Wednesday, August 15, 2012

What Does a Financial Planner Do?


In the “old days,” investors turned to stockbrokers for help with investing. Over the last 20 years a new approach to investing has emerged, replacing the stockbroker model. A key element of the change involves the role of the financial planner (notice that the title “stockbroker” has quietly slipped out of favor.) What’s the difference? Let me explain.

Under the guidance of the traditional stockbroker, a veritable laundry list of things went wrong for investors. In fact, the stockbroker’s goal was seldom solely to make the investor money. The stockbroker’s investment recommendations had to satisfy something called the suitability standard – a vague set of guidelines that obscured underlying conflicts of interest between the investor and the broker or the broker’s company. Fees always varied. Investors didn’t know what they were paying for, or if they were successful. Perhaps they made money on certain trades, but did they come out ahead in the end? There was no systematic process for managing risk and scant attention was paid to achieving goals.

The Certified Financial Planner™ operates under a different standard – a fiduciary standard – in relation to his or her clients. This means that the planner must always place the interests of clients ahead of his own. The CFP’s primary responsibility is to help clients reach their goals. The process of investing must first begin with a thorough understanding of the client’s goals, values and priorities. Believe it or not, the goal of simply “making money” is actually too vague! 

Think about it – the most serious risk you face is that you fail to reach your goals. The amount of investment risk taken should be assessed relative to each goal. For example, if the goal is to generate a certain amount of income from your portfolio in five years, you don’t want to fall short. The investments you select will be more conservative than they would be if the goal were of lower priority. Taking too much risk decreases the chances of attaining a goal. 

Alternatively, the goal of purchasing a second home in 10 years, while important, is not a necessity. You set a target amount of money desired. The trade-off lies in establishing a floor amount and deciding how much risk you would be willing to take to achieve a higher amount. Taking more risk here in anticipation of higher returns may be appropriate, while it would not be advisable if the funds were intended for retirement. Should you fall short of your target, you will still have your floor amount and be able to reach your objective. 

You can begin to see the difference in process between a financial planner and a stockbroker. You work collaboratively with the financial planner to achieve goals, based upon your values and priorities. Certified Financial Planners™ place your interests ahead of their own. Investment strategies are developed around taking only the level of risk necessary to reach your goals. While making money is important, the financial planning approach to investing offers a more meaningful and comprehensive experience than the previous stockbroker model did. A big difference indeed!

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