When hiring a financial planner for the first time, many people can get overwhelmed by the task of simply knowing what to look for. After all, the financial services industry doesn’t make it easy for the average person to make an informed decision.
One way to better understand what you’re looking for is to decide between a financial plan or financial planning. Simply put, a financial plan is a snapshot at a moment in time accompanied by a list of
recommendations intended to put you on track to achieve your goals. Conversely, financial planning is an iterative process that identifies what needs to be done and is updated routinely as changes in your life occur.
In other words, hiring a financial planner to present a financial plan is like going to the doctor one time for a checkup. Hiring a financial planner to help with ongoing financial planning is like routinely seeing your doctor, even when you feel perfectly healthy.
Unlike going to the doctor (which everyone should do), many people are perfectly fine handling their own finances. After all, financial planning is a process that you can do yourself, if you are willing to:
Take the time to objectively evaluate your own situation
Create your own financial plan
Hold yourself accountable to getting things done
Back in your grandfather’s day, if you wanted to buy stocks, you had to find a stockbroker and place the order. If you wanted insurance, you had to buy it from the door-to-door salesman, because there wasn’t another viable alternative. Today, virtually any investment or insurance product that is worth purchasing is available to the consumer, and all the research can be done online. But it requires time, education, and a discipline most people don’t have.
It’s still tempting to hire a financial planner to do the analysis, then just use the financial plan as a checklist for you to do yourself. In theory, that would be the cheaper option, since you’re only hiring the financial planner to do the analysis and give you a recommendation. Here are seven reasons why that might not work the way you planned:
#1. There might be red flags about the ‘financial plan’ you’re receiving.
There are a couple of different ways by which a financial advisor will offer a financial plan as a service.
As a stand-alone service offering. In other words, the financial advisor is saying to you:
“Hire me to look at your current situation, analyze it, and give you some recommendations. I will calculate a fee that represents the amount of work I plan to do. This will (usually) include a conversation so we go over my advice so that you know what you need to do. I will make myself available for a certain period of time after I present the fee to you, but implementing the recommendations (or not) is your responsibility.”
You’ll often be able to look at their financial planning fee, then verify against their hourly rate (outlined in their disclosure form, known as Form ADV). For example, a financial advisor whose hourly rate is listed at $250 per hour, and who usually takes 6-8 hours for a financial plan would reasonably charge between $1,500 to $2,000. Garrett Planning Network is a great place to find an hourly financial advisor, many of whom use a similar pricing model.
As a lead-in to ‘other services.’ Another way that financial planners use a written financial plan is to demonstrate their value to you, in the hopes that you might hire them on a longer-term basis.
This isn’t necessarily a bad thing—the hourly financial planning model outlined above is an incredibly difficult way for a financial advisor to earn a living. Even if they ‘bill’ $200 per hour (or more), living hourly is only as good as the amount of work that you can keep coming in the door. And after a while, this begins to feel very transactional, when many financial planners enter the field to develop relationships with their clients. It’s very hard to build relationships when you depend on volume as part of your business model
Many advisors might charge below market value for a financial plan, then use that plan as a roadmap to illustrate what they would do for you, should you hire them. Again, this can be a good thing, because it demonstrates their ability, and outlines expectations if you want to hire them. Building putting together a stand alone financial plan that a client could implement helps build the framework for the work they can expect to accomplish if they decide to hire the financial planner to help do some of the heavy lifting.
Of course, the broker-dealer industry picked up on this a long time ago, and started using reduced price (or even free) financial plans as a way to attract unwary consumers to their products. This is a little more subtle than the free dinner seminars that have become the bane of the industry, but it’s a little suspicious to see a shiny plan where every recommendation happens to be tied to an investment or insurance product that the ‘advisor’ happens to be able to sell you. Life usually isn’t that clean cut. Just understand that this is where you might run into problems.
To avoid the second situation, simply expect to pay a fair market rate to the advisor for the financial plan, and fair market rate for ongoing planning services. Some financial planners might ‘credit’ the cost of the plan into the cost of ongoing services. This is normal—after all, it allows the planner to be fairly compensated for the work they have done if you decide to take the plan and walk away. However, their financial plan fee should be a clear representation of their hours worked and their hourly rate (which is usually outlined in Item 5, Fees and Compensation, of their Form ADV 2A, known as their firm brochure).
If this isn’t the case, then ask how they might be compensated if you decided to work with them—that should tell you what you need to know about the quality of the plan recommendations.
#2. You might have difficulty implementing the recommendations
Hiring someone to help you develop a financial plan is a great start. And in many cases, that’s all someone needs—a checklist of recommendations that they can implement. On their own terms. At their pace.
But life happens. As the sage Mike Tyson once said, “Everyone has a plan until they get punched in the mouth.” For all his other faults, he couldn’t have been more right. After all, changes occur in your life, constantly. Major changes, like health scares, job changes, or close family events, might be significant enough to make you drop what you’re doing.
When that happens, you don’t get to implement the recommendations when you originally intended to.
#3. If you wait too long to implement the recommendations, you might find they’re no longer applicable to your situation.
We recently signed a client who was looking for a financial planner in 2014. Then her husband had a major health scare which required a double-lung transplant. Five years later, she just started having enough free time to take another look at their finances. She decided that hiring a financial planner to help with several aspects was the right thing for her.
But what if she had gotten a financial plan back in 2014 and decided to start checking things off her ‘to-do’ list? Odds are that a decent amount of the recommendations would have still been applicable. Advice such as, “Update your estate planning documents,” is pretty evergreen.
But what about investment recommendations? What about how much they should have in their emergency savings fund? Having gone through a major health crisis, this client’s attitudes towards risk has probably changed drastically. And trying to follow a 5-year old recommendation might do more harm than good.
While this appears to be an extreme example, the principle applies regardless of how old the plan is.
#4. A stand-alone plan does not account for updates
Most financial planners accept that there is truth to this President Eisenhower quote:
“Plans are useless, but planning is everything.”
The meaning behind this is that a stand-alone plan cannot possibly be accurate unless there’s a way to make adjustments along the way. In the military, there is a written plan for virtually every conceivable event—war, humanitarian operations, etc. But every person who has ever worked in a military plans office knows that that as currently written, each plan is virtually useless. It doesn’t matter if the plan was ‘finalized’ last year or last month—if it comes time to actually use one of these plans, there is new information that will change something that was built into that plan. What that change is—that is impossible to know until you go back, account for the new information, and adjust the plan to reflect that new information.
A simple way to mitigate this is simply to have your financial plan updated each year, or every couple of years. That is an option that many people have successfully used, particularly if they want to do things themselves.
However, there are many things that might be simple on paper, but still impossible to take the next step on.
#5. A financial plan doesn’t guide you through decisions you KNOW you have to make.
One reason many of our clients appreciate working with us is because we help them with getting things done. A financial plan might tell you to apply for Social Security benefits, but it’s not going to set up the appointment for you. It’s not going to give you reminders, encouragement, or if needed, actually go to the Social Security office with you to make sure you get the benefits you’re entitled to.
A good financial planner will help you with as much (or as little) of this stuff as you need. Especially since we know that some of the hardest decisions, tasks, or choices that you have to make will be during some of the darkest times of your life.
Getting a financial plan can be a great start towards tackling some of your problems so you can get on track. And if you’re the kind of person who only needs a checklist to get going, hiring someone to write a financial plan and a set of recommendations might be all you need. But those recommendations don’t implement themselves.
If you need help taking that next step, or even figuring out what to do first, you might want to consider hiring a financial planner to help you get started. Schedule now to set up a complimentary phone call so you can learn more.