You know more than you think you do. And if you take a moment to think about it, you will find that when it comes to finances, you have a rudimentary knowledge about how they work and where you are right now. In many instances, if you are in trouble either with poor credit scores , you know how you got to that point. You already know how car insurance works but you probably don't believe you have enough savvy about the subject to go after the best deal with the right company. You may even know how to buy a house or even how to refinance one, but you probably took the best first offer, which may in fact be the only one you sought. You might even have a 401(k) at work without any real clue about what or why you should use it.
So you have some knowledge but you would probably agree that is not enough.
I recently did a segment on AM NorthWest, a morning variety show in Portland, Oregon, on bankruptcy. Several days later, a home viewer sent me an impassioned email about her circumstances and whether I could point her in the direction of a good financial planner to help her and her husband make ends meet. I forwarded the correspondence on to the producers - it was their audience and they should know how I conduct myself with them - and they responded: "so when do you need a financial planner?"
This country is quickly becoming two separate nations: those that can afford the services of professionals and those that wish they could. In other words, if you don't make enough money to warrant the help, hiring a financial planner would be just another in a long line of financial mishaps.
So when and more importantly, why would you need one?
Like Toni, the young lady who wrote me, many people have slid into a debt that was unforeseen and as in many of those situations, that debt can become the cross they bear day in and day out. It becomes a "can't see the forest for the trees" problem. What Toni may fail to realize is that no matter what you do financially, you must always bring two important facts with you.
No money problem can be fixed immediately. Sorry. There is no quick fix.
None.
If you decide to fix or improve whatever you see as a financial issue in your life, you will find that, no matter who you turn to for help, it will cost you money. And in the end, you will be required to do the following: be patient, be forthright about your information, and be willing to take some level of risk.
No matter what you do, whether you hire a financial professional or use the DIY method, it will always take a disciplined approach to paring down debt and growing savings in order to succeed.
(A side note: The quick fix of Chapter 7 bankruptcy, the clean slate approach for truly troubled financial horizons is about to go away on October 17th.)
You can do much of the repair yourself It goes back to how much you know. If you have backed yourself into a corner financially, getting out may simply be a reversal of habits. A financial planner will offer you a variety of products designed to do some of the heavy lifting but you will still need to discipline yourself in a way you may not have done before. So help comes with a price that needs to be factored into the growth of your investment.
So when do you hire a planner?
Financial planners/advisors/brokers do not want to offer a steadfast rule for when their services would be needed. They would like to believe that they have a product for every lifestyle and pocketbook.
So you need to be forthright with yourself by asking some serious questions about your needs. Long before you reach the planner's office - and take advantage of their free initial meeting, ask yourself:
1. How much do value your time? To arrive at a cost, we need to accurately estimate our worth, not only net worth as in assets but the cost of your time on an hourly basis? Our time is valuable and we all have pressures placed on that time, but adding an accurate cost to it may be as easy as determining what your employer pays you.
If your hourly wage is in excess of a hundred dollars an hour, a planner might be a good choice. If your pay is less, finding a few hours to educate yourself is probably your best bet. Either way, I am convinced that once you grasp the idea, developing a plan and the discipline to follow it through with those three basic promises - patience, honesty, and risk - you can do it without help.
2. Do you know the difference between planning and investing? Planning is the actual mapping out of a strategy whether it be for your career or your financial future. A good plan answers all of the important questions such as where do you want to be in the next twelve months, five years, longer and begins the process of thinking about those destinies. Once again, this takes time, patience and discipline.
Investing, on the other hand is what is done once you have done your best to control any debt you might have, seek out the best deal possible in shelter and insurance while covering the needs of your family. Only then does investing for your future become the right thing to do. (With one exception of course. When you have a 401(k) plan or similar self directed savings opportunity, you should always take advantage of it. It removes pre-tax income, in many cases with a percentage matched by your employer, that often won't have any negative effect on your take-home pay.)
3. Are you hiring financial help for wealth management or financial direction? This is the hardest question to answer and the most often asked.
Once again, there are difference between the two.
Wealth management if you have found your monthly income far exceeding your outlays. This excess income needs to be protected and grown often at a conservative pace. In many instances, professional help is required to take advantage of tax opportunities as well as preservation of principal. If you feel this describes you, you have already made some decisions about where you are headed and how you are planning on getting there.
Financial Planners are looking for new clientele among blue-collar contractors.
Now you will need to ask your advisor some questions. The National Association of Personal Financial Advisors (NAPFA) not only suggests you speak with two or more firms, they also encourage you submit a questionnaire to your planner prior to actually hiring one. (click on How to Choose a Financial Planner) The form offers some basic guidelines on what to look for in the person you hire as well and force you to consider how you plan to employ this person(s). I'd be willing to wager that you thought this was going to be an easy process akin to giving someone your checkbook to pay the bills.
Think of a financial professional as a one stop shopping experience. They can provide help with the following financial services:
Family Issues (including divorce issues), Investments (Equities (stocks, Bonds, General, International , Mutual Funds, REIT), Planning (College Expenses, Estate and Wills, General, Home, Retirement, Small business, Taxes, 401(K) and IRA Plans), Insurance (Disability insurance, Health , Life Insurance, Long-term care insurance), Asset Allocation, Employment Status/Employment Horizon (Early in Career, Mid-Career, Near-retirement, Retirement).
The following is financial checklist for any good plan. (It can be used for those who think they need a planner but are not willing to pay for the same information that, with a little time and effort, they might be able to find themselves.)
Pump up your retirement plans.
Cost of advice: Free with most 401(k) plans; three to five hours research for IRAs. Costs of managing the funds and retirement plans are included in whichever plan you choose.
If you can afford to max out your plans, do so. That means that if you are under 50 years of age, contribute $14,000 to your 401(k) in 2005, $4,000 to an IRA, and/or $8,000 to your SEP IRAs. Over fifty year olds can boost those contributions to $18,000 for 401(k) plans and, if you will be age 50 or older at yearend, your maximum contribution is increased by $500 to $4,500.
You may spread that $4,000 (or $4,500) among different IRA accounts for which you qualify. Study your company's plans and with a little effort you can find some successful plans to take advantage of depending on you risk tolerance. The younger you are, the higher the risk you should take. Many plans offer baskets of funds grouped together for just this purpose.
IRA investments are just as easy to research. Keep three basic things in mind. You want a fund manager that has been with the fund for at least five years, led the fund to at least the 10% of its peer group in terms of rating for the last five years and charges very little for the privilege of investing with their fund.
If you are self-employed, investing in SEP-IRA in much the same. You still need to determine your time horizon, your risk tolerance, and your ability to invest consistently.
Be sure you have adequate insurance coverage.
Cost of advice: Free although actual policy premiums do pay a portion to the agent for their service.
For many with sizable estates and houses now worth a considerable amount, check with your agent to see if an umbrella policy would be the right protection for you. It covers you from extra liabilities and goes a long way at providing asset protection.
And while you are with your agent, ask about disability coverage. Grouping as many policies into one company can save you money over the long term.
Keep your will updated
Cost of advice: Several Hundred Dollars.
Do this every couple of years. If you have young children, review who will care for them, Make adjustments in how your wealth will be distributed. Be sure your investments such as retirement plans and insurance policies all point to the wishes of you will. Do this by making your beneficiary, "as per will".
Do adequate tax planning
Cost of advice: Often free between regularly scheduled tax preparations - fees for which vary.
If your taxes are complicated, don't venture out on your own. Many tax preparers will advise you on tax implications throughout the year for a nominal fee if at all. They will be familiar with your tax situation and can help explain what each investment will do to your tax bill.
While high worth individuals have a set of problems all their own, everyone who enters into a relationship with a planner should be aware that what they do they do for a price. The larger your income, the less you want a financial advisor who charges commissions for their services.
Fee based services offer a more clear cut cost for high worth users, those with incomes over $500,000 a year. Every investor should already be aware that fees can derail a good plan.
Good planners will keep the risk levels and tax consequences acceptable, integrate all of the client's financial exposures, and keep from generating fees using churning, a method of changing holdings to generate additional buy and sell fees for the broker.
As I mentioned earlier, planners will view potential clients in two ways and ultimately will charge these clients differently. The higher your net worth, the greater your likelihood you will be charged by fees. Commissions will be the cost consequence of those who make considerably less.
Those thinking about hiring a planner should consider the cost of their time
- can you do this yourself? - whether you are willing to pay for their service - can you find the same advice for far less at specific financial retailers such as insurance agents, CPAs, lawyers, etc.? - and are you bringing a disciplined financial house to the discussion - are you forcing your planner to scratch your current course for an entirely different destination?
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