establish and achieve goals. They can also help you get on track financially and help keep you on track. Finally, they can help you get organized and keep you organized.

Advisors are stewards. They’re there to look after you. They dedicate their lives to helping individuals with their personal finances. To succeed, they study and practice their craft. They pay attention to the economy and markets. Advisors are there to listen, answer your questions, hold your hand, keep you calm, and help you make good financial decisions.

Like most things in life, the sooner you get started, the better.