Whether you need guidance on specific issues or you’re not sure what to tackle next, working with an objective advisor can help you in key areas of your financial life.
An objective financial planner or advisor is one who has minimal conflicts of interest and always has your best interests in mind.
An objective advisor doesn’t receive commissions for selling you investments or insurance. Instead, you pay only for the advice, like the way you’d work with an attorney or tax professional. This is called “fee-only” or “fee for service” advice. Since the planner doesn’t benefit financially if you take the advice or not, beyond the fee you pay, you can feel confident the recommendations are objective. This may not always be the case when an advisor is selling products and receiving commissions.
Many experts recommend working with a certified financial planner who is fee-only and operates as a fiduciary — a professional who must put your interests first — 100% of the time. Such a planner can help you with a wide array of financial decisions.
Defensive financial planning
Defensive planning helps make sure you’re protected against the unfortunate things that can happen in life. Looking at your financial picture and how best to protect your family’s financial future, defensive planning covers:
Current financial status: Are you overspending and not saving enough for future goals? Looking at your spending, you can see whether there are areas where you can redirect resources to better fund your more important goals. An advisor can help you determine your net worth and consider how it may change over time. If necessary, you can work through how best to pay down your debt.
Risk mitigation: Risk mitigation is a fancy term for insurance planning. Do you have the correct types of insurance in place? Are your premiums reasonable for the benefits provided? Your advisor can help you determine whether you and your assets are protected against unexpected events that can arise. For instance, how would your family be affected if you became disabled or died? Would your assets be at risk if you were sued?
Estate planning: This involves creating a plan and the necessary documentation to minimize problems for your family if you die or become disabled. With proper estate planning you may be able to have your estate avoid probate, the lengthy and often costly legal process of distributing your property. You also will be able to determine the best ways to minimize the tax consequences of passing on your assets to your heirs. You must think through and document who will care for your minor children if you and their other parent pass away, who will make medical decisions if you cannot and who will receive your various assets when you die.
Offensive financial planning
Offensive planning elements are those that can increase your chances of financial success and enhance your quality of life in the future. They include:
Education planning: How much will your children’s education cost? If you want to pay for it, will you be able to, and how much should you be saving now to fund those future costs? Your advisor can help you determine the best ways to save for education expenses and how this fits into your overall financial plan.
Retirement planning: This is a major piece of developing a financial plan. Your advisor will help you take steps today to make sure you have adequate income and assets to live the life that you want during your retirement. Working with your advisor, you will determine whether you’ll have to work longer than you expected or can retire earlier than you’d planned. As you near retirement, you’ll also develop a withdrawal plan that will let you know how much of your retirement savings you can safely spend early in retirement so that you don’t run out of money later on.
Investing: Investing plays an important role in helping you achieve many of your financial goals. Your advisor will help you figure out your investing goals and how best to reach them. Key investing questions your advisor can address include:
- •Do you have the right level of risk in your portfolio?
- •Are you getting the maximum return for the level of risk that is right for you?
- •What are the costs of your investments?
- •Is your portfolio adequately diversified?
- •Is your portfolio tax-efficient?
Tax planning: While you may also work with a tax professional, your advisor will cover issues like strategies to minimize your overall tax bill. Tax planning involves looking at the tax efficiency of each part of your financial plan, including your investments and your retirement, education and estate plans.
Home purchase, remodel or downsizing analysis: If you are planning to buy a home, your advisor can work with you to determine how much house you can afford while still being able to fund your other goals. You’ll also figure out how much to put down, the best way to finance the purchase, how best to title your home (this depends on state laws) and when it’s a good idea to refinance your mortgage. As you get older, you will likely think through other issues about your home, such as whether to downsize or whether you can stay in your home as you age.
Depending on your situation, your advisor can also help you with or refer you to a specialist on other issues like charitable giving and legacy planning, specialized investment strategies or small-business continuation planning.
With so many important decisions required to build a sound future for yourself and your family, there are many benefits of working with an objective, fee-only financial planner. Aside from helping you set goals and making sure you’re on track to meet them, you’ll have peace of mind knowing that your advisor is looking out for your best interests.
Michael Chamberlain, CFP, AIF, is a fee-only advisor and owner of Chamberlain Financial Planning and Wealth Management, with offices in Sacramento, Los Gatos and Santa Cruz, California.