People often ask me whether financial planning services actually provide any value. Oh, not directly, of course. They’re far too polite to spell it out that way, but that’s definitely the meaning behind their diplomatically worded queries. Where is the true value in financial planning?
Let’s talk about that, but first, what does financial planning even mean?
• Financial planning is not just managing investments.
• Financial planning is not just referring you to an attorney and maybe placing some insurance.
• Planning is engaging in a clear process moderated by a professional.
• Planning encompasses the process of building your plan as well as the ongoing support involved in consistently updating this plan every year.
I know the part about the ongoing support starts to sound a bit hokey and intangible, but it is so critical to your success. Over 22 years as a financial advisor, I’ve watched and helped cheer on many clients as they built a comfortable nest egg, secured future income streams and established a legacy beyond their wildest dreams.
Since you don’t have the opportunity to observe the impacts of financial planning the way I can, let’s look at its value in terms of professional stewardship. This is the true value proposition inherent to financial advisory services. It starts with helping you make informed decisions — figuring out how to employ your money most effectively to achieve your personal objectives and mitigate financial risk.
Professional stewardship includes things like saving strategies and optimal investment vehicles for different types of savings, cash flow management, analysis to help you determine which kinds of insurance coverage make sense for you and in what amounts, thinking through estate plans, and how to balance your legacy goals with current and future lifestyle preferences.
Market-based investment advice and evaluating financial moves in terms of tax efficiency are other basic services a competent financial advisor provides.
Besides helping you understand what you should be doing with money, your advisor is alert to potential risks and lets you know what not to do. Financial planners help you avoid a host of financial mistakes: things like taking distributions from the wrong accounts or at the wrong time, retiring before you’re financially prepared, or committing to a large purchase or financial obligation (college education, anyone?) without understanding the impact of the decision on your financial reality.
But you’re intelligent. You could, if you really put the time and effort into it, learn the same techniques and strategies that your financial advisor is sharing with you. Would you really lose anything by going it alone?
You would, and that’s because professional stewardship doesn’t end with the technical advice you receive. Behavioral finance guidance and support are key things clients get from their advisors, and this holds considerable value — measured in dollars, not touchy-feely metrics.
As humans, we have a natural impulse to avoid risky situations, including market volatility. But that inclination to run away (by selling during a market downturn or periods of exceptional volatility) invariably comes at a financial cost.
Research shows that investors who work with professional advisors maintain a more passive investment strategy during market downturns, selling less and buying more than other investors. By communicating positive news on the financial front during market volatility and in other ways encouraging clients to maintain the status quo, investment advisors help their clients resist the urge to overreact and engage in panic selling. Net result: better portfolio outcomes.
It’s not just about money, though. Professional financial planning services can give you a psychological boost that could make you measurably happier by reducing stress and freeing up your time to focus on the things that matter to you.
That sense of dread as you wonder if you’re doing the right thing? Professional advice helps you turn off the worry cycle. The time you don’t spend worrying about financial questions, sifting through often-conflicting information as you try to figure out what you should do, can be devoted to activities that bring you joy rather than frustration and anxiety. Choosing how you spend your time can have a huge impact on your happiness and well-being, regardless of financial stressors.
So in a nutshell, professional financial planning can potentially lead to better decisions, more money, less financial risk, less stress, more leisure time at your disposal and a happier life. How’s that for value?
However, it’s a valuable service but not a free one, so professional assistance may not be appropriate for some earners. If cost is a drawback, it’s best to focus on the basics to get your financial house in order while you boost your earning power. Once you’re ready to start working with an advisor, here’s how to get the most value out of the engagement:
• Thoroughly vet potential advisors to choose someone who is well qualified and works frequently with clients similar to you in terms of income level and lifestyle.
• Check the fit before you commit. Look for someone you enjoy on a personal level so you’ll feel comfortable sharing intimate details of your family and financial life.
• Once you’ve found the right one, be sure to share information honestly and completely so your advisor can truly understand your situation, establish realistic goals and help you formulate the most effective strategies for achieving them.
This article originally appeared on Forbes.
