Tuesday, December 4, 2012

Financial planning: What it's not and what it is

Recently one of our staff member within the Efinity Mortgage team asked what we felt was a fairly brave question during a meeting involving cross-platform personal (Insurance - Financial Services - Mortgage Lending). In short, she asked what our Licensed Financial Professionals did and was there a difference between financial "Planning" and "Advising". The answer was of course was clearly yes; there is a difference however the explanations which followed were a bit less clear. We felt this would be an excellent talking point within our firm. We set out to obtain Efinity's own definition of not only both terms "financial planning" and "financial advising" but offer some additional color on the subject. We found a commentary piece which largely outlined what we were interested in sharing. So in giving credit where credit is due, the below commentary is thanks to a Ryan Fox and Tim Maurer found at eveningsun.com back on 10/14/2012. Financial planning: What it's not and what it is Two of the terms in the financial services industry that are so often misused are "financial planning" and "financial advising." What is the first thing that comes to your mind when I ask, "What is a financial planning/advising?" My guess is that 65 percent of people assume the term is synonymous with the sales or management of investments with a stock broker. The other 30 percent probably think that it is the pursuit of finding the right insurance policy or policies. It may be generous to assume that 5 percent of people have been painted an accurate picture of what true financial planning or advising really is. One thing that makes accurate discernment so difficult regarding this terminology is that financial planning does, indeed, include investment planning and insurance planning. But if the advice stops there, it's not genuine financial planning. The primary reason that financial planning has been viewed in such a modular fashion is that the behemoth financial industry realized before financial planning even became a thing that couching product sales in the appearance of sound planning and advice was good business. But, at the end of the day, financial planning with a brokerage firm inevitably leads almost solely to the sale of brokerage products; with banks, banking products; and with insurance companies, insurance products. Below you'll find a glossary with more complete definitions of the fundamental tenets of true financial planning and advice; what it's NOT and what it IS: Investment planning - Is NOT merely the sales of stocks, bonds and mutual funds; it IS determining how all of the assets in your life-including stocks, bonds and mutual funds, but also real estate, commodities and entrepreneurial ventures-intersect with life and move you closer to your goals and objectives. Insurance planning - Is NOT just about buying prescribed insurance products; it IS learning how to manage risk first through risk avoidance, risk reduction and risk assumption before transferring risk through insurance products. Cash flow/budget planning - is NOT just for the under-resourced living paycheck-to-paycheck; it IS the engine of every household's sound financial plan, just as it is for every successful business. Tax planning - Is NOT having your tax return prepared or jamming your numbers through Geitner's Achilles heel, Turbo Tax; it IS planning for the present, but also the mid-term and the long-term regarding payroll taxes, income tax, capital gains tax, tax deferral, gift tax, inheritance tax and estate tax. Education planning - Is NOT sloughing a random chunk of money every month into an education savings plan to assuage your guilt that you're too busy keeping your own financial house in order to apply much thought to the cost of your children's education; it IS first developing a Family Education Policy (here's how much mom and dad are willing to pay and the terms you need to meet to receive that help) and then establishing a deliberate plan to meet those goals, some of which should be saved in a 529 education savings plan. Retirement planning - Is NOT slaving away at a job you don't love so that you can shelve as much of your income as humanly possible in a 401k and IRAs to which you'll look for financial salvation in a retirement that can't come soon enough; it IS, first and foremost, finding a career that you can enjoy indefinitely so that you are always employable (the BEST insurance against running out of income in retirement), saving effectively for financial independence while also allocating dollars to enjoying life today and in the mid-term. Estate planning - Is NOT sleeping through an expensive meeting with an attorney to have documents drafted that you don't understand; it IS examining the impact that you'd like to leave on this earth and implementing tangible plans - yes, through wills, powers of attorney, advance directives and occasionally other trusts, but also - designed to create a legacy, no matter what your age. One of the reasons it's especially difficult to get complete answers about financial planning is because the purveyors of financial products - banks, brokerage firms and insurance companies - are working very hard to convince the public that they are to be trusted both as the advisor and the salesperson. Unfortunately, their economic bias - their financial conflict of interest - is so overpowering that the best advice is often tainted or watered down. If Efinity Financial can bring some clarity to your financial goals, aspirations & questions we encourage you to reach out to one of our Licensed Financial Professionals - www.efinityfinancial.com