What does a financial planner do?
Like everyone else, you have plans, dreams and set life goals for yourself, children and family. These might include saving for children’s education, buying a home, taking a super fun vacation, retiring comfortably, buying a business and similar things.This post will examine 7 Reasons why working with a Financial Planner enables you to make better financial decisions and capitalise on opportunities.
Financial planning is a process that examines your entire financial picture and helps you to properly manage your finances in order to achieve your needs, hopes, and dreams. A financial planner in particular usually chooses a holistic approach and then formulates an integrated investment strategy to achieve your goals. In addition, by setting up specific, measurable, attainable, relevant and time-bound goals (SMART goals) this facilitates goal achievement.
How is a financial planner compensated?
Financial planners are compensated in many ways including the following:
- A fee-only – planner develops a plan, implements it and watches it progress for a certain period of time
- A commission-only – planner creates a plan for free and is paid by a percentage of income the portfolio assets generate.
- A fee plus commission – planner charges a fee upfront and then receives a commission from the spread between the purchasing and selling price of investment products in order to keep the portfolio on course
- By salary – Applies for planners working in big financial institutions who create financial plans for high net worth clients. They are paid salary but there is also an executive fee.
- Percentage of assets – The fee is a percentage of the investment assets held by management
Always ask a financial planner how they are compensated so you can establish if there’s any potential conflict of interest in executing recommendations.
Annual checkups with a financial planner are recommended
Just like a vehicle requires annual tune-ups it’s encouraged to conduct annual checkups for your investment portfolio. Furthermore, every asset class is reviewed and compared against benchmarks and if there’s a variance a proper corrective action is recommended.
More often than not the bank of Canada hints at upcoming policy changes. Accordingly, an experienced planner is able to anticipate the likely effects on your investments from upcoming policy changes, specifically interest rate increases. This may increase the cost of borrowing resulting in falling stock prices, therefore adjustments are made to your portfolio ahead of time to mitigate the downside effect.
7 reasons to seek help from a financial planner
A financial planner works with you to determine a roadmap and an achievable savings strategy for you to meet your goal. If you currently don’t have a retirement plan in place. A financial planner will conduct a full financial analysis including cash flow, budget, expenses and then create a suitable plan for you.
Our Parents Generation worked for one company for life
The retirement planning process is a corroboration between you (the owner) and the financial planner in order to establish a proper retirement savings goal. Once a plan is set up a retirement savings strategy is mapped out for you to follow. Working towards a goal gives you a target to aim for in life. Unexpected events such as emergencies are factored into the plan with plans on how they should be handled.
If you are working for a company with a retirement plan like an Employee Share Ownership Plan, make it a point to enroll as soon as the policy allows. Set up a retirement account and have your payroll contributions matched by your employer; it’s free money.
In our parents’ generation, they used to work for the same company for 40 years or more. Therefore, after retirement, they automatically qualified for the company’s pension for life. Conversely, in this day and age, very few companies have in-house pension plans so it’s the employees’ responsibility to pick investments for their retirement account.
Meanwhile, government benefit plans like the Canada Pension Plan (CPP) payments are nowhere near enough to afford you the present lifestyle in retirement. As a result, aggressive retirement saving cannot be emphasized enough as it will shape your quality of life in retirement.Check out your current net worth using a calculator.
2.Pay off student loans quickly
College is super fun, definitely a cool place to develop and nurture friendships that can last a lifetime. However, the excitement wears off quickly, especially if you have student loans as repayments come due six months after graduation. Without proper planning, this could be a source of stress and may affect your credit, especially if you can’t afford to make payments.
This is a perfect scenario to see a financial planner to help you with the following:
- Set up a monthly budget and keep track of your monthly expenses
- Work with you to determine what percentage of your salary should go towards debt repayment in order to meet your repayment goal.
- How much should be allocated as an emergency fund. Life happens so it’s crucial to keep an emergency fund just in case you get sick and are unable to work.
In essence, following your student loan accelerated repayment plan will slash thousands off future interest payments to the government. In turn, this can free up cash for a home down payment as well as retirement.
3.Plan to buy a home
Since most of us don’t have huge sums of cash available sitting around in our bank accounts for a down payment. A financial planner will create a feasible and tailor-made financial plan to accelerate goal achievement. Normally the plan demands huge sacrifices on your part. Above all, it requires a complete lifestyle change in order to facilitate goal achievement.
Additionally, you need to make saving priority number one and treat it as a discretionary expense. Here are the most efficient ways to save for a home:
- Pay off high interest debts such as credit cards (this will free up more cash for savings)
- Cut back on eating out (make meals at home)
- Bring lunch to work
- Drastically reduce discretionary expenses (for example shopping for expensive clothes)
- If you have two cars, sell one
- Pull the plug on cable TV
- Cut off the landline
- Dial down expensive vacations
Another source for down payments:
- First time home buyers program – Available to Canadians where first time home buyers can use their registered retirement savings plan (RRSP) as a source of down payment. You borrow from your retirement fund interest-free and the government will give you 15 years to pay it back. This is a neat approach to borrow from your retirement savings tax-free.
- Ask the bank of mom and dad-Ask your parents or grandparents if they could gift you part of the down payment. This is totally allowed by all financial institutions as a legitimate source of down payment.
To purchase a home in Canada the minimum down payment requirement is 5%. However, if you put down 20% or more then you don’t have to get private mortgage insurance. In the long run, higher down payment results in lower monthly payments and interest costs.
4.Investments have leveled off or decreased in value
For the most part portfolio growth is a fantastic way to increase your net worth as well as future cash flow. It’s extremely exciting to see your investments are constantly trending up quarterly on your statements. However, this is not always the case due to poor decision-making or a poor economy where portfolio growth can level off or tank. For instance, if your projected portfolio growth was 7% annually for the next 3 years, in turn, your portfolio has achieved -5%.
This is a perfect opportunity to review your portfolio’s performance levels with your financial planner and make some necessary tweaks to keep you on track with projected earnings estimates.
5.You are self-employed
Being self-employed coupled with running a successful business is mentally and financially challenging. They’re so many moving parts that a business owner is solely responsible for in order to keep the business operating smoothly.
By employing a financial planner to handle some critical financial responsibilities. Certainly, this will free you to focus on growing sales or building relationships to expand the business.
Seeing a financial planner helps a business owner with the following:
- Establish a budget: This is a critical cash management strategy and sticking to a plan will help you to reduce stress and ensure your spending is in check. Calculate how much your monthly expenses are and then create a budget to meet the most important expenses first such as payroll, suppliers, mortgage or rent, utilities, and retirement.
- Get enough insurance: Life happens and a business owner can fall ill or get injured. Having insurance in place is a fantastic risk management tool because it protects you, your family and your business if you’re not able to work due to illness or disability.
- Line of credit: Debt can be a very valuable asset if used properly, for example, a line of credit can help fund for employee wages or business growth in times of financial difficulty.
- Build an emergency fund: When you’re running a business expect the unexpected to occur. Therefore be prepared for it with a rainy day fund only to be used for emergencies.
- Retirement planning: Most of the time business owners are so passionate about running a business and forget to start planning for retirement. You feel since you’re living the dream then there will be no retirement or you make it a low priority. It’s inevitable that a day will come when you have to hang the gloves and retire, so set aside a percentage of your profits for your retirement. Always pay yourself first and invest wisely to generate reasonable growth. Government pension payments are nowhere near enough to cover for the basic necessities of retirement.
- Maximizing RRSP or 401K contributions: A financial planner helps with determining your maximum RRSP or 401K contributions. Assuredly, meeting your maximum annual retirement contributions is a tax minimization strategy since if you make a higher contribution to your RRSPs it will lower your taxable income leading to lower taxes payable.
One critical point that a business owner should bear in mind is that you can’t do it all alone. Seek the services of a professional financial planner to help you with handling your financial issues.
6.You are starting a family
Getting married and having kids creates many challenges for a family. So many expenses can creep up at a moment’s notice like dental bills, prescription bills and car payments. Such expenses could force you to become over-reliant on credit to meet unplanned expenses, which could risk your family’s financial future.
Without a proper financial plan and savings strategy, it surely could be overwhelming when bills suddenly turn up. A financial planner will help you to set up a budget and workable savings plan to meet unexpected expenses.
A sudden financial windfall from an inheritance or a substantial profit from a sale of a business is overwhelming for an inexperienced investor.
In this situation, a financial planner is driven by your needs and goals. Suppose you’re 35 years old and you inherited 1 million in cash. Your goal is to retire in 10 years then live off of your interest and earnings from the portfolio.
A financial planner will establish;
- Your risk tolerance – that’s how comfortable you are with ups and downs in the market movement of your investments.
- Time horizon – in this case, 10 years before retirement and roughly another 40 years post-retirement.
- A portfolio or asset mix will be created for a10 year pre-retirement period based on your risk profile.
- After 10 years when you’re retired proper adjustments are made to the portfolios to generate desired monthly cash flow.
A good financial planner must first understand your goals then create a long-term financial plan for you. Stay away from financial planners who recommend products before first learning about your financial situation. An ethical financial planner always provides the best service truthfully. In fact, are called upon to advise you completely and in good faith.
Financial planners are licensed experts in financial planning but they corroborate with experts such as accountants, lawyers, insurance agents and make referrals accordingly.
What are your thoughts about the post? I would love to hear them in the comments below!
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I’m an extreme personal finance enthusiast and have been working in the financial industry for over a decade. The blog was started to further explore and share personal finance knowledge with the world.
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