Managing finances can be daunting with all the intricacies and uncertainties involved. Even if you feel like you’re successfully tackling some aspects of your finances — such as paying down debt or saving for retirement — you might still feel like you’re not doing enough. Questions may continue to build in your mind like: “Am I saving enough for retirement?” “Are there tax benefits I’m missing out on?” “Should I try to pay down my mortgage more quickly?” “Is there something more or different that I should be doing?”
The truth is that the answers to these challenging questions and others depend upon your unique financial situation and aspirations. For many, a financial advisor can help answer these and other questions, develop a financial plan, and help you work toward your goals. However, many people are hesitant to work with a financial planner, often due to myths or misconceptions they have. Here, I attempt to address five common myths about financial planning.
MYTH #1: Financial Planning is Only for the Wealthy
Financial planning isn’t just for wealthy individuals. The same techniques that help affluent people earn and sustain high levels of wealth are open to you. Reported by the Motley Fool, the 2023 Gallup poll indicates that 62% of adults owned stock and 53.7% owned mutual funds, which relates to roughly 162 million households.1 As of 2023, North America had a record high number of high-net-worth individuals at 7.9 million (with more than $1 million in liquid assets).2 When formulating a plan, life circumstances or transitions matter more than your level of assets or age. And the earlier you start, the better; many important financial decisions come into play when you’re young.
Said another way, it’s more advantageous to think about your financial future in the first quarter than the fourth. Employing a skilled financial planner and organizing your finances early can reduce the uncertainty involved in managing your assets, alleviating stress later. If a financial planner finds a way to save even $500 for a client, it’s not only more meaningful to someone with fewer assets, but due to the power of compounding interest, more powerful in the long run for someone with 30 years until retirement.
MYTH #2: Once you have a Financial Plan in Place, You’re Set
“When life throws you lemons, make lemonade.” A cliché to be sure, but it highlights an important part of financial planning – adjusting to meet the new opportunities and challenges that life throws your way. For example, changes in employment or marriage status, an increase or reduction in cash flow, or the birth of a baby will introduce new considerations for financial planning. Each of these requires additional thought and may change your goals as well as the plan to achieve them.
The sandwich generation in particular — those who face the realities of supporting both children and aging parents at the same time — understands all too well that financial goals and priorities change as unanticipated financial obligations arise. Diligent financial planning can help ease the stress associated with the unique challenge of spreading financial support across three generations.
MYTH #3: Investment Management and Financial Planning are the Same Thing
A common myth is that investment management will suffice when it comes to financial planning. While some financial planners also serve as investment managers, the reverse is not always true.
Investment managers typically focus on investing your money based on the investment objective for the strategy they manage and not necessarily your specific risk profile. While some investment managers consider broader financial implications, others may not consider tax aspects such as capital gains, or other important variables. Comprehensive financial planning considers the whole picture, developing a plan that is unique to your risk profile and individual situation.
MYTH #4: DIYers Win Because they Don’t Pay Fees
Many investors, because they are conscious of fees, believe the best choice is to “Do-It-Yourself” (DIY) to save money on the management of finances. This mindset ignores the value of your own time, as well as the value that trained professionals can add when it comes to tax planning, estate planning, and other potentially complex areas.
DIYers are also greatly susceptible to missing out on money-saving opportunities and making unfavorable, emotional decisions, like bailing out of the market at precisely the wrong time. Financial planners act as coaches who can offer an objective eye, eschewing emotional, short-term thinking in favor of rational, long-term planning.
The value of financial advice is a challenging question for both investors and financial professionals, but in the spirit of “penny wise, pound foolish,” there is ample evidence to suggest that professional financial advice can more than offset the fees paid. In 2021, T. Rowe Price completed “The Retirement Savings and Spending Study,” confirming that the value of advice can range broadly and typically falls between 1.6% to over 3%, varying widely by both the expertise and needs of the professional and consumer.3
MYTH #5: It’s Too Expensive, and All Financial Planners are the Same
Some people believe that the fees paid to a financial planner are too high to justify the expense. Concerns over fees are often compounded by the fact that many individuals — even those who currently work with an advisor — have no idea what they are paying and ultimately what they are receiving for their fees. Good financial advisors are transparent about their fees and will clearly convey what you get for the fees you pay.
This leads to another important distinction — financial advisors have different designations and fee structures. In other words, all financial advisors are not created equal. Different fee structures (flat fee, etc.) and different designations (whether for divorce or retirement planning) will matter differently to you depending on your situation.
Generally, advisors fall into one of two categories:
- RIAs, or Registered Investment Advisors, act as fiduciaries who are required to put their clients’ interests first. They are often called fee-only financial advisors because they don’t work on a commission basis (i.e., they aren’t paid for selling specific products). Rather, they are paid a fee for their services and are available at your disposal to answer questions and provide guidance. This structure is designed to create fewer conflicts of interest.
- Another type of advisor is a registered representative. While some work on a fee basis, some may also receive commissions for certain products. While registered representatives are required to meet certain suitability standards, this model has the potential to generate conflicts of interest. Traditional brokers and many insurance agents often fall into this category.
It’s surprisingly easy to verify a financial advisor’s background by using BrokerCheck, an online tool by the Financial Industry Regulatory Authority (FINRA), or by checking with the CERTIFIED FINANCIAL PLANNER® Board of Standards. Reading through financial advisor bios can also be helpful, as they may specialize in an area that resonates with your unique situation. Selecting an advisor from a firm with a wide range of talent and specialties could mean you have a deeper bench of experts available to support you.
The bottom line is that investors can make a big difference in their financial lives by seriously considering what professional support can do for them. The value of financial advice goes well beyond your portfolio performance. Successful relationships with advisors are created when consumers enter the relationship with their eyes open, fully informed of the benefits they are receiving and can expect their advisor to do for them.
1 Source: https://www.fool.com/research/how-many-americans-own-stock/
2 Source: https://www.capgemini.com/wp-content/uploads/2024/05/WWR_2024_web.pdf
3 Source: https://www.troweprice.com/personal-investing/resources/insights/what-is-value-of-financial-advice-and-would-you-benefit-from-it.html
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