The Importance of Financial Planning

Transcription

1 Donʼt Fail To Plan. The Importance of Financial Planning Craig Slayen, Principal Winship Wealth Partners 1 The Need For Financial Planning It wasn t long ago that financial planning was thought of as a discipline that only applied to the very wealthy. Most people didn t feel the need to plan, and, frankly, most financial advisors felt the same way. If you consider the fact that, just a few decades ago, the average life expectancy was just 74 years, few people were concerned with making their retirement income last a lifetime. And, back then, the majority of retirees were supported by the three-legged stool of Social Security, personal savings and guaranteed pensions. But much has changed in just the last 15 years that has extended the need for financial planning to anyone with hopes of achieving their most important goals and securing their financial future. Consider how our financial world has evolved: Life expectancy took a huge leap in the last twenty years with average life spans increasing to 85 years and an increasing number of people living into their 90 s. Add to that the continued extinction of guaranteed pension plans and suddenly people are concerned about outliving their resources. Health care costs have more than doubled over the last few decades threatening to consume as much as one third of a retiree s resources. The near vertical trajectory of the stock market of the 1980 s and 90 s has become, to many people, a sadistic roller coaster ride they would rather not have to stomach.

2 2 The proliferation of investment products and providers over the last couple of decades has created too many choices which have led to confusion, and, ultimately, investment paralysis. Current and future generations will spend an additional 15 years on average caring for family members either a child with financial problems or an aging parent, or both. College tuition continues to climb out of the reach of many American families. Over the last twenty years, the Internal Revenue Code has become, arguably, one of the most complex in the world. Of course, these developments as well as the ongoing evolution of the financial world affect all of us. The paradox of wealth accumulation is that the better you do, the more complicated your needs become. And, there is an additional layer of complexity in solving for longer life spans, higher health costs, less earnings, smaller pensions, and fewer accumulated assets. A comprehensive, well-coordinated financial plan needs to be able to address all of your needs and concerns and do so in a way that allows you to worry in order, one priority at a time. What Exactly Is Financial Planning? Financial planning is the process of assessing your current financial situation in light of your most important financial goals to determine the most efficient and effective way of allocating your resources towards achieving them. The plan is implemented through coordinated strategies involving investments, tax reduction, risk management, retirement programs, and estate preservation, and then monitored to ensure that it is on track. The ultimate benefit to you is greater control over your financial future so you can focus on the here and now. All of us have certain things in life we want to accomplish and many of them require financial resources. These are called financial goals. Living a secure and enjoyable retirement is a goal shared by most people. In addition to that, parents want to be able to provide a college education for their children, buy a bigger house, or expand their business, and while working towards all of those, they want to ensure the financial security of their loved ones. These all become intricately linked pieces of the financial puzzle. A financial plan is about carefully forging those pieces and fitting them in their proper place so that they work effectively together towards your vision. If a piece is missing or doesn t fit quite right, it could skew all of the other pieces. For high net worth or highly compensated people, there are several additional pieces that need to be able to fit the financial puzzle including risk management, taxation, business continuation, and estate planning. Because of their impact on the total financial puzzle, it is critical to have a well-conceived, integrated plan.

3 3 The Importance of Financial Goals Financial goals are life s destinations, whether it s where you re headed today or twenty years from now. But there is a significant difference between a clearly defined goal with a plan to achieve it, and a fuzzy vision of what you d like to have happen. Goals that are perceived as not achievable aren t really goals at all. They become pipe dreams or they whither into hopeful aspirations. Or, if a goal isn t clearly defined with a real intrinsic value attached to it, it won t spark the inspiration needed to pursue it. If we can t visualize the end result, or if the end result doesn t hold real value for us, we are less motivated to act. Nothing happens. Generally, people without clearly defined goals, or who view the future with uncertainty, will lack the confidence necessary to adhere to a long-term strategy. Investment plans based on the hope that past performance will prevail in the future don t engender confidence, nor does the notion of planning toward the accumulation of a capital need using arbitrary or out-dated rules and assumptions. Effective goal setting is not a science, nor is it particularly difficult. And while, there is no one best way to set goals, it does require a certain frame of mind in order to give the process the perspective it needs. Goals are set to be met. Ascribing any less importance to it, renders the whole exercise a waste of time and discourages future efforts. So, it is important that your goal setting process works the first time around. Time is of the essence with goal setting. The only resource available to us, over which we have some element of control, is time. However, it is a wasting resource if it is not optimally utilized. Each day that passes, without some contribution of money, either in savings or interest, the cost of your financial goals increases. As time marches on, the obstacles to achieving goals of any time horizon become increasingly insurmountable. These are the obstacles we all face in trying to achieve our financial goals: Diminishing Time Value: Most people have heard of the financial axiom, the time value of money that describes how the growth of money is primarily a function of the amount of time it is given to work. The less time that money has to work, the more it will cost to attain the goal which is also defined as the cost of waiting. Risk As A Replacement For Time: The more time money has to work, the less it needs to grow. Given enough time, money will let compounding interest work its exponential magic thereby eliminating the need for higher returns and the greater risks associated with them. When it is necessary to assume greater risks in order to overcome the loss of time, financial goals can be jeopardized. Inflation: Inflation is one of time s worst enemies. The longer the time horizon, the longer inflation can eat away at the true value of money. At a normal inflation rate of 3%, the value of money is cut in half after 23 years. The cost of financial goals must incorporate the cost of inflation when calculating how much savings will be required to achieve them.

4 4 Taxes: Taxes are the one certainty of life that can obstruct your progress towards reaching your goals. The good news is that, with the proper planning, and the use of the right tools, they can be minimized to reduce their impact. Life: Yes, life happens, and very rarely in the way we anticipate, which is why financial goals must be defined, calculated, measured and reviewed frequently so that the necessary adjustments can be made to keep you on the right road when life throws you a curve. Ultimately, your goals and objectives become your investment benchmarks, an absolute measure of your investment strategy s performance. This allows you make investment decisions based on where you are in relation to your objectives rather than on market returns which are beyond your control. More importantly, it will shield you from the irrational behavior of the herd which is often driven by euphoria or panic. The Financial Planning Process Most professions require a disciplined approach to delivering their services to ensure the highest level of quality, accountability and compliance with laws and industry standards. Financial planning is no different requiring an orderly set of deliberate steps all of the way through to its implementation and follow-up. By understanding the specific steps involved, you will be in a better position to gauge the effectiveness of your advisor and have clear expectations as to the outcome. The 6 Step Financial Planning Process 1. Defining the Client-Advisor Relationship: Your advisor should clearly explain and document the services to be provided to you and define both his and your responsibilities. The client-advisor relationship is defined in large part by the method of compensation, so the advisor should explain fully how they will be paid and by whom, and all potential conflicts of interest should be disclosed. You and your advisor should agree on how long the professional relationship should last and on how decisions will be made. 2. Fact Finding: Your advisor should develop a thorough understanding of your overall financial picture. The advisor should understand and document your specific personal and financial goals, and establish benchmarks for measuring performance and progress towards these goals. At this stage, your advisor must also understand your comfort level with various forms of risk. 3. Financial Analysis: At this stage, your advisor should take the information provided in the Fact Finding stage, and provide an assessment of your current financial situation. The advisor should also provide some financial forecasts, based on reasonable assumptions of inflation, investment returns, interest rates and tax rates. This assessment of your current and prospective financial situation helps to provide a benchmark assuming no specific action is taken. All strategies developed and implemented by your advisor are then measured against this benchmark.

5 5 4. Developing a Set of Strategies: Your advisor should develop and present a full slate of options and strategies that help you to reach your specific financial planning goals. The advisor should help you to understand these options and strategies, selecting the strategies that are going to be most effective. The advisor should also understand your specific concerns and tailor the strategies accordingly. 5. Implementing the Selected Strategies: You and your advisor will then work together to implement the selected strategies, establishing task lists and time lines. Your advisor should then work with your accountant and lawyer to complete each of the tasks, ensuring that the tax and legal implications are fully understood. 6. Monitoring the Plan: You and your advisor should then establish regular intervals when you meet to measure progress, and make adjustments to your Plan based on any changes in circumstance, making adjustments to the implemented strategies, as required. These meetings also provide an opportunity to request reporting that is often required by your accountant and lawyer on an annual basis.

6 6 The Advisory Team Most high net worth individuals are surrounded by a small cadre of advisors a financial advisor, an attorney, an insurance professional, an accountant, and business planning specialists each tasked with solving a different piece of the puzzle for the client. However, without coordination or collaboration between the various disciplines, you could be left holding different pieces of the puzzle without a clear picture of how they fit together. We all know what it s like to try to piece together a puzzle without being able to see the box top. And, because each of the pieces is formed in separate silos, the likelihood is they won t fit cleanly together if at all leaving you with a discombobulated plan. High net worth individuals and couples especially need an integrated approach to their financial planning but most don t know how to go about achieving it on their own. It requires a collaborative process that incorporates the planning efforts of multiple disciplines into a coordinated plan. Put another way, it requires a team approach championed by a professional advisor who is adept at forging effective, working relationships with advisors in other disciplines. In many cases, a qualified financial advisor is best positioned to function as the team quarterback to facilitate the collaboration of all key players. Whoever is selected as the team leader, he or she assumes the responsibility for ensuring that all of the elements of your financial plan are developed as prescribed by your plan and then fully implemented on an established timeline. Conclusion No one plans to fail, but until deliberate steps are taken to clearly define your goals, assess your current financial situation, and implement actionable strategies towards achieving your goals, you will have failed to plan. And, that can be devastating at a time when the stakes have never been higher. We are living in an increasingly complex era, a period of time during which we ve seen the cost of retirement increase dramatically while the rate on savings has gone negative when you factor in inflation; we re witnessing the massive migration of Baby Boomers into a retirement for which nearly half are not prepared; we ve experienced one of the worst economic downturns in our history which many believe has led to a new normal ; and the universe of financial products and options has expanded beyond most people s comprehension. It is a truly extraordinary time of confusion and fear which has left many people paralyzed. The financial planning process enables you to focus clearly on your specific goals while addressing all of your concerns so they are no longer obstacles. And, having a well-conceived, comprehensive financial plan enables you to shutout the constant drone of doom and gloom, because, in the long-term, your plan is all that matters. A competent financial advisor will not only guide you through the process of planning your future, he or she should also be your financial coach, coaching you through the brief moments of fear and encouraging you to the finish line.

7 7 About the Author From an early age, when his friends were thinking only about sports and music, Craig Slayen became enamored with the stock market, idolizing the heroes of Wall Street, such as Warren Buffet, Benjamin Graham, Peter Lynch and David Dodd. After graduating from the University of California at Berkley, it was no surprise to anyone that Craig would start his career with an investment management firm in the Bay Area in equity research, analyzing companies for the firm s investment portfolio. After mastering fundamental financial analysis on the equity side, Craig was placed in charge of fixed-income trading where he analyzed and traded municipal, corporate and government bonds for client accounts. For the first half of Craig s career, he excelled in a world where research is coveted as the fuel for finding stocks and bonds to outperform the market. It wasn t until he began to manage client relationships that Craig experienced an epiphany which would forever change his view of investing and ultimately transform his career. Having the opportunity to work closely with many of the firm s clients, largely affluent families with substantial assets and complex planning issues, Craig quickly discovered that the best research and stock selection that money could buy could not consistently outperform the markets. This led Craig to ask the question Is it even possible for a portfolio manager to consistently outperform the market? After several years of compiling the data from client accounts, Craig discovered that the inconsistencies in portfolio performance were not based on portfolio management skills or the accuracy of research, rather it was because of the sheer randomness of the market, and all of the academic research he studied confirmed it. That experience inspired him to start his own investment advisory practice which he founded with his wife, Melissa in Since then, his firm, Winship Wealth Partners, has catered to families and individuals with an emphasis on comprehensive financial planning, asset allocation and investor behavior management based on sound academic research. About Winship Wealth Partners Winship Wealth is an independent wealth management firm providing investment consulting and advanced planning services to individuals and families. Their aim is to deliver sound investment strategies and disciplined management to help their clients achieve their goals and have a positive investment experience. Winship believes in an integrated approach to planning and investment management and is dedicated to providing objective council to help their clients make good decisions with their financial resources. While they provide comprehensive planning services which include wealth accumulation strategies, tax planning, and risk management, they specialize in helping clients plan for retirement and navigating the myriad of issues and opportunities associated with this big life transition.