What does the phrase ‘wealth management’ mean to you? It can mean many things to many people; however, in general, wealth management encompasses the plans and strategies that help build and preserve your savings and financial independence.
It can sound misleading and, as a result, there are those who feel that wealth management services are only an option for high-net worth individuals. While it is true that in our practice we deal with clients every day who have built multi-million dollar investment portfolios, we also support individuals from all income and asset categories in the early-to-middle stages of planning for their future financial security.
From a conceptual standpoint, the same strategies that advisors use to aid high-net worth clients can be used to help regular investors as well. For all investors, a wealth management plan begins with thorough and proper analysis of your financial needs—where short-term, intermediate, and long-term goals are identified, risk tolerance is discussed, cash flow details and scenarios are reviewed, and hypothetical modeling of returns are analyzed.
When analyzing your objectives, you should consider the impact of potentially life-changing events. These could include buying a home, having children and saving for their college tuition costs, losing your job or experiencing the death of a loved one. Retirement is also a major consideration, because you need to plan for the things you would like to do during retirement, in addition to simply planning your retirement date.
You will also need to determine your tolerance for risk—whether you would be classified as a conservative or risk-taking investor, or if you are somewhere in between. When you talk about risk, most people immediately think of investment vehicles that are not guaranteed and, therefore, could lose value. However, there are many types of risk that impact the fluctuations in the market, such as inflation risk, political risk, and international risk. All of these affect the economic conditions in the investment markets.
Most recently, another risk has been more apparent than in the past—financial institution defaults, and the financial soundness of many public and private entities. Understanding the relationship between returns and risk is critical. For example, you may want to invest your entire portfolio in a certificate of deposit (CD) because it provides guaranteed returns. However, if the CD is paying 2 percent and inflation is at 5 percent, you are, in effect, losing money, because dollars today may not buy the same amount of goods and services tomorrow.
The old adage of “don’t put all of your eggs in one basket” is true with your savings as well. In other words, don’t leave all of your money in a vehicle you can not easily access in an emergency or in something that won’t grow well over time. For example, to meet a short-term objective of minimizing the burden of losing a job, you’ll want to keep approximately six months’ worth of living expenses in a protected, accessible fund in the event of an emergency. However, you face inflation risk if you leave the money there too long, making the same type of account inappropriate for your retirement savings, depending upon your age.
It may seem overwhelming, so partnering with an investment advisor to create a financial plan can provide tremendous benefits and help you focus on what is important. Perhaps more importantly, studies indicate that you will have a higher success rate of reaching your goals when there is a well thought-out plan in place to guide you.
One of the most valuable benefits you can receive by working with a financial advisor is the support and guidance during a down market. It’s not hard to stick with your financial plan when the market is going up and making money. The true challenge comes when the market is down and you are left with decisions to make about your investment portfolio. The experience and industry knowledge of a financial advisor can give you the peace of mind to stick to your plan during the tough times.
A Certified Financial Planner™ (CFP®) can work with you to develop and administer a comprehensive plan, which outline details such as the type of investment vehicles best suited to help you meet your goals or other solutions like legacy or estate planning. The cost for these plans can typically range anywhere from $1,000 to $5,000. Staying the course with one of these plans will help put you in a better position to answer “yes” to the tough questions like, “Will I be able to pay for my child’s college expenses?” or “Can I retire at 60?”
Don’t let the cost of a plan stop you from saving at all, though, because the sooner you start, the better. In general, most find it easier to stick to a plan if a commitment of time and money has been made to create one. However, you don’t have to purchase a formal financial plan before you invest.
Many financial advisors offer consulting services billed by the hour or simplified plans for free. Even the do-it-yourselfers can benefit from working with an advisor. While you will not receive comprehensive analyses, a financial advisor can help provide investment tips and techniques. You will leave with a strategic roadmap to help you understand how to invest your money. With investment solutions available to meet all of your short-term, intermediate, and long-term needs, working with an advisor will help you develop a much better idea of the types of investment products that are appropriate for your situation and, most importantly, those that are not.
Whether you engage a financial advisor or not, the bottom line is that a critical component of long-term financial success and security is successful planning.
