During my PhD, I’ve taught numerous classes related to personal financial planning. In these classes, I’ve noticed that many students don’t understand the financial planning process. If my students don’t understand the process, and they are enrolled in a CFP® Board registered academic program, then what about the general public? I’m guessing few individuals outside of the financial industry have an accurate understanding of financial planning.
This lack of understanding is exacerbated by the hoards of people calling themselves “financial advisors” or “financial planners” or “financial consultants” or “financial brokers” or “wealth managers.” All of the different titles and job descriptions are confusing, and confusion ultimately reduces consumer demand in a knowledge based profession.
If you’re considering hiring professional help, you need to know what to expect from a good financial planner, and how to tell the difference between a salesperson and someone who offers fiduciary financial planning advice. Hopefully this article will lead you in that direction.what-is-financial-planning
What Financial Planning is NOT
Before I describe the financial planning process, let’s clear up a major misconception surrounding the profession:
Financial planning is not synonymous with asset management, stock picking, or investing.
Investing is an important part of the financial planning process, but it’s only one small part of the overall plan.
Low-cost index funds, robo-advisors, and automated investment platforms have made investing ridiculously easy for everyone. With a few clicks of the mouse, anyone can establish a well-diversified, low-cost portfolio of index funds. I believe this trend will continue to accelerate, making it harder for brokers and salespeople to sell commissioned investment products (most of which should not exist in the year 2016).
What is Financial Planning?
Financial planning is about using your money to achieve your goals.
A financial plan should begin with a series of questions about you. For example:
What do you want to achieve in the next 5, 10, 20 years?
What are the most important things in your life?
What activities make you happy?
What are your core values?
These questions should make you think about your life, goals, and priorities. Without a clear understanding of these things, it’s impossible to create a personal financial plan.
You may be asking, what about the financial aspect? Well, that’s part of the process, but it’s secondary. Your financial assets are the means by which you achieve your goals. You must define your goals before worrying about the dollars and cents.
Financial planning is an ongoing process.
Your life circumstances, goals, and values will change over time. A good financial plan allows for that change.