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What is Financial Planning, REALLY?

Hi everyone! This is Kyle Davis. I am the founder and owner of Integrity Financial Group here in Orlando, FL. We are a locally owned independent financial planning firm. Sometimes when I’m out in the business community or I’m meeting new people, they ask me what I do for a living. Naturally, I share with them that I’m a small business owner and I own a financial planning firm here in town. What comes out of their mouths next though, usually makes me cringe.

Probably 75% of the time they lay this one on me, “Oh, so you’re a money manager?” or, “Oh, so you manage portfolios and do stocks and bonds?”

Now, these things are sometimes PART of a broad financial plan, but trading stocks and bonds or managing an investment portfolio DOES NOT make someone a Financial Planner. It makes them exactly what they are – a Stock Brokeror and Investment Manager. Often one can be lulled into a false sense of security by thinking that their stock portfolio will provide all of the answers to their financial future. What’s worse, they assume that their stock broker is putting together a comprehensive financial plan because they are managing the stock investments, when that conversation never happened. I want to get into the nuts and bolts of what I believe to be the key elements involved in true financial planning and answer the question, “What is Financial Planning, REALLY?”

 

Do you know all the pieces of the game?


I agree with one of my instructors Craig LeMoine, CFP at The American College in his assessment of what it means to be a true comprehensive financial planner. To explain this, let’s look at the acronym G.R.E.T.I.R.E. and separate them into the following list. I want to touch on each area on its own and really punctuate that these are the things that encompass financial planning. As you can see, it goes way deeper than investments.

General Principles– These are the base principles of the process. The financial planning process itself can be separated into 7 Steps. 1) Establishing the planner-client relationship which essentially means setting expectations, 2) Gathering relevant data and personal information, 3) Analyzing that data, 4) Forming the recommendations based on that client’s individual situation, 5) Presenting those recommendations and choosing which direction to go, 6) Implementation of the chosen recommendation, and 7) Monitoring the recommendation and making adjustments when necessary.

Risk Management– Managing risk in a broad sense, all the way from investment risk to personal, income, and life risk. When you engage in the practice of risk management, there may be insurance products involved. Do we have strong liability limits on our auto and business insurance? Does the client have the proper disability coverage? Does the client have adequate life insurance in place to ensure that their family will be financially strong? Am I accomplishing my investment goals without taking on more risk than necessary? These are the types of questions that the planner must think about.

Employee Benefits- This one is extremely important, and many workers (especially the self-employed) may not have access to quality benefits at reasonable rates. The rising cost of healthcare is always a large concern, especially presently. Employee benefits can cover or completely eliminate the high out-of-pocket expenses for benefits such as health and disability among others. We must also consider deductibles for health insurance or any benefit elimination periods(waiting periods) on disability coverage.

Tax Planning- This one should go without saying. We are all affected by taxes. Do many people feel they pay more tax than they should? Well, the short answer is Yes, nobody WANTS to pay taxes. This key element of financial planning can be the difference between all going smoothly, or an ugly unexpected surprise. Tax liability, especially when it comes to retirement planning, is a HUGE consideration, especially in the realm of IRA and 401(k)/403(b) investing. Our video on Qualified Retirement Plans explains why.

Investment Planning- Here is where our stocks and bonds can reenter the conversation. Do investments play a part in financial planning? Absolutely they do. They allow us to grow our money so that there is more for later, as well as fight inflation.  However, we need to understand that “investing” is NOT financial planning. It is simply that. Investing.  Often, investments can come with a large amount of risk. The key is in the type of investments we are making. Who shoulders the risk in your investments? Do you hold all of the risk by putting your money directly  into stock markets, or have you shared that risk? Are we properly diversified, or do we have all of our money into the market? There are many risk-free investment options out there as well that pay guaranteed returns. Remember, stocks and bonds did not come into vogue for the average American until the 1980’s. Even now, people still invest in land, buildings, businesses, annuities, and futures.

Retirement Planning- Retirement isn’t just about having money saved up. It’s also about living arrangements, care giving, income planning, medical care, and deciding weather to continue work and to what degree. This is obviously not an exhaustive list, but we now see that there’s a lot more going on than just saving a big retirement account. Having said that, saving money for retirement has become one of the main focuses in the overall financial planning environment. We can no longer rely on companies and pensions like we used to years ago. It’s a different game now, and we must plan for our own well-being in retirement more than ever.

Estate Planning- For one to truly call themselves a comprehensive financial planner, they must be willing to get other professionals involved in the process. This reflects heavily in estate planning, as an attorney must become part of the client/planner relationship. Proper estate planning can affect generations- ensuring that one’s hard-earned estate is not eroded by heavy taxation, or making sure a business is properly sold or carried on upon the owner’s death.

 

Does it make a little more sense now why I cringe when people immediately jump to talking about investments when I tell them that I’m a financial planner? It’s not all about stocks and bonds, and I hope you now have a clearer understanding of why that’s the case. Man cannot survive on investments alone. If one lives by the markets, then one dies by the markets as well. Until next time, keep up the good work, and don’t hesitate to call us or fill out the contact form if you have any questions.