I once read an article that many people put meeting with a financial advisor in the same bucket as taking a math test or going to the dentist! While the thought of working with a financial advisor may be intimidating, most people find the process is easier than they thought it would be and walk away with increased peace of mind. Many sources recommend working with a financial advisor that holds a Certified Financial Planner (CFP) Practitioner designation. CFPs are required to work as fiduciaries, must meet experience requirements and pass extensive examinations.
What is Financial Planning? There are many aspects to financial planning. Some advisors only help clients in certain areas. CFPs generally provide comprehensive advice covering all areas and how they interrelate. Your situation may also warrant working with someone that specializes in more complex situations such as divorce, business owner strategies or tax planning.
Financial Position. This area is quite broad. Should you buy or lease a car? How much should you put down on a home purchase? Are you fully utilizing your work benefits? CFPs can also assist with looking at your cash flow to set up a budget, as well as debt management strategies.
Protection Planning. This includes life, disability, long-term care, homeowners, auto and liability insurance. CFPs can help you understand the differences between various types of insurance, as well as how much insurance is appropriate, as well as riders to consider.
Investment Planning. The universe of investments is expansive. CFPs can help you review options in your work retirement plan. They can also help you set up investments in mutual funds, ETFs, 529 plans, stocks, treasuries and CDs. Investment planning includes strategies to achieve specific goals such as a home purchase or college education.
Tax Planning. There are key differences between tax preparation and tax planning. Tax planning involves looking at past tax returns and exploring proactive strategies to reduce taxes. These generally fall into categories of tax deductions, tax credits, tax deferral and tax-free income.
Retirement Planning. This includes strategies to be able to retire, such as how much money do you need to save, how to leverage work retirement plans and where to save. It also includes critical strategies once you retire, such as creating lifetime income, adjusting risk, housing changes and healthcare.
Estate Planning. An attorney is utilized to create estate planning documents. CFPs assist with the implementation of estate planning strategies. This includes items such as setting up beneficiaries, types of trusts and how to avoid probate. It can also include more advanced considerations such as avoiding estate taxes and sheltering assets from Medicaid.
Compensation. Financial advisors can be compensated on a commission-basis and/or fee-basis. They may receive commissions on products they recommend. Fee-based financial advisors typically charge an annual retainer for financial advice and/or a percentage of the assets they are managing for you. It is important to understand how your advisor will be compensated.
Key questions to ask when interviewing an advisor. How will you be paid? Do you receive incentives to sell certain products? How many years have you been practicing? What professional designations do you hold? Do you function as a Fiduciary? How often will you meet with me? What areas do you specialize in? When are you paid commissions?
The relationship with your CFP is a critical one. Obviously, education, experience and product availability are critical, but it is also important that you feel comfortable with their style and personality. If you are not satisfied with your existing advisor, most financial advisors are willing to meet for a complimentary consultation for a second opinion.
Lars Lambrecht, Rehoboth resident and Certified Financial Planner, is available to answer questions or meet for a consultation. 617-947-6428
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