Building Your Financial Team: Financial Planners

Farm Business Management Update, June 2000

By Alex White

Financial matters are becoming increasingly complex -- tax regulations are always changing, new investment vehicles are always being developed, estate planning laws are constantly being revised. It is easy to get confused and fall into the "One Step Forward, Two Steps Back Syndrome." Basically, this syndrome is where you make a financial move that is intended to benefit you in one way, but it ends up hurting you without your knowing it. An example is trying to save money by minimizing your annual income taxes -- while this may lower your tax bill, it also drastically reduces your future Social Security benefits and the amount you are eligible to invest in a qualified retirement plan.

One person would find it hard to keep up with all these changes and manage a business (or family) at the same time. That is why you should consider forming a financial advisory team. Let the experts keep you informed about the issues that affect you, so that you can make informed decisions that move you toward your financial goals.

So who should be on my financial advisory team? Start with a registered financial professional, such as a Certified Financial Planner (CFP), Registered Financial Planners (RFP) or Registered Investment Advisors (RIA). These planners are going to be the "quarterbacks" of your team. They will work with the other members of your financial team to make sure that you get the most current information. Most CFPs have training in five financial areas: Budgeting and Investing, Insurance Needs, Estate Planning, Retirement Planning, Tax Management. Thus, they are able to coordinate your financial moves to help you reach your goals. Because they are certified, they must participate in continuing education programs to remain current on financial matters, and they must follow a code of ethics to maintain a high level of professionalism.

Who are the other members of my financial team? Other possible members for your financial team include:

Because these professionals specialize in certain areas, they are able to provide you with accurate, up-to-date, in-depth information. It is advisable to work with professionals who maintain a solid working relationship with other members of your financial team. For example, you will have a much stronger team if your financial planner, accountant, and attorney are able to work directly with each other.

How do I go about selecting a financial planner? Your financial planner is basically going to be your partner, so take care in selecting that person. He/she will be helping you manage your money, which is a serious responsibility. Interview at least three individuals before you commit to one. Some questions you should ask during the interview are

• What is their professional background?

  Are they certified by a legitimate agency? Are they affiliated with a reputable firm, or are they independent? Many people worry that a financial planner who is affiliated with a certain firm will try to sell them only that firm's products. As long as they are quality products, this really is not an issue with which you should be concerned.

• In which professional associations are they members?

  Do they keep up-to-date through professional associations? Are the associations reputable and recognized by the profession?

• How many years have they been in the profession?

  If possible, look for proven performance from that individual over a 5- to10-year period. One thing to consider is that a majority of the current financial planning professionals have not lived through a severe economic downturn. What may cause them to be less risk-averse (more aggressive) in their recommendations? Another question to ask is how long they have been practicing in the community -- have they put down roots in the area or are they likely to move to a new area in the near future?

• Ask for references from their existing clients.

  Contact the planner's current and former clients to see if they are pleased with their performance and level of service. Be sure to talk to clients who are in a similar financial position as you are. Do they have other clients who are agricultural producers? Do they understand the risks, debt loads, and cash flows associated with agricultural operations? Try to work with a planner who is familiar with your industry/business.

• Ask them for a sample financial plan.

  Try to get an idea of the type of financial recommendations the planners will make. Are their attitudes fairly conservative or fairly risky? What have they recommended for others with similar goals, income, and net worth? Don't expect to get a complete financial plan in five minutes. Try to determine if you will be comfortable with their recommendations and their style.

• What is their fee structure? How do they charge for their services?

  Some financial planners charge a straight annual fee. Others charge a fee or commission (approximately 1 to 5 percent of the funds managed) for each service they provide. Some charge an annual fee and a fee/commission for services rendered. Ask for a written document that clearly states their fee structure. If you are confused about the fees, ask the planner for a "dollar-for-dollar" example -- "exactly what will it cost me?"

• Do they understand your financial goals and your risk tolerance?

  The most important aspect of choosing a financial planner is determining if they do not understand your goals and risk tolerance. If they do not, you will be wasting your time and money! For example, if they recommend very risky investments, and you do not like to take much risk with your money, you will not be satisfied with your working relationship. It is extremely important to identify your financial goals before going to see a financial planner!!

What to Expect from a Financial Planner

Your financial planner should be able to

• Assess your relevant financial information, such as tax returns, investments, retirement programs, will, and insurance policies;
• Review your net worth statement (balance sheet), examine your cash flow and debt structure, and make appropriate recommendations;
• Identify financial areas where you may need help, such as building your retirement income, improving your investment returns, fine-tuning your insurance needs, tax-saving suggestions, etc.;
• Help you decide on a financial plan, based on your personal and financial goals, and your investment risk level, by systematically laying out your options;
• Provide you with a clearly-written financial plan specific to your situation and discuss it thoroughly with you to make sure you are comfortable with it;
• Help you implement your financial plan, including
• referring you to or working hand-in-hand with
• specialists, such as lenders, lawyers, accountants, etc., when necessary;
• Review your financial plan periodically and suggest options to improve your program when needed; and
• Provide monthly or quarterly statements indicating the condition and performance of your account, including account size (dollar amount), past transactions, average rates of return for the period, etc.

Financial planners can be a great asset to you in reaching your financial goals. Think of them as your financial quarterback - leader of your advisory team. Think of them as your financial partner. Work with them to develop and implement a sound financial plan for you and your family.

Contact the author at axwhite@vt.edu.

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