Prime Time for Financial Planning?

Many of us assume that the services of a financial adviser are most appropriate for two groups of people: those who have more money than they know what to do with, and those who can't make it from one paycheck to the next.

But say you stand somewhere along that wide range in between. You meet all your expenses, you have your debts under control, and you've set aside a cash reserve that would carry you through several months should a financial emergency arise. Beyond that, you have additional money that you've begun to invest to build your financial future.

Does this mean you've reached a point in your life when you could benefit from professional financial planning services? Perhaps, depending on your circumstances.

Seven questions

A financial planner is someone who can evaluate your overall financial situation--your budget, savings, investments, retirement plans, taxes, estate planning, and insurance--and recommend strategies that will help you reach your financial goals.

To decide if seeing a financial planner would be a wise move for you, Sharon Danes, a professor of family social science at the University of Minnesota, St. Paul, suggests asking yourself seven questions:

Am I confident about making financial decisions? Am I knowledgeable enough to begin my own long-range financial planning? Do I know enough about my investment options to work effectively toward my short-term and long-term objectives? Do I expect my present income and investment approach to provide for my retirement years? Am I comfortable with my level of debt? Is my household income less than $50,000 a year? Do I have enough time and knowledge to devote to analyzing my family's financial situation?

If you answered "no" to some of the above, you may be a candidate for professional financial planning advice, Danes says. The more "no" answers you gave, the more strongly you should consider consulting a financial planner.

Danes emphasizes that income level alone is not an indicator of the need for a financial planner's services. While her list mentions a $50,000 income guideline, she's not suggesting that anyone earning more than that automatically needs to see a financial planner. Neither does this decision depend solely on reaching a certain stage in life.

"That's why I go back to those seven questions," Danes explains. "You have to look at all those issues" in determining if it makes sense for you to work with a financial planner.

Can you afford a financial planner?

Vickie Hampton, a certified financial planner and associate professor of personal financial planning at Texas Tech University in Lubbock, agrees that deciding to use a financial planner hinges on much more than how much money you make.

For instance, a change in life circumstances, such as the birth of a child or the death of a family income-earner, may spur someone to seek financial planning help. "Sometimes it's just a matter of reaching a point when you think it's time to deal with your finances," Hampton notes. "You could learn to do it yourself, but you'd prefer to do something else with your time. It may be more cost-effective to pay a professional to help you with your finances."

While Hampton says it's difficult to pinpoint an income threshold at which you should consider using a financial planner, she points out that because you're paying for those services, your income has to be sufficient to justify the expense. And the cost can vary widely.

Some planners provide ongoing consultation and assess a fee based on a percentage of the client's assets or income. Others charge by the hour or a flat fee for the job. Some charge no fees and earn commissions from the companies whose financial products they sell. Some get paid with a combination of fees and commissions, while others earn a straight salary paid by the company for which they work.

"There are so many business models out there," Hampton says. "We're also seeing more financial planning done in the workplace and in banks and credit unions. Those models often are better suited to moderate-income people."

You can work with a financial planner in many different ways, which also affects your costs. For example, asking a planner to provide an ongoing comprehensive review of all your finances would be the most costly. On the other hand, you'd pay much less to hire a planner to sit down with you for an hour or two, maybe once every few years, to get a second opinion on whether your own financial decision-making is on the right track.

Choices, choices ...

A confusing array of options awaits the person who decides to seek consultation with a financial planner. Most anyone can claim "financial planner" as his or her job title, and there's little government regulation.

Thus, it's wise to check the education, experience, and credentials of anyone you decide to hire. You'll encounter such designations as CFP (certified financial planner), ChFC (chartered financial consultant), and CPA/PFS (certified public accountant/personal financial specialist). These professionals had special training and passed exams to earn credentials as financial planners. They also must meet continuing education requirements.

One adviser alone, however, may not be able to handle all your financial planning needs. For instance, if you have a complex tax situation, you may need advice from a tax attorney. A reputable planner will refer you to specialists in areas outside his or her expertise.

Even if you do use a financial planner, you still need to stay on top of what's going on with your finances. Be sure you understand the planner's advice. Ask questions. Read to build your own knowledge of financial topics.

"You have to know enough to know whether your planner is steering you right," Hampton notes. "There's a saying that nobody cares about your money more than you do. So keep in mind that when all is said and done, it's your responsibility. You're the one who will reap the benefits or the losses. You have to stay engaged."

Published January 6, 2003