It’s surprising to me how many people still don’t understand what a financial planner does. Over the past year, I’ve found that a lot of people either just have no clue at all, immediately think of the “financial advisor” who tried to sell them whole life insurance or an annuity and then asked them for names of their 5 closest friends to contact, or they think of the traditional investment advisor who helps them manage their retirement portfolio.
There’s so much more to financial planning than any one of these.
In fact, none of what I mentioned above is financial planning. Financial planning doesn’t have to mean selling a financial product and it doesn’t have to mean managing investments (although managing investments is often part of the financial planning process).
As I wrote around this time in 2019 in a blog titled What is Financial Planning?:
“True financial planning involves taking a deep dive into every aspect of a client’s financial life, helping them to organize, set goals, and create a plan to reach those goals, and helping the client follow through on their plan. A financial plan should paint a picture of where you are, help you figure out where you want to go, and define the steps that you’ll need to take to get there. Succinctly, financial planning involves helping others allocate their money and other financial resources in a way that aligns with their goals and values.”
What Is Financial Planning?
When I think about answering the question, “What is financial planning?”, I first come to another term that I want to explain: wealth management. Wealth management is financial planning plus investment management. This is a holistic or comprehensive practice of helping someone with all aspects of their financial life. I practice wealth management with my clients.
Wealth Management = Financial Planning + Investment Management
Financial Planning
Simply put, financial planning is figuring out your current financial situation, establishing financial goals that you would like to accomplish, and creating a plan to accomplish them. Financial planning answers the question, “How can you make your money and your assets work for you and help you reach your goals?”
The CFP Board defines financial planning like this:
“Financial planning involves looking at a client’s entire financial picture and advising them on how to achieve their short- and long-term financial goals. From saving for education and planning for retirement to effectively managing taxes and insurance, financial planners develop valuable relationships with their clients to provide them with confidence today and a more secure tomorrow.”1
I think that does a pretty good job of summing up a complex profession in just a couple of sentences.
Financial Planning Topic Areas
At a high level, there are a handful of topic areas that the CFP Board has defined that CERTIFIED FINANCIAL PLANNER™ professionals help clients with. There are so many intricacies within each of these topic areas that a financial planner explores and helps a client create a strategy and plan for that there’s no way I could list them all.
I’ve included a high level overview of these topic areas below with a brief description of each12.
Basics of Financial Planning
- Financial statement preparation
- Cash flow management
- Budgeting
- Debt management
Retirement Savings & Income Planning
- Creating a retirement plan and determining how much money will be needed in retirement
- Helping to evaluate different retirement plans and determine which to invest in
- Understanding and navigating Social Security and Medicare
- Helping to distribute assets in a tax-efficient manner
Risk Management & Insurance Planning
- Helping clients to evaluate their risks and create a plan to manage those risks whether that may be through appropriate insurance coverages or other strategies
- Evaluating clients’ insurance policies including life insurance, disability insurance, health insurance, homeowner’s insurance, auto insurance, etc. and making recommendations on these policies
- Planning for the costs of healthcare and long-term care in retirement
Investment Planning
- Understanding and planning for the taxation of different types of investments and retirement accounts
- Determining investment risk tolerance and factoring that into the portfolio allocation
- Creating a portfolio using various investment vehicles and retirement accounts while diversifying assets through an appropriate portfolio allocation of bonds and stocks (often through mutual funds and ETFs) and managing risks appropriately
Tax Planning
- A CPA who files your tax return is most likely looking at last year, while a financial planner is helping you to be proactive and reduce and/or manage your tax bill looking forward
- Understanding tax laws and helping clients to implement strategies to appropriately reduce their taxes
- Locating the appropriate asset classes within the appropriate retirement accounts for tax efficiency (e.g. high growth assets in Roth accounts)
- Charitable contribution strategies
- Does not include filing tax returns for clients
Estate Planning
- Understanding estate laws
- Making sure that clients have appropriate estate planning documents in place and that the declarations in those documents are being carried out appropriately
- Making sure clients’ financial account beneficiaries are setup appropriately
- Providing guidance and strategies on gift and estate taxes
- Does not include preparing estate planning documents for clients
Education Planning
- Helping clients with strategies to save and pay for college education
Investment Management
Investment management, or portfolio management is the second half of wealth management. While many clients may seek out a financial planner to help them with their investments, I always explain this concept secondarily to financial planning because the financial plan tells you how your portfolio should be allocated.
As we can see above, investment planning is one of the key financial planning topic areas that the CFP Board defines. Having the financial plan in place before trying to figure out what your portfolio should look like is so beneficial because it provides a roadmap for your journey. If you want to take a road trip it’s hard to figure out how to get where you’re going if you don’t know where you’re starting or even where you want to end up.
Here are some additional areas within investment management that financial planners help clients with:
- Asset Allocation (how much of your portfolio is in stocks, bonds, cash, etc. as well as how much in US vs international stocks; large, mid, small cap stocks; growth vs value stocks; US vs international bonds; corporate vs government bonds; short, intermediate, long duration bonds, etc.)
- Asset Choice (which stocks, bonds, mutual funds, ETFs, etc. to include in the portfolio)
- Account Choice (which types of account to invest in – 401(k), Traditional IRA, Roth IRA, brokerage account, etc.)
- Asset Location (which types of assets should you keep in which type of account)
- Tax-loss harvesting
- Tax gain harvesting
- Portfolio rebalancing (trading the portfolio when appropriate)
Some Intangible Things That a Financial Planner Does
Provides Accountability
- People often need someone to keep them accountable in many areas of their lives from health to work to relationships. This includes financial planning as well.
Provides Peace of Mind
- Many people choose to use a financial planner because they understand that the world of personal finance and investing is huge and they just don’t know what they don’t know.
- Having someone on their side who has seen hundreds of different client situations and knowing that there’s a plan in place for their specific situation provides great peace of mind for many. Having someone on your side who you know wants to help you be successful feels awesome.
Frees Up Time
- There’s only so much time in a day and many people are better suited spending that time with their family, enjoying the things that they love to do, and advancing their career.
- Working with a financial planner who is focused on helping you to create, implement, and monitor a financial plan that was specifically created for your personal situation frees up a lot of time that would otherwise go towards learning about financial planning and/or investment management.
Helps to Make Difficult Decisions
- Financial decisions can often wigh on people and feel like there’s no right or wrong answers. Many times a financial planner has helped someone make the decision before and can help guide a client throught it.
Provides Referrals to Trusted Partners
- A financial planner isn’t the only professional relationship that you need. Many clients also need a tax accountant, estate planning attorney, and insurance broker to help them follow through with their financial plan. A financial planner can provide the names of the trusted partners who do good work for their clients.
Financial planning is so much more than just selling financial products or managing someone’s portfolio. Everyone’s life is unique, everyone is in a different financial situation, and everyone has different goals. That’s why financial planners do what they do.
1 What is Financial Planning? (CFP Board)
2 Certification Coursework Requirement What You’ll Learn (CFP Board)
