What Is A Financial Planner?
There are different types of financial planners for different types of plans. For this discussion, we will refer to financial planners specializing in investments.
A good financial planner starts by learning everything about you, i.e., your current financial situation and your goals. He needs to know all about your income, what you have in your savings, what your living expenses are, your debts, your children and their ages, and any medical conditions, and so forth..
Your financial planner then spends time with you discusses what your goals and objectives may be. This includes when you want to retire, the kind of lifestyle you want in retirement, if you need money set aside for your children’s education, etc.
A good financial planner has sophisticated software able to analyze all of your financial information and to determine how much you need to save and what rate of return you need to make on your investments in order to meet your goals. Unfortunately financial planners find, after running the numbers, that a client has to achieve an unreasonably high rate of return on his/her investments, and save much more than expected in order to reach their financial/retirement goals.
While unpleasant to learn, it’s critical regarding realistic financial planning. The good news is, the quicker you find where you stand, the better, so you can start making adjustments to reach your goals.
Decisions On The Investments :
This is the difficult part: To make a decision on investments and the allocations. You should, at this time, (along with your financial planner), decide on a realistic rate of return on your investments and how much risk you are willing to take to get there.
It should be noted that everyone has a different financial situation. Therefore, no specific list of investments can be recommended. But, most portfolios include a blend of large, medium and small cap stocks, international stocks, a blend of bonds and maybe some real estate. These asset classes are usually in the form of mutual funds.
A good financial planner has sophisticated software in order to analyze mutual funds in each asset class and to recommend top performers in each group. He/she should show you historical data on each fund, including long-term rate of return, worst losing periods, standard deviation, and so on.. He/she should also advise you if there have been any changes in managers of the funds recommended.
Many financial planners recommend "alternative investments" such as hedge funds, professionally managed futures funds, etc., especially for larger portfolios that can diversify more. These types of investments are not suitable for all investors and should be carefully selected.
It’s possible that some investments you have are worth keeping. A good financial planner will not assume everything in your portfolio is bad. He/she should analyze each of your current investments to see if they are comparable to any of those they recommend. If they are, you should keep them to avoid some transaction costs.
Once the investments have been chosen, your next step is to fund the accounts and make the purchases. A good financial planner will keep tabs on your portfolio on a regular basis. You should get an easy to understand quarterly statement with a detailed breakdown on how all of your investments are doing, as well as your overall portfolio return.
A good financial planner will stay in touch with you with periodic phone calls/emails to see if there are any changes to your financial situation. He/she should also notify you if any changes need to be made in the portfolio. For example, maybe a fund changes managers and together you decide to move to another fund. He/she should also phone you at least once a year (or as often as needed) to discuss re-balancing the above portfolio.
A good financial planner should constantly search for better funds, better managers and better alternative investments.
Lastly, in regards to fees, there are several kinds of financial planners: "Fee-only" planners who charge a fixed fee for providing the service; "Commission-based" planners who are paid by the commissions on the products they sell (which could lead to conflicts of interest); and there are "Asset-based" planners who are paid a pre-determined management fee based on the size of the assets under management. There are pros and cons to each fee arrangement, but the asset-based fee is the one usually preferred.
There is a general consensus that the press should stop telling individual investors that they can do these complex things on their own. As mentioned earlier, most investors haven’t a clue as to how to do sector rotation, market timing, etc. No one knows which stocks will be the best over any given period. The press should be advise them to seek professional help in investment selection and portfolio management.
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