I’ve been a financial planner for over 22 years and I know that 9 out of 10 financial advisors miss the two most important steps in financial planning. Here’s what it takes to build a solid financial plan and more importantly, to keep it on track.
- A thorough review of the client’s current situation and their short, medium, and long-term goals.
- Getting a financial plan together that comes up with solutions to meet these goals.
- A thorough explanation of the worst case and best case scenarios of the plan.
- Implementation of the plan.
Here’s where everything breaks down in most cases:
- A semi annual or at least an annual review of the financial plan. Financial planning is not something that is done only once and then left on its own to produce results. There are too many variables, personal and economic, that can knock the financial plan off course. This step is not taken in most cases because there is no incentive for the advisor to review your plan. Once you have transferred in your assets to him or her, they have made their money and will likely call you again for your RRSP contribution. And that’s just about it.
- A semi annual rebalancing. Let’s say you have determined with your advisor, that your portfolio should be balanced, say 60% in safety and 40% in stocks. If the markets go significantly higher, all the sudden you’re 40% in stocks may have become 50% or 55% because of the higher markets. Now you’re too aggressive than your original plan so you need to sell those gains to bring your portfolio back to the original allocation. That’s where the term “selling high” comes from. Needless to say the opposite is true. If the markets go down, you might find that your portfolio is now 30% in stocks and 70% in safety. At that point you would sell some of your safety to buy the markets. That’s where the term “buying low” comes from. This is what rebalancing is all about.
In my opinion these two steps are the most important ones that must be taken for an investor to have long term success.If you’re working with a fee based financial planner who is not paid on commission they have an incentive to do a review for you and rebalancing because that’s how they get paid.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2015 Advisor Websites.
