How Financial Planners Can Help
In Jonathan Clements most recent WSJ Getting Going column titled "Why Worry? Well, Here Are Four Reasons" (sorry, no link as it's not free any more!) he discusses four things you should (or could) worry about regarding your finances. The first 3 are:
1) Bad Ideas - assuming that the market will make 10% or 12% in your planning among other things
2) Monthly Mentality - thinking in terms of monthly payments vs. monthly cash flow with cars, dvd rentals, etc.
3) Penalty Play - not planning and needing to withdraw from your IRA or other retirement account and having to borrow from it and othe penalties
His last one was a very complete thought titled, Debtor's Prison that stated:
Suppose you own a $250,000 house and you have $200,000 stashed in stocks and bonds. You also, however, have a $200,000 mortgage and $30,000 in auto loans and credit-card debt.
Add it up, and you have $450,000 in total assets and $230,000 in total debts, giving you a net worth of $220,000. Doesn't seem particularly risky? Usually, it wouldn't be.
But imagine you lost your job during a weak housing market. After some scrambling, you land a new job, but it is on the other side of the country. That means you have to sell your current home, relocate your family and buy another home, while continuing to cover living expenses and service debts.
With any luck, thanks to your new job, you won't have any problem qualifying for another mortgage. But you still have to come up with a down payment for the new house.
That may not be easy. Given the housing market's weakness and your need to sell quickly, you might end up unloading your current home for $225,000. After forking over a 6% real-estate commission and paying off your $200,000 mortgage, you would net just $11,500.
Fortunately, as you cobble together a down payment for the new house, you can draw on your $200,000 in stocks and bonds. Unfortunately, much of this money is in retirement accounts, so tapping your portfolio could mean paying income taxes and tax penalties.
One way or another, you would probably muddle through, somehow managing to relocate, keep your creditors at bay and buy a new home. Still, if all this seems a little precarious, there's a reason: It is.
My goal here isn't to dissuade you from ever taking on debt or ever funding a retirement account. But bad things happen, so you need to give yourself some financial breathing room. That means limiting your debts, holding down monthly financial obligations and having some savings in a regular taxable account.
But most of all, you need to think ahead. What if you don't have steady employment from now until retirement? What if real estate doesn't always appreciate? What if stocks don't return 10% a year? You need to build such possibilities into your financial plan -- before something goes wrong and it's way too late for planning.
Some bloggers and blog readers have been bashing financial planners recently. However, there are many complex financial decisions that I think most consumers would need the help of a true Financial Planner, one that is trustworthy and aligned with the client's goals (and I'm sorry to say, some (or is that most?) aren't!). We can not see into the future, so I think most people need help to plan for situations like the above and be able to make the right financial decisions with the help of a Financial Planner. Are you ready if some situation like this hit you square in the face?
1) Bad Ideas - assuming that the market will make 10% or 12% in your planning among other things
2) Monthly Mentality - thinking in terms of monthly payments vs. monthly cash flow with cars, dvd rentals, etc.
3) Penalty Play - not planning and needing to withdraw from your IRA or other retirement account and having to borrow from it and othe penalties
His last one was a very complete thought titled, Debtor's Prison that stated:
Suppose you own a $250,000 house and you have $200,000 stashed in stocks and bonds. You also, however, have a $200,000 mortgage and $30,000 in auto loans and credit-card debt.
Add it up, and you have $450,000 in total assets and $230,000 in total debts, giving you a net worth of $220,000. Doesn't seem particularly risky? Usually, it wouldn't be.
But imagine you lost your job during a weak housing market. After some scrambling, you land a new job, but it is on the other side of the country. That means you have to sell your current home, relocate your family and buy another home, while continuing to cover living expenses and service debts.
With any luck, thanks to your new job, you won't have any problem qualifying for another mortgage. But you still have to come up with a down payment for the new house.
That may not be easy. Given the housing market's weakness and your need to sell quickly, you might end up unloading your current home for $225,000. After forking over a 6% real-estate commission and paying off your $200,000 mortgage, you would net just $11,500.
Fortunately, as you cobble together a down payment for the new house, you can draw on your $200,000 in stocks and bonds. Unfortunately, much of this money is in retirement accounts, so tapping your portfolio could mean paying income taxes and tax penalties.
One way or another, you would probably muddle through, somehow managing to relocate, keep your creditors at bay and buy a new home. Still, if all this seems a little precarious, there's a reason: It is.
My goal here isn't to dissuade you from ever taking on debt or ever funding a retirement account. But bad things happen, so you need to give yourself some financial breathing room. That means limiting your debts, holding down monthly financial obligations and having some savings in a regular taxable account.
But most of all, you need to think ahead. What if you don't have steady employment from now until retirement? What if real estate doesn't always appreciate? What if stocks don't return 10% a year? You need to build such possibilities into your financial plan -- before something goes wrong and it's way too late for planning.
Some bloggers and blog readers have been bashing financial planners recently. However, there are many complex financial decisions that I think most consumers would need the help of a true Financial Planner, one that is trustworthy and aligned with the client's goals (and I'm sorry to say, some (or is that most?) aren't!). We can not see into the future, so I think most people need help to plan for situations like the above and be able to make the right financial decisions with the help of a Financial Planner. Are you ready if some situation like this hit you square in the face?
posted by Financial Fruition @ 6:51:00 AM
4 Comments:
You know I couldn't let this go without a few comments (ha!):
1. I know Jonathan Clements. Great guy. I trust him and his advice.
2. I use financial professionals when they meet my criteria (stated in a recent post -- you commented on it, so I know you've read it). If they don't, I don't use them.
3. As you hint, many financial planners are salespeople first. Stay away from these.
4. Question: Do you personally use a financial planner? I'd be interested in hearing your actual experiences in what they do well and what they don't.
FMF
I was hoping you would stop by FMF.
To answer question #4, I do not currently use a financial planner. The main reason for this is that my current assets are in a very limited 401k in which I've chosen the investments. However, I have done a lot of of research on FP and just finished the education requirements of the CFP board and will be sitting for the exam in about 5 months.
I am very fortunate in that I work for an investment firm and have become very familiar and studied up on everything regarding the industry. Yet, I do not work as a financial planner yet (currently on the creative side of the business...think ads, brochures, newsletters, etc.). Having gone through the education requirement, I am gaining quite a full understanding of what it means to be a true financial planner.
Notice I keep to referring to a "TRUE financial planner". I feel that the word "financial planner" (along with Wealth Management), are overused terms and have really become a marketing position for investment firms. My feelings this way stem from the abuse of the term financial planner, by brokers and the like, who have no idea what comprehensive financial planning is...they are just out to make a commission on a product.
On another note, my parents have recently had financial trouble/decisions (Dad lost job a couple of years ago and is forced to work at an hourly retail job because of his age, YES..there is age bias when hiring!) and because I work for a firm that have unbiased, salaried financial planners, I am able to get them into discuss and formulate a complete financial plan at no cost to them. We will see what happens as over the next month they will be reviewing and implementing the recommended plan. I'll let you know about my parents experience in this regard. The first 2 meetings have been informative.
Good stuff to know. Congrats on making the education requirements.
If you narrow it down to what you call "TURE financial planners", this would be the only group I would even consider using. (I'm not into the salesman type.) However, they would still need to meet my criteria, namely they need to be better off than I am (from a net worth standpoint).
Does this sound fair to you?
Definitely, and that's why I won't be doing this on my own...I will be learning how to apply what I've learned under the tutelage of our experienced and much more well off financial planners at our firm. That way I can learn the business from an application standpoint and establish myself with regards to my own personal finance standpoint (read: personal net worth)
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