“Sell Everything! I want to go to cash before I lose it all!” Hearing phrases like these from investors is commonplace for financial planners when paranoia in the markets runs rampant. However, through channeling their inner behavioral economic therapist, financial advisors ease their clients’ fears and remind them of the financial plan and investment strategies they put in place. Individual investors must deal with their emotions every day while investing, exploring different financial ideas, and consistently and thoroughly implementing various tax and investment strategies. Juggling all of these while still working your day job and balancing family life is a tall task for any one person. With all these obstacles to reaching your goals and objectives, working with a professional financial planner to create a financial plan is imperative. In the paragraphs that follow, I’ll discuss why financial planning is important and how to find the financial advisor that’s right for you, your finances and your investments.
Before understanding the importance of financial planning, the foundation of why you need a financial plan must be in place. At this foundation lies the central question, “What do I do with my money, my savings, my finances?” Searching the internet will turn up lots of investment advice of varying quality. Instead, it can be useful to look at other factors in your life that are just as valuable, such as your health. When you have a health issue, the first thing you probably do is consult your doctor. The doctor listens to your problem and prescribes a treatment plan to resolve that issue. When you follow that treatment plan as prescribed, your health improves as a result. Your finances can be just as important to you as your health, so why treat them any differently? Becoming a healthier person or achieving your financial goals doesn’t just happen. They both require planning.
When financial planning occurs, whether formally with a professional financial planner or informally through do-it-yourself spreadsheets and approximations, the chances of successfully reaching your goals increase. Though what determines investor success is subjective, how much you save due to financial planning is not. Surveys have found that respondents who had formal or informal financial planning experienced greater savings to those who had done no financial planning at all. Those same surveys have found that more respondents claimed they saved more through a financial planner than those who did not use a professional.
Though saving more is undoubtedly a vital part of a financial plan, it’s a part of a much larger financial planning component. Financial planning encompasses many facets of your life. From insurance to tax planning, investments to estates, having a plan for each of these aspects is critical before they become overwhelming. Unfortunately, the individual investor’s behavior within the framework of their financial plan and investment strategies can often make or break their ultimate financial success. Erratic or irrational investor behavior can ruin even the best financial plan. Something as serious as your financial well-being is going to stir up emotions. When the news is in a panic and your friends and colleagues are selling their investments and going to cash, it’s hard to stick to the plan you’ve started.
Understanding your financial and investing goals and devising a plan to reach them are critical for achieving financial success. Though drawing up a financial plan on your own is a possible way of achieving your financial goals, working with a professional financial planner can help you stay on that path. Consulting with a professional financial planner, provides a buffer against emotional decision-making. When investors introduce emotion into their financial decisions, they often do things that can seriously inhibit reaching their financial goals. Selling investments after a market downfall or chasing performance amongst hot stocks can push those goals years down the road. This aspect of financial planning with a professional financial planner may be the most important we cover. According to Vanguard Advisor’s Alpha, intervention by a financial advisor before an emotional financial decision is made “may prevent significant wealth destruction and also add percentage points – rather than basis points – of value. A single such intervention could more than offset years of advisor fees.” Having that professional financial planner providing financial advice can help keep you accountable towards your savings and investing goals and help prevent emotional decision-making from creeping into your financial plan.
Helping to contain emotional investing decision-making isn’t the only reason financial planning with a professional financial planner is essential. At the start of the financial adviser-client relationship, the financial planner asks the investor to create an investment policy statement, a critical component to the investor’s ultimate financial success. This statement outlines expectations by creating an asset allocation and time horizon for the invested funds. Through creating this statement with a professional financial planner, an individual investor starts from a secure position as they begin to work towards their long-term financial goals. The financial planner has a better understanding of what the investor is trying to accomplish and the potential pitfalls they may face. Using the investment policy statement to create an asset allocation profile suitable for an individual investor, the professional financial planner can manage the investment return expectations of a client during different market cycles. As a result, emotional decision-making can be avoided as the financial planner concentrates on the investment plan they created with the client, so news headlines don’t dominate their clients’ behavior.
Although having a check against emotional investment decision-making and having a statement of your investing goals are two critical reasons financial planning with a financial advisor is important, they both can be done by an individual investor with no professional financial planning experience. Investors can keep their behavior in check while also referencing their investment policy statement to ensure their financial portfolio still matches their investing goals. But if an individual investor can manage the above tasks, will they be better off financial planning by themselves and not paying the fees associated with using a professional financial planner? While this certainly could be true for the savvier individual investor, how the financial portfolio is managed will be a better determinant of whether this is the case. According to Vanguard Advisor’s Alpha, working with a professional financial planner through different portfolio management techniques (rebalancing, asset allocation, and strategic withdrawals) has the potential to add over 100 basis points to your overall portfolio’s return. It’s not just in the total return where an investor realizes a professional financial planner’s value. They look at the risks to your financial plan. A financial planner looks at rebalancing your financial portfolio when assets begin to drift, shifting your asset allocation when your lifestyle changes, or determining what accounts to withdraw from to avoid taxes. Though hard to quantify, there are real advantages to working with a professional financial planner that hands-on investors must juggle themselves.
As you read this article, it’s evident that financial planning covers many topics. As a result, trying to cover all the bases on your own can be a time-consuming process. The more your assets grow, the more time you spend reviewing your investment strategies or learning new ones to continue to optimize your returns and lower any associated costs. Eventually, it may come to a point where the time it takes to manage your financial plan is worth more to you than the costs of hiring a professional financial planner. When this happens, finding the right financial planner is just as important as having a financial plan itself.
How to find the right financial planner can be a very subjective matter. Some investors want a financial advisor who’ll go through every detail of the financial plan with them, while others prefer the financial advisor in complete control and only want to be notified when needed. These differences in style are because all financial advisors have different planning philosophies. Ultimately, the right financial advisor for you will have two essential skills: good communication and trustworthiness.
Communication skills are vital when choosing a financial advisor. With so many contribution deadlines, maximum contribution amounts, and phase-out ranges, an advisor who relays clearly and concisely what you need to do and when will help ease much of the stress financial planning can cause. Listening is also a crucial communication skill when looking for the right financial advisor. A financial advisor who doesn’t listen to your needs won’t serve you best. Reinforcing this, a 2020 survey by Natixis Investment Managers found that the top two reason why clients leave their financial advisors are not listening to their needs or failing to meet client expectations on communication.
Lastly, choosing a financial advisor you trust gives your financial plan its best chance of success. When you select a financial advisor, you are putting your finances in their hands as they guide you through the economic stages of your life. Not trusting that your financial professional will do as they say could cause anxiety and strain rather than relief.
To many people, financial planning is as intimidating as a meteor barreling towards Earth. Pulling back the curtain of your financial life can reveal some painful truths about how you’ve been managing your money. The goal of financial planning is to help shed light on these truths and set you on a course toward financial success. By creating a financial plan and working on that plan, your investing dreams for the future become attainable goals. Working with a professional financial planner will guide you through the journey towards your investing goals through behavior coaching, implementing investment strategies, and refocusing the financial plan as your life changes. To find the right financial advisor for you, a great place to start is asking your close friends and relatives whom they use as a financial planner. If those close to you know someone they trust, it can add an extra layer of comfort knowing you’re not the only one entrusting your financial life to this person. Ultimately, it’s up to you, the investor, to determine what type of relationship you expect from your adviser. However, it is the adviser's role to meet your expectations.
Goodsell, D. (2020). 2020 Global Survey of Financial Professionals. Boston: Natixis Investment Managers.
HSBC. (2013). The Future of Retirement. London: HSBC Insurance Holdings Limited. https://www.sgmoneymatters.com/wp-content/uploads/2013/05/HSBC-The-Future-Of-Retirement.pdf
Kinniry Jr., F. C., Jaconetti, C. M., DiJoseph, M. A., Zilbering, Y., & Bennyhoff, D. G. (2019). Putting a value of your value: Quantifying Vanguard Advsior's Alpha. Valley Forge, PA: The Vanguard Group. https://advisors.vanguard.com/insights/article/IWE_ResPuttingAValueOnValue
Author: Cassidy Richardson, CFP® | Financial Planner | Allegheny Financial Group | March 2021
Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC.