Do You Need A Certified Financial Planner?

by The Smarter Wallet on August 7, 2009

Need help to manage your money?

There was once a time when I thought I’d pursue a career in personal financial planning as a second wind (after I moved on from a career in the engineering field). I’ve always been interested in helping others out with their finances, and this would be a natural progression. But it would take some studying and passing some certifications to do this. Instead, I found a more suitable niche for myself: as a financial blogger! Still, I’ve always been interested in exploring what kind of work a financial planner gets into, so I’m here to discuss what’s behind the tasks of a professional planner and whether hiring one is right for your needs.

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How A Certified Financial Planner Can Help You

Then let’s start with a few questions: do you need a second opinion on a financial decision? Do you wonder if you are saving enough for your children’s education or have a financial goal that you can’t quite reach and don’t know why?

Some people may not be able to work out their finances on their own. There are those of us who just don’t have the energy, time or interest to do our own financial planning and who would probably benefit from the services of a financial expert. If you find yourself in this situation and want to make the most out of your money, (and who doesn’t?) then you’re likely to benefit from using a professional certified financial planner.

There are various designations for financial planners, some have specialized in insurance and accounting fields. A Certified Financial Planner, or CFP, has passed a national test covering insurance, investments, taxation, employee benefits, retirement and estate planning administered by the CFP Board of Standards. They must meet requirements and abide by a code of ethics. Unless you have a particular insurance need, you are probably safe to solicit the services of a local CFP.

As you move down life’s pathways, your financial and investment needs change. A financial planner can help to provide counseling, as well as to suggest products and services to suit your changing needs. They will work with you to address every financial stage of life, by assisting you with:

  • Developing your first financial plan
  • Buying a home
  • Planning for your childrens’ education
  • Working on your estate plan

Here’s what a good financial planner will do: they’ll look at you as an individual and provide advice based on your unique situation. Their job is to understand you, your needs, requirements, financial goals and expectations, and will ask you to consider some of the following:

  • What are your financial goals? These may be long term goals such as home ownership and children’s education savings, or shorter term goals like a special vacation.
  • How long do you expect your money to be invested before you will need it? Again this may include shorter and longer term investments.
  • How do you feel about risk and what type of an investor are you? Some investors are comfortable with their long term horizon, are accepting of risk and able to ride the market’s ups and downs; others find it hard to sleep if the market drops. Your ability to tolerate risk is an important factor in building your personal financial plan so your planner must first understand what type of investor you are.
  • What are your current obligations? Are you supporting dependent children, aging parents? Do you have personal or business loans?
  • What is your current financial situation? Is your net worth below $50,000 or over $100,000, or somewhere in between? This, along with your other financial commitments, may help determine how your financial portfolio needs to be structured.

Your financial planner will explain the pros and cons of different investment vehicles (he or she will ask you to look into investing in stocks and bonds, mutual finds, etc). They will also advise you if your needs require specialized professional services. For instance, he or she can recommend a good accountant or insurance agent for you, if need be.

Depending on your financial goals, a planner will work with you to develop your first financial plan and will review it periodically to ensure that you are staying on track to meet your goals.

Your Personal Financial Plan

I’d like to share a simple tool for building your financial plan. It is based on four areas, with each area taken to help you progress and grow financially; each step will build upon the next and cover basic to advanced tasks and responsibilities.

Protection: When you focus on protecting your assets, you look into certain activities such as debt reduction, saving for an emergency fund, acquiring disability and life insurance, building regular savings and setting up your will via estate planning.

Savings: One important area of your financial life involves saving for the future: purchasing mutual funds, investing in retirement funds and buying a home.

Growth: During this stage, your aim is to grow your net worth and to work on paying down your mortgage. You should continue to purchase stocks and bonds to help grow your investment portfolio.

Speculation: A part of your plan may involve some level of speculation; if you’ve grown more financially sophisticated, you may want to look at tax shelters, more high return investments and other more advanced aspects of finance to support your growing net worth.

The early steps describe financial planning issues that must be addressed first: insurance needs, properly drawn wills, debt elimination and an emergency fund. As you move through the stages, income protection is replaced by wealth accumulation. Each level enables you to take on more risk, with the potential for higher returns. Remember that your personal investment portfolio should be diversified. Even the most aggressive investors should think about purchasing bonds or money market funds.

There can be a whole lot of stuff involved with keeping your finances on track. If you’re able to do this on your own, then keep at it — that’s the best way to go, in my opinion! But if not, then a personal financial planner could be the right person to help you sort through all the choices that are available, and give you confidence in your decisions and in the financial direction you take in life.

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{ 1 comment… read it below or add one }

1 Kristin Harad August 14, 2009 at 11:49 am

Fantastic argument that pretty much tells you what to expect from a CFP. I’d add that when looking for a CFP, Try to find a planner who is at about your same life stage so that they have a good understanding of where you are and where you want to be. For instance, I have two young children and my whole practice is geared towards new and expectant parents. I am highly tuned into the challenges that come with a growing family and can closely relate to my clients. On the other hand, I wouldn’t take on a client who is nearing retirement, since I don’t have as much insight to their goals and worries.

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