Do you know how there are some things we just have to experience before we understand it? Like child rearing. Horseradish. Flying. Lots of things. I’m going to spend some time this week attempting to explain something or things related to your finances that are hard to understand until experienced. Some of these things you don’t want to now first hand – for example, living in poverty. And yet, many of you listening have made financial decisions that are leading you in that direction.
Facts and emotions. That’s how we make decisions. Usually the emotion comes first. We use the facts to justify our decision or to explain it.
Handling our personal finances is challenging. Many people choose to ignore them. Others just don’t handle them well – usually because they don’t know enough about the facts and systems that can make money management and money decisions easier and more reassuring. We all make decisions in different “frameworks”. If you are the type of person who likes detail, the big picture may escape you. Or if you are a big picture person the details of how to get from where you are to where you want to be – that’s not very clear. Many of us take our best stab at it and hope for the best. No matter what your learning or decision or functioning styles are, you are probably too busy to pay much attention to your finances. There is no doubt you are too busy to learn everything you need to know to make the best decisions.
That’s why people hire financial planners. Unfortunately, people don’t know about financial planners, either – at least not until they’ve used one. I hear such horror stories about going through hours of information collection only to receive some boiler plate plan and to realize your planner doesn’t know much more than you do.
Have you ever used a financial planner? That is, have you gone to someone’s office, gone through hours of data collection and ended up with a printed plan?
Boiler plate financial plans can be ok for starter plans. If you are a young couple just starting out, they can analyze your need for insurance and do an abbreviated income tax analysis and see whether it looks like you’ll have enough money in retirement - although I’ve reviewed a lot of software programs and internal tax calculations that may cause the program to show you incorrect numbers can be really messed up by unknowledgeable input and incorrect future income tax assumptions. Unless the planner wrote the program, it’s hard to trust the numbers.
I worked with a young planner – who is not part of our group - on a case last year. He was using a program selected for him by his broker/dealer. When he showed me the output, it was obvious there was something wrong. The numbers were way off. He couldn’t see it. He didn’t have the experience of designing a program or doing long-hand calculations. After I insisted – and it was quite a battle – he found that his input assumptions had made the program go a bit haywire. To the point that it was showing a young couple - who were not really saving much - that their retirement would be OK. I knew better. I did a manual calc, ran the numbers on one of my programs and we discovered the problem. There was a double inflation rate applied to the teacher’s retirement plan figures. Beware if you are a teacher! The teachers website used a 4 or 5% income increase factor – are you getting a 5% increase every year? - and the program this young planner was using was using another 3%. We went back and did a manual calculation on the retirement benefits – something I’ve done hundreds of times over the past 20 some years – and got the correct figures. GIGO. The plan wouldn’t have been worth the paper it was printed on.
Well, I digressed. I suppose the point is the more the planner knows and the less boilerplate – the better the numbers.
Is financial planning just about numbers?
It seems that many financial plans focus on numbers instead of uncovering and solving the problems inherent in most of our finances.
A good financial plan finds problems. If you think about it – a computer program is not going to do that for you. The planner is going to do that for you. Even better, you and the planner are going to work together to dig deep and uncover your values, goals, the things that are holding you back in decision-making and together you will create a roadmap or blueprint of how to get where you want to go.
The plan has to clearly identify where you are right now, where you want to be, what you are doing to get there – and the gap.
It’s not just about our pension or investments. Consideration has to be given to the dangers and risks that may bankrupt you or your loved ones. Medical, personal lawsuits, business lawsuits, an unbalanced portfolio, long-term care, disability, death, paying too much taxes and many others. A good planner is aware of the frequency and actual risk of these things.
Your planner should be able to help you sort out what is important and what isn’t. In order to do that they have to know about taxes – and how to read your tax return, If the planner you talk to does not do their own income taxes, keep looking. They must be very knowledgeable about insurances – your homeowners and auto, umbrella, life, disability, errors and omission or malpractice,
If you have had a financial plan done, what were the credentials and experience of the planner? The more credentials the better – and find out what they mean.
How can you keep from making a big mistake when hiring a planner?
It amazes me how many people do not ask about the credential of a financial planner they are considering hiring. They will be divulging all their most private thoughts and finances. Wouldn’t you think they want to know about qualifications? Unfortunately for the consumer, most planners are thinly disguised sales people. They THINK they’re financial planners and they can be very convincing – but they don’t understand what true planning is.
What it is not, is collecting a bunch of information and having your company back office produce 100 pages of boilerplate. What it is, is conversations a qualified person who helps you develop and understand your philosophy, goals, and numbers in a dozen areas of planning.
So let’s talk a little about credentials – keeping in mind that the people skills of the planner are also important and perhaps, a bit less quantifiable – although some background in psychology is good.
Let’s deal with five credentials – CPA, CLU, CFP. ChFC and JD.
CPA – Certified Public Accountant - is a rare designation for a financial planner, but if they have it you can be sure they understand how to do taxes. Make sure they also understand tax planning. They should be able to help you find ways to reduce your income taxes.
CLU – Chartered Life Underwriter – the course work these people take includes taxes, pensions, investments and, of course insurance – not just life but also property casualty and health. They should be able to analyze all your insurances and find any holes or mistakes as well as help you determine how much coverage you need.
CFP – Certified Financial Planner – a misnomer in my book. The course work does include some general planning but it is very skewed toward investing. If you think investing is what financial planning is, go back and read the previous few days’ information at www.planningsense.com.
We’re out of time. Check the web for the rest of the story.
What importance do you place on the planner’s credentials when you are out there hiring one?
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What happens to your financial plan if your planner really doesn’t understand insurance?
I’m not suggesting just the technical side – insurance is often an emotional purchase. Take life insurance for example. I consider personal life insurance to be a love letter to the beneficiary. Every widow I have worked with has felt the same way. Your planner should be able to help you develop your philosophy of insurance. Let me tell you a story as an example.
There is an island where the custom in the culture is to ask the hand of the young woman in marriage and then pay a price for her in cows. Johnny wanted to marry Serita, whom he loved very much. The average price for a wife was two or three cows. Johnny went to an island powwow and sat with the wise man. He asked “what are the most number of cows that have ever been paid for a wife?’ The wise man said “Seven cows, but that woman was the most beautiful, intelligent person on all the islands and it was 100 years ago.”
The next day Johnny went to Serita’s father and said “I’d like to marry your daughter.” The father said “How many cows?” Johnny said “Eight cows.” Yes!, her father said – because although Serita was a very nice woman she was an average woman.
So they married and went to live on Johnny’s farm. At the next gathering of the men, they made fun of Johnny. “Why would you pay so much when you could have gotten your wife for three cows?” Johnny said, “Sooner or later all the women will be comparing notes and when that subject comes up I would not want the woman I love to think I paid the least for her.”
As the story goes, Serita was well loved and was transformed into the most beautiful, intelligent and nurturing person in the islands – because someone valued her so much, she became all that she could be.
What does this story have to do with life insurance? You tell me.
Continuation of credential information:
I am a CFP and I was not impressed by the coursework. I got my CFP in 1996 and took the exam on a challenge basis. Many current CFPs only had to take 4 or 5 courses – it’s a few more now, and many of them took cram courses or worked with cliff notes to get through instead of studying and really understanding the material. Of course, the same could be true of any of these designations.
ChFC – Chartered Financial Consultant – in my mind is the true financial planning designation. It was the one I finished back in 1982 that set me on the course of doing individualized, comprehensive, fee-based financial planning. There are ten classes required – offered by the American College in PA. Definitely advanced college material.
A good idea would be to ask to see the coursework studied by the planner. If you are working with a true fee based planner and not some company hog0tied planner, they will have an ADV filing with NYS that discloses all their personal information and credentials. Unfortunately, if you work with a planner tied to a brokerage house or insurance company, the ADV will only reflect the information about the brokerage company subsidiary that does the planning. Not very useful!
The JD is the only credential that is actually a degree. It means juris doctorate and is a law degree. If your planner has one of these, you’ll want to see their list of classes taken. There should be a concentration in tax, estates and subjects that tie into planning. Constitutional Criminal Procedure and Evidence may be important for the bar exam but a concentration in criminal law won’t help you with your finances! See what else is on their transcript!
There are many more designations out there – some mean something and others are bought off the rack – meaning you can buy the right to use the credential. Be careful – and do not EVER work with a planner with no credentials.