What Does A Financial Planner Do?

Financial planners can help you make sense of your financial life. Depending on their qualifications and expertise, they can offer advice and investment plans for managing cash flows, reducing liabilities, saving for retirement or your children’s higher education, resolving tax issues, evaluating insurance and other asset protection options, and distributing your wealth to your children or favorite charities.

How Does Financial Planning Work?

Financial planners start by listening. They ask a lot of questions in order to unearth the financial challenges you’ll need to solve, and define the goals you want to accomplish.

This may be a specific issue such as recommending ways to make your investments more tax efficient or a broad mandate to holistically address your entire financial situation.

Depending on the nature of the engagement, you’ll be asked to provide documentation of your financial assets and liabilities. These may include, but will not necessarily be limited to, banking and investment accounts, IRAs, pensions and 401(k) plans, mortgages and home equity loans, auto and student loans, credit cards, state and federal tax returns, real estate tax statements, and estimated Social Security benefits.

Your financial planner will analyze all of this information and develop a comprehensive financial plan. This will act as a blueprint to help you save, protect, and build your nest egg more effectively.

Investment Planning

Financial planners can recommend an investment plan that aligns with your specific objectives–such as saving for retirement or your children’s higher education–and your personal level of risk tolerance. From this information, they can recommend an asset allocation strategy to divide your money among stocks, bonds, and cash.

Many financial planners are also investment advisors. So if you’re satisfied with their investment recommendations, they can execute the plan for you. They do so by investing on your behalf in securities or mutual funds, and then managing all (or part) of your portfolio. They will also monitor and report performance over time and make changes as necessary, with an eye on tax and cost efficiency.  

Retirement Planning

Financial planners can help you address what will probably be your most important investment objective: Saving for retirement & accumulating a nest egg large enough that it enables you to live comfortably during what could be decades of retirement.

If retirement is still a long ways off, a financial planner will start by helping you estimate the monthly (or annual) income you’ll need after you leave the workforce. They’ll then analyze all of your potential sources of income during retirement, including Social Security, pensions, 401(k) plans, IRAs, taxable investments, and projected proceeds from the sale of your home and other valuable assets.

From this information, they’ll use sophisticated retirement planning and investment modeling tools to figure out how likely you are to reach your desired retirement income goals. This is based on how much you’re saving today, as well as thousands of positive and negative market return scenarios. If potential shortfalls exist, they may recommend increasing your 401(k) and/or IRA contributions, or adopting a more aggressive investment strategy (if appropriate to your risk tolerance and capacity).

As you approach retirement, they can calculate your income needs based on current assets and liabilities. They’ll help you determine when to start taking Social Security payments, as well as offer strategies for making intelligent (and tax-efficient) withdrawals from your retirement and taxable investment accounts. 

Your financial planner can also help you prepare for unanticipated expenses–such as catastrophic healthcare costs–and help you weigh the pros and cons of terminating life insurance policies or purchasing long-term care insurance.

Tax Planning

Many financial planners offer tax-related advice. They can help you deal with specific issues, such as finding ways to manage the tax impact of distributions from your IRAs and 401(k) plans, or minimizing capital gains taxes from the sale of company stock options. Some can help small business owners deal with corporate tax issues, and may even help you prepare your federal and state returns.

Not all financial planners are qualified to provide these tax-related services, though. If you’re looking for tax planning help, make sure you ask a financial planner what qualifies them to provide this advice. Better yet, narrow your focus on financial planners who are also CPAs.

Asset Protection & Estate Planning

Financial planners can help you evaluate options for providing financial security to your spouse and children. They can evaluate your current life insurance policies, or recommend insurance options and coverage assets.

Fee-only planners are ideal for these types of insurance evaluations, as their interests are best aligned with yours. This is because they do not receive any commissions from the insurance products they recommend to you.

Financial planners can also help you avoid common estate planning errors, ensuring that your assets are passed to your heirs in an efficient manner. For example, they can recommend ways to transfer qualified IRA accounts to your children, and they can make sure that the beneficiaries listed on your investment and life insurance accounts reflect your wishes.

If you’re in the process of establishing a trust, the financial planner can work with your trust attorney to make sure that your investment accounts are titled correctly before they’re transferred over.

How Financial Planners Are Paid

Some financial planners charge a fixed or hourly fee for developing a comprehensive financial plan. Since most financial planners are also investment advisers, you may decide to hire this type of professional to manage all or part of investment portfolio, as well.

For these services, you’ll typically pay a percentage of your assets directly to the advisor as an annual fee. These fees usually include ongoing monitoring, rebalancing, and reporting of your financial and investment plans, with recommended adjustments as your financial situation changes over time.  

However, as discussed in How Do Advisors Get Paid?, not all financial planners are investment advisers. Many are registered representatives (brokers), and get paid commissions for selling you specific investments. It’s important that you understand the distinctions before you hire a financial planner.

How Do I Find a Financial Planner Near Me?

The question of how to find a financial planner is a critical question. That’s because, while investment professionals must be licensed and regulated by state or federal authorities, there are no such laws governing financial planners. So the responsibility is on you to make sure that any financial planner you’re considering is truly qualified.

You may want to limit your search to financial planners who have been certified as a CFP® professionals by the Certified Financial Planner Board of Standards (CFP Board). These planners earn their certifications by being experienced financial professionals, and have passed a rigorous financial planning examination.

It is also important to note that just because a planner is a CFP, that doesn’t mean that they are a fiduciary in the eyes of the law.

You can easily find a financial planner by using our own advisor matching feature. We utilize a thorough vetting process for fee-only financial planners, to ensure that the planners you get matched with have the knowledge, process, and aligned incentives to provide you with an excellent service.