How Does Financial Planning Work

Published by vicky on

Few of us have any training in investments, economics, insurance, taxes or law. You’ve never heard of Harry Markowitz, you don’t know about the efficient frontier, you have trouble spelling amortization (let alone explaining it), and you can’t explain the difference between a testamentary trust and a springing power of attorney.

Yet you are faced with decisions pertaining to these things. You know you have to make financial decisions, and you are correct in thinking that the wrong decision could cost you and your family huge amounts of money. No wonder you feel as though you’re in over your head. How can you conquer the field of personal finance and obtain financial security for yourself and your family?

I have good news for you. Simply approach the topic of financial planning exactly as you do the field of medicine. After all, you might not be accustomed to working with a financial planner, but you’ve been to the doctor. Approach both the same way.

All you need to do is focus on your symptoms: Where does it hurt? What’s bothering you? What is the cause of your concerns? Just tell your advisor — and let the advisor respond. A thorough advisor will engage in diagnostic efforts: He or she will ask you a bunch of questions and, believe it or not, you really will know the answers. The planner will then run tests to assess the situation, evaluate the findings, and then prescribe a treatment plan for you. Sound familiar?

When to see a financial planner.

You should see a financial advisor even if nothing is bothering you. After all, even healthy people should have an annual physical. Just because the patient has no symptoms — “Doc, I feel great!” — doesn’t mean nothing’s wrong. Lots of illnesses have no symptoms (high cholesterol and blood pressure, for example) but you can die if you don’t treat them. You know this, and that’s why you go to the doctor every year or two to let him poke around and ask you a bunch of questions.

On the same basis, visit a financial planner and let him or her poke around, too, even if you think everything is fine financially. Show him your investment account statements, employee benefit printouts and insurance policies and let him read your trust documents. (What? You don’t have any of those things? That’s a hint your appointment might be overdue.)

The planner will ask you questions about your income, expenses, assets and debts. He’ll poke into your real estate, mortgage, employee benefits, and then he or she will get really intimate. If you think taking your clothes off in front of a doctor is awkward, wait till you tell your planner about your marriage and family circumstances, your career, your goals and, gulp, your fears. How do you feel about risk? What’s your need for liquidity?

Your answers will enable your financial planner to determine what tests need to be conducted before he or she is able to offer recommendations to you.

If you hesitate delegating such responsibilities to the expert, well, that’s exactly how you work with your physician, isn’t it? And the best part about this process is that you are the expert, too: You are the expert on your symptoms; nobody knows your symptoms as well as you do.

You know about your income; you know how much you spend; you know what’s going on in your family; you know your goals; and you know what’s concerning you. You know where it hurts. Stop right there because that’s all you need to know. You don’t need to know more about money than you do about pharmacology.

And if you’re worried that your financial planner will make bad recommendations, well, that’s what second opinions are for.

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