There are a lot of financial planners out there. Some are good. Some are not as good. But they all have a financial plan for your money. This post will show you – What is a Good Financial Plan?… and What is NOT!
What is a Financial Plan?
According to Investopedia, a financial plan is…
a document containing a person’s current money situation and long-term monetary goals, as well as strategies to achieve those goals.
Notice how the definition starts with a person’s money situation. Unfortunately, many financial planners start with their products, and how they might fit into a person’s money situation. Fair enough – if all you have is a hammer, everything looks like a nail. But people are complicated. We have different needs and wants. Just because saving and life insurance are components of a whole life insurance policy, and you need to save for retirement and have a need for life insurance to protect your family, doesn’t mean a whole life insurance policy is your best option to save for retirement. It means it is an option. I once met with someone who was sold a whole life policy for his retirement plan when he didn’t need it. In the policy, he was saving $20,000/yr that was growing tax-free; but he wasn’t married, didn’t have any kids, and definitely didn’t need life insurance. He would have been better off saving the same amount in a 401k.
What is a Good Financial Plan?
A good financial plan begins with the end in mind. It asks where you want to be, looks at where you are, and how to get you there. This path should be comprehensive in nature, and use strategies that fix YOUR situation. Not everyone is a nail. How comprehensive in nature should your plan be? Very!
NAPFA’s Comprehensive Financial Plan
I learned to do real financial planning when I joined NAPFA, the National Association of Personal Financial Advisors. It was at the “basic training” portion of NAPFA’s 2003 Toronto National Conference. Bob Maloney, self-proclaimed Chief Listener, had various NAPFA Registered Financial Advisors share a different section of what NAPFA deemed the components of a comprehensive financial plan.
The NAPFA comprehensive financial planning modules included goal setting, budget analysis, tax analysis, and 3 years tax projection, cash management, goal analysis, insurance review, and estate review.
The insurance review includes a review of the home, auto, umbrella liability, medical, dental, vision, hearing, disability, life, and long-term care insurances. NAPFA members cannot sell insurance. They can only review, and advise you on how they impact your financial plan. They have no skin in the game if you have them, or don’t, giving you a completely unbiased opinion.
The estate review reviews your account titles and beneficiaries, along with the basic estate planning documents including wills, trusts, medical and financial powers of attorney, and patient advocates, and medical directives. Again, NAPFA advisors have no skin in the game. They do not draft nor comment on the validity of your documents. They merely let you know what you have and who the key players are so that you can decide if you should update them with your attorney.
A Financial Plan is NOT
As you can see, a real financial plan is more than a calculator. It is not a product either. An annuity, a whole life policy, or a variable life insurance policy is not a financial plan. A financial plan is also not only investment-centric. You are more than your portfolio. Sure, the advisor may be paid based on your investments or net worth, but you should get a lot more than just investment picks, especially if they’re holding themselves out as a financial planner.
If you are interviewing a financial advisor, I would have them complete the NAPFA Financial Advisor Checklist and Financial Advisor Diagnostic. Both documents will give you a clear picture as to what kind of a financial plan you can expect.
Takeaway
My dad worked in the financial planning industry for over forty years. He started out selling whole life policies as a financial plan. When he figured out that a whole life policy was not a financial plan, he began doing financial planning. At the time, this was focused mainly on investments, and how much was needed to earn in return and save in order to fund goals. I joined him in 1997, and in 2003 we joined NAPFA. We learned how to do real comprehensive financial planning. It took my dad 30 years to learn how to do planning right. It took me 6 years. Now that you know what a good financial plan is, and what is not, hopefully, you’ll benefit now. You can find a NAPFA Registered Financial Advisor in your area at https://www.napfa.org/.
