What is financial planning, really? What do I do, as a financial planner? What does the relationship between me and my clients look like?
Several things stand in the way of people understanding the answers to those questions (aside from financial planners’ inability to articulate things well 😬):
- You’ve never worked with a financial planner before.
- You’re not intimately familiar with someone else who has worked with a financial planner before.
- This profession is very young. Doctoring, for example, has been around for thousands of years. Lawyering, also thousands, just fewer of ‘em. The financial planning profession was more or less born in the 1970s, making it Extremely Young, In Fact, Rather Dewy-Skinned, Veritably Overflowing With Youthful Vigor (says the woman born in 1976).
- The financial services industry—which financial planning is a part of—is such a sprawling, ill-defined, inconsistent mess (despite having enough regulations to choke a horse) that even if you have worked with someone calling themselves a financial planner or financial advisor, the next financial advisor/planner might do the work differently. (I have seen this many times with clients who came to us from a different financial advisor, usually at one of the Big Names, and end up having a very different experience, service, and feeling.)
Prospective clients often ask these questions. It’s tempting to say “You gotta experience it to understand it” (because it’s kinda true). That is, however, not particularly helpful.
The practice of true financial planning can be rich and expansive and touch so many parts of not only your finances but also your life. Here are a few analogies that describe the work, hopefully helpfully, so that even the “uninitiated” among you might still have a better grasp on what this work is.
Financial planning is like building a strong core.
What do you do for exercise? Lift weights? Yoga? Jog? Bicycle? Whatever it is, I’m sure you’ve heard a thousand times about the importance of a strong core. No matter what you use your body to do, it works better if your core is strong and flexible. Your arms and legs and feet and back and everything work better, work more efficiently, and are less prone to injury.
In financial planning, your core is the understanding you have of your values, goals, and the life you want to lead. All the technical parts of your finances—cash flow, employee benefits, insurances of all sorts, estate planning, career plans, all sorts of legal work, taxes—are the limbs or other bits and pieces of your body.
The stronger your core, the stronger your understanding of the why of all this work, the more efficiently all your limbs will work. The rest of your body will move with much more coordination. (Let’s ignore the fact that you have a lot of freaking limbs in this analogy.)
What to do with your company stock? Well, what kind of life are you trying to build for yourself? Do you want to buy a home? Or retire early? Or pay for your kid’s college?
What kind of insurance should you get? Well, who do you value protecting in your life?
What kind of estate planning do you need? Well, who do you care about and what values do you want to pass on and who do you trust?
And so on and so on.
Financial planning is like putting together a jigsaw puzzle.
When you put together a jigsaw puzzle, what’s the first thing you do (other than maybe finding all the corner and edge pieces, you pedant)? You look at the picture on the box top. You can’t know what to do with all those hundreds or thousands of pieces if you don’t know what picture you’re trying to build.
When I speak with prospective clients, many of them talk about how they feel like they’re making lots of financial decisions one by one, with no sense of coordination with any other piece of their finances. What they want is a coherent plan, and to know that each financial decision they’re making is a coordinated part of that overall plan. That the decisions actually fit together.
In financial planning, what we try to understand is what the “picture on the boxtop” of your life looks like. That boxtop is our vision of your life that we’re trying to build. It’s our high-level plan or strategy for your life.
Then we make a thousand separate decisions about investments or taxes or company stock or 401(k) participation (i.e., we place a thousand separate puzzle pieces) knowing how they fit into the bigger picture.
Without knowing what the picture on the puzzle box top looks like, of course you’re going to be making arbitrary choices about each individual puzzle piece. No wonder it all feels random and frustrating.
[Note: I got this analogy from my business coach, Elizabeth Jetton.]
Financial Planning is like the hub of a wheel.
Imagine the wheel of a bike (the normal hub-and-spoke kind; don’t get fancy). The hub is at the center. It holds the spokes together at the center, and the other end of the spokes connect to the outside of the wheel, where the tire lives.
If you don’t have any or enough spokes, or too many spokes get broken, then your wheel would collapse. Alternatively, if you have lots and lots of strong spokes, but no hub to hold them together, your wheel would also collapse.
Financial planning is the hub of your financial life, and that life has many important spokes: taxes, legal, insurance, career, and on and on. That hub and all those spokes, when all strong and in coordination, support the wheel of your life. We want that wheel to keep rolling and rolling, as smoothly as possible.
That Taxes spoke? Yes, please, use a good tax professional (CPA or EA) to do tax projections and prepare your tax return every year.
How does the financial planning hub help? It helps us know what your career plans are for the next few years, that you took a sabbatical this year and plan to go back to work after another year. It helps us know that this year and next are a good opportunity for a Roth conversion.
It also tells us how much cash you have, so we can help coordinate paying the taxes on the conversion with preserving enough cash for the rest of your sabbatical. We also know, because we pay attention to the Investments spoke, that you could do some tax-loss harvesting this year, which will help reduce your taxable income from that Roth conversion by $3000, and how that impacts how much cash you need.
All those spokes are professionals who know way more about their domain of knowledge than you or I do. (I did not go to Tax school, or Lawyer school, or Insurance school.) The goal of a financial planner is to know enough about each spoke to recognize the need for an expert in that domain, help you find one, and then to fit that spoke efficiently into the hub, i.e., integrate their advice into the complex whole that is your financial life.
Financial Planning is like a Pie. (Mmmm, piiieeee.)
Imagine your favorite pie. (For me, blueberry pie spiced with nutmeg and cinnamon, lattice top crust. Possibly, a lemon tart. Not, technically, a pie, but it’d still work for today’s purposes.)
Your pie has many slices (as much as my husband and children would like to pretend a pie is One Serving). Your pie sits in a pie plate. (We’re not talking about a beautiful, rustic galette here.) Occasionally the pie slices are all evenly cut, but most of the time the slices are different sizes.
In your financial life, the pie is all the technical stuff you have to figure out (taxes, company stock, savings rate, spending, wills, etc.). Each slice of the pie is one of those topics. The slices are usually not the same size. Some years, the investing slice is the biggest by far. Some years, it’s outmatched by the Estate Planning slice. But all the slices are there, and they are all necessary to make up your delicious pie.
The pie plate is the vision of your life you’re trying to build. The entire pie, and all the slices of the pie, have to fit within that pie plate. We have to know the shape of your pie plate in order to make the right decisions about your slices.
Most importantly, you get to choose the shape and flavor of your pie!
If you want to work with a thinking partner who can help you to discover and define your goals, and use that to help make your best financial decisions, reach out and schedule a free consultation or send us an email.
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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.
