The Role of Financial Planners Explained

By Levi Sanchez

The variety of financial advisors, financial professionals, financial planners, etc., that people hold themselves out to be has become extensive. Our industry hasn't done a great job of defining the distinguishing characteristics of each to our consumers. It's probably left you asking, what do financial planners do?

If you had to choose between an advisor that was legally obligated to do what's in the best interest of his/her clients and an advisor who did not, wouldn't the decision be a no brainer? What about an advisor that limited their conflicts of interest by not selling any commission products, selling only their advice and financial planning expertise, as opposed to an advisor who sells insurance, annuities or expensive mutual funds?

This article will explain what financial planners do, what characteristics to look for, and why we shouldn't be construed as a stockbroker of yesteryear. (For more, see: Financial Advisor vs. Financial Planner.)

What Financial Planners Do

Financial planners help their clients analyze their financial picture from a holistic perspective. This can include many different topics such as debt analysis, investment management, employee benefits optimization, business and asset protection, risk analysis and much more. Each part should be viewed as an individual piece of a comprehensive whole. For example, it's impossible to recommend that a client purchase a life insurance policy, without knowing other integral information. Are they the primary source of income if they're married? Do they have substantial debts that would be hard for a surviving spouse to pay off should anything happen to the individual?

In addition to taking a holistic view of the client's finances, a quality financial planner provides the following: financial advice, not products. It's virtually impossible to eliminate all conflicts of interest when it comes to handling financial matters. But we believe in order to eliminate as much as possible, a financial planner can't sell any sort of commission paying investment products. By doing so, they can be persuaded into recommending a product for its commission-paying potential over its true benefit to the client, leaving the client with something that may or may not truly be in their best interest.

Whether the client needs the product or not, it’s hard to silence that voice vying for a commission. It's not to say that a financial planner who offers commission-based products has sold something to a client that they didn't' necessarily need, but it's impossible to know the difference unless you take away the ability to sell those products completely. Financial planners who sell only their advice and planning expertise are the only way you can be sure they're always looking out for what's best for you. These types of financial planners are called fee-only advisors. (For more, see: Fee-Only Financial Advisors: What You Need to Know.)

Establish and Track Goals

After gathering all pertinent data to build a financial plan, a financial planner will help you define and refine your goals. Goals could range from saving for a home, becoming debt free, saving for retirement or starting a business. Goals change over time. Your financial planner should be there along the way to help you navigate and correct the course when needed. Whatever they may be, a financial planner can help you define those goals and track your progress towards achieving them.

Tracking progress and holding clients accountable to their stated goals helps increase their chances of success. We all know success is defined by achieving the goals we set, but we can’t just set goals without some meaningful way to track our progress. That's where a financial planner really adds value. We track your progress, hold you accountable, educate you and coach you towards better financial habits with the intention of increasing the chances of you successfully achieving your financial goals. When tough decisions arise or markets recede, a financial planner helps you avoid making irrational decisions and walks you through the proper steps.

Provide Investment Advice

Your investments are part of your overall financial picture. Financial Planners can help build an asset allocation that's suitable to your tolerance for risk while taking into account the return necessary to achieve your goals. The asset allocation portion of a financial planner’s business has become rather commoditized in recent years. With the rise of robo-advisors, asset allocation and automated investing are cheaper and more accessible than ever. A quality financial planner’s true value comes through in their advice surrounding your goals, navigating risks and planning for the future. Asset allocation andinvestment adviceshould be a given if you work with a financial planner. But it's really just one piece of the entire puzzle.

Peace of Mind

Most people simply don't have the time available nor interest in planning for their financial future. If you're a working individual, have kids, run a business or are just a busy individual in general, you're probably like most people and procrastinate when it comes to financial planning. Why not delegate that part of your life to a professional who you trust and who truly understands you? Not only will it save you time, but it will provide you with peace of mind as well. There are many moving parts alongside changing laws and regulations that can make staying on top of your personal finances and wealth-building endeavors a challenge. If managing your finances and the big financial decisions that come along with it linger in your mind, consulting a financial planner can help alleviate the stress.

Financial planners help maximize financial decisions and opportunities when they present themselves while mitigating the potential downsides. Knowing there’s someone who has your best interests at heart and understands you and your family’s goals relieves the burden of the unknown when it comes to managing your finances.

How Planners Answer Client Questions

Financial planners first gather as much data as possible about their client and their current financial situation. This data is compiled in high-tech software that is capable of projecting cash flows, stress testing the plan through different types of scenarios and determining the probability of success, as it pertains to those specific goals. With all this information, the planner can answer many of the questions that their client might have such as:

  • Should I be paying off my student loans or saving for retirement?
  • How much do I need to invest to become a millionaire by age 40?
  • How should I be saving for my child's college tuition?
  • Will my family be taken care of if I was to pass prematurely?
  • How much should I be saving?
  • I've won the lottery, now what?

Certainly, the last question is a one off and not common. But cash windfalls do happen and properly addressing them is important. The rest of these questions are just a few examples that a financial planner can help solve.

As with anything in life, articulating goals and putting a plan in place to achieve them greatly enhances your chances of success. A financial planner is your coach and accountability partner throughout this ongoing process. (For more from this author, see: The Best Way to Budget: Automate Your Finances.)

This article was originally published on Investopedia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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