Investing vs. Planning

Submitted by Larry Frank Sr. on Thu, 03/21/2013 - 12:00pm

Financial planning, investment advice and retirement planning are different services that financial advisors give. They overlap and reinforce one another, and they each are vital. But it pays to know what you get and what you need. When choosing an advisor, pay attention to the advisors’ pay structure and also whether they take control of your assets – to make sure that their work focuses more on planning for goals rather than just investing. Financial planning is more than just investment advice. It takes you from where you are to where you want to go in the future. It encompasses, tax and estate planning, college savings and any other goal that you want to meet in addition to retirement planning, which is a common goal for everyone. Investment advice is structuring your resources toward that goal and many confuse the investments with the goal. Goals might be: having enough money for retirement, to pay for your kids’ education, to afford a second home, to start a business. Without a goal, it is just investing for investment’s sake. In these situations, benchmarks like the S&P 500 have nothing to do with you are what you try to beat. Instead, staying on track or moving toward your personal goal is much more meaningful as a signal of progress. Businesses plan all the time. The problem is that people don’t, but they should. Without a plan they end up with random results and wonder what happened. However, the real goal is managing wealth in such a way that the goal is not only achieved, but sustainable. For example, the goal of retirement planning isn’t to just retire. The goal is to afford a decent quality of life throughout retirement.

Which type of advice you want to emphasize should guide your choice of advisor. When you pick one, think about what kind of control you give him or her. You may choose an advisor who has discretionary control over your assets. In other words, you give the advisor authority to decide when and how to invest your money and make changes, based on written guidelines. Alternatively, you may choose an advisor who has no discretionary authority over your assets. They advise and you decide. In reality, one with no authority is closer to a true advisor. An advisor with discretionary authority is closer to a money manager. In general, but not always, the non-discretionary advisor has a broader perspective because the emphasis is placed on goals and the plan and not just investing. How you pay the advisor also matters. Some are paid commissions from selling you financial products; others take a fee as a portion of your assets. Some charge an hourly fee or retainer. To be clear, compensation is not how you distinguish one advisor from another. Generally, an advisor who does not take commissions is more likely to advise in your interest than one whose paycheck depends on convincing you to buy products. When you are interviewing someone to help you, keep in mind what kind of planning you are trying to do and what kind of control you are willing to give up. Don’t let an advisor steer you into just investing. Most of the conversation with your advisor should be on the planning topics for you and less on investment advice. Investing is a means to support a plan, not the plan itself. When you are interviewing someone to help you, ask these helpful questions from the SEC. The National Association of Personal Financial Advisors(NAPFA) also has a list of questions to ask your advisor. The Securities and Exchange Commission has a list of helpful resources for finding the right advisor. The SEC’s Investor Alerts website is also helpful for separating legit advice from fraud. In addition, AdviceIQ lists local advisors in its system, ranking them by various metrics, such as the most clients who are widows or have $250,000 to $500,000 in assets or specialize in doctors. Plus, all of the advisors that appear on this site have flawless regulatory records. Remember: You aren’t arranging your financial affairs to buy a product. You need the service and process of planning as the foundation where financial products are almost an afterthought. Follow AdviceIQ on Twitter at @adviceiq. Larry R. Frank Sr., CFP, is a Registered Investment Adviser (California) in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has an MBA with a finance concentration and B.S. cum laude in physics with which he views the world of money dynamically. He has peer-reviewed research published in the Journal of Financial Planning. www.blog.BetterFinancialEducation.com.

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