I’m noticing an increasing proliferation of proprietary financial services companies—like discount brokerage firms and mutual fund families—suggesting that they do “financial planning” or will offer their would-be customers a “financial plan.” But then they go on to discuss said “financial plan” as a mere review of one’s investment holdings, as though an investment plan and a financial plan are somehow synonymous. They are not.
If all you get is a portfolio review, that’s not financial planning.
If all you get is an insurance analysis, that’s not financial planning.
If all you get is a retirement assessment, that’s not financial planning.
Each of the above, and a great deal more, are part of financial planning, of course. But to refer to any of these parts as though they represent the whole is both incorrect and misleading.
The reason it’s important to make this distinction is that without consideration of someone’s entire financial situation, recommendations regarding specific elements of planning are diluted, at best, if not dubious. This fact is also my greatest defense against one-off cocktail party questions like, “Should I buy Roblox or Bitcoin?”!
So let’s talk about true financial planning, in part and in whole—what it’s NOT, and what it IS:
- Investment planning—Is NOT merely the sale of stocks, bonds, mutual funds, and ETFs; it IS determining how all of the assets in your life—including stocks, bonds, mutual funds, and ETFs, but also real estate, commodities (virtual and otherwise), 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 carefully considered 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 and online tax service; 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 (if you’re lucky) 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 could likely benefit from being invested in a 529 education savings plan.
- Retirement planning—Is NOT pounding away at a job you don’t love so that you can shelve as much of your income as humanly possible in a 401(k) 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), and 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—through wills, powers of attorney, advance directives, and often trusts—designed to create a legacy, no matter your age.
Financial planning is a blend of all of these applicable elements, as well as others. It includes investment, insurance, tax, estate, retirement, and cash flow planning, but it is necessarily more than a rifled approach to any one of them. And at the core of the practice is not products, services, or proprietary strategies—but you. Your hopes, dreams, fears, concerns, priorities, goals, values, and aspirations are the driving force behind everything. Or, at least, they should be.
As defined by the Certified Financial Planner Board, financial planning is “a collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.”
Which is to say that the best financial planning is really financial life planning.