Yes, I can read minds. Because that is what you’re wondering, right? And well you should! I don’t know anyone who’s not a little worried about their finances. Us financial planners included.
It used to be the case that financial planners were the domain of the Rich or the Almost Retired And I’ve Been Saving My Entire Life So I Have a Big Investment Account. It didn’t matter if you could benefit from a financial planner…you couldn’t find one who would work with you or whom you could afford.
But no more! Financial planning is increasingly the domain of the middle classes, too. (Whereby “middle” I mean people with a reasonable amount of savings or income but not Gobs and Gobs. I’m pretty sure that’s how the Department of Labor defines it…)
In terms of both the cost and the service we planners are able to provide, regular folks can now find good financial planners, not just people who will sell you commissioned insurance products or mutual funds. But still, it’s a commitment of money, time, and energy. It can be pretty intense to dive into this stuff. So, it’s worthwhile asking: do you really need a financial planner?
To determine whether you should work with a financial planner, think about the complexity of your finances, the cost of the service, how much accountability you need, and how confident you are about your financial situation.
Complexity vs Simplicity of your Situation
I recently started working with a woman whose employing company had just been acquired. She said that up until now, her finances were pretty simple (I make a bunch of money—more than my parents do, to be sure, I save to my 401(k) and to my emergency fund, and I spend the rest), and she was comfortable doing it on her own. But this acquisition (and its implications for stock options, RSUs, new 401(k) plan) was a complexity too far.
As it turns out, as soon as we started diving into the rest of her finances, I got genuinely excited by all the other opportunities for her improving her finances: helping her clarify her goals, having a more rigorous and intentional savings plan to support those goals, insurance and various estate planning documents to help protect her against unlikely but devastating risks, increasing her retirement savings.
For other clients, it wasn’t a single event that tipped them into seeking out a financial planner: it was just the accumulation of crap in their financial lives until they finally hit a wall. Recently, a woman sought me out for recommendations for planners local to her. She has an MBA and works in finance, but “whenever I apply that knowledge to my own money I feel very overwhelmed.” I think if an MBA working in finance can cop to that, then we should all feel a little better about our own overwhelm. Hell, even financial planners get overwhelmed by their own finances: because it’s not a simple matter of mathematics!
Ask yourself: Can you make all the parts of your finances work together? Or are you just playing whack-a-mole whenever a financial decision arises?
There is no rule of thumb that says “Paying over 2% of your income for financial planning is too costly” or “A financial plan should cost no more than $4000.” It is all very specific to your situation.
But there are several ways to evaluate the cost of the planning you’re receiving or considering:
First and foremost, know what the damn cost is.
In this profession, broooooadly speaking, we have a nasty habit of saying “Oh, pay no attention to the cost behind the curtain. Look over there! Shiny!” Costs aren’t on our websites. We charge percentages instead of dollar amounts. We hide the cost inside commissions.
Cost alone is meaningless. VALUE is what you want.
What do you get in exchange for the money you pay? I could give you financial planning for $5/mo. But if I never did anything for you, that’s $5 straight down the tubes. (Plus, the regulators would want to have some Stern Words with me.)
You can pay $18,000 for a middle-of-the-road compact car, or $25,000 for a Honda, which you will then sing “Happy 200,000th mile birthday!” to with a girlfriend one day while you’re driving around most definitely not breaking down. (True story.)
While there are some parts of financial planning that have a clear dollar value to you (“Look, Dear Client, I just saved you $1000 in taxes by recommending you donate company stock instead of cash!”), there are perhaps even more that aren’t so easily quantifiable. “Now I don’t wake up in a sweat at 4 a.m. wondering if I’ll ever be able to buy a home! Now I know I can take this vacation without having to feel guilty! Now if I lose my job, I can actually take my time finding a new one because I have this Spiffy New cash cushion to see me through!”
How do you pay the cost?
This powerfully affects how you feel about the costs. It boils down to “The less obvious the payment is, the less you think about it, and the more likely you are to (continue to) pay it, whether or not you’re getting value.” Here are some common payment methods for financial planners, from least obvious to most:
- Commission: You never actually pay the planner a dime…directly. But that planner is definitely getting paid whenever she sells you a mutual fund or insurance product or whatever else she’s selling, and oftentimes continue to get paid “trailing” commissions as long as you own the product. Many people even think they’re getting free financial planning.
- Percentage of “assets under management”: This is the OG form of fee-only financial planning. You pay your planner usually 1% of the assets they manage for you. If you have $1M, you pay the advisor $10,000/year to invest your money, and possibly also provide financial planning services.Typically, and here’s the rub, the fee is debited automatically from your investment account. So while it’s possible for you to easily see exactly how much you’re paying to your advisor, most clients never look at the amount and pay little mind to the price they’re paying.
- Retainers: This is how I operate. (Well, I also manage money, but retainer-based financial planning is my core service.) You pay an advisor a set monthly fee for ongoing financial-planning service, and 24×7 access to your planner. Maybe you pay the fee by automatic bank payment, or your advisor uses a payment collection tool (as I do), or maybe you even write a check every quarter. This makes payments more obvious to you than either of the previous models.
If you’re paying—or looking to pay—a less-obvious cost for your financial planning, I suggest it’s time to think a bit more pointedly about how much you’re actually paying…and what value you’re getting in return.
Ask yourself: What is the cost of not hiring a financial planner?
It’s hard to know what the cost is of planning maneuvers you’re not even aware of. But it’s easy to know that the cost of not working with a planner is “continuing to be frustrated because I’m making no progress towards my goals” or “continuing to be stressed out and uncertain and just generally blargh! about my finances” or “still unable to buy a home because we just can’t seem to save any damn money even though I swear we earn lots!”
This is one of those “impossible to quantify” values of financial planning. Unfortunately, it’s also possibly The Single Most Important Value A Financial Planner Provides. If you don’t believe that’s true, just go back and look at all those capitalized letters. See? It must be true.
A few months back, I did a one-time comprehensive financial plan for a woman who was about to retire. (Not my typical gig, but we worked well together.) She had an investment advisor (a guy who did not much more than manage her money) whom she’d been with for years, having “inherited” the guy from her parents.
We spent a goodly portion of every meeting talking about how she was dissatisfied with the relationship, how she felt uncomfortable asking him questions and with the way he communicated with her. She would be better served by a different advisor. She knew it. I knew it. She talked about it every time we spoke.
Yet it took a few months of talking, and me repeating back to her what I’d heard her say about her own dissatisfaction and discomfort for her to actually make a move to one of the several new investment advisors I recommended for her.
We all know, change is HARD. And it really helps to have someone bringing your attention back to what you really want in order to make those painful short-term changes.
Ask yourself: You have a vision of your Good Life. Are you getting it done on your own?
Some of my clients have pretty good investing and personal finance knowledge. Some come to me pretty uneducated. But what they all want is to know that they’re doing the right thing. Know that yes, they are going to accomplish their goals. Know that they’re not making boneheaded mistakes, missing opportunities, or putting their finances or family at risk. They no longer want to feel like a lost little puppy when they enroll in employee benefits or when they leave a job and have to figure out what to do with their 401(k).
Ask yourself: If you currently manage your own finances, do you worry that it’s enough, or the right thing?
Question: How would your life be better if you were working with a financial planner? You can leave a comment below.
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