The characteristic that distinguishes 4J Wealth in our industry is our continuous focus on providing clients with comprehensive financial advice. At the root of comprehensive advice is a deep understanding of all the moving parts of your financial life and how they are coordinated. Unlike most products or services, financial planning is not static, it is iterative. It is unique because it necessitates a third party (financial advisor or someone with broad and deep personal finance knowledge) who can separate many of the innate biases that an individual has when evaluating their own life situation. For most people, over a long enough timeframe, there will come a time when working with a financial advisor is a better alternative than doing it themselves. Why is this the case? It is a guide to better decision making.
At the core of financial planning, there are a couple of truths that are self-evident. As it pertains to money, time is the single greatest determinant of financial success. The earlier you start investing, and the longer you live, the more money you will have. This is not a linear relationship; it is exponential. The other is finite resources. If you consider your net worth, it is a combination of two things 1) your current resources (money saved) and 2) how your future earnings will translate into assets (savings).
The starting point in financial planning is to get an accurate account of the resources available today. Resources are comprised of assets, which are usually in the form of cash, real estate, stocks, bonds, and future income potential. Debt owed is a subtraction from resources and decreases as the debt is paid off. Over time, your resources will change as a function of the change in value of cash, real estate, stocks and bonds and debt. The change in value of stocks and bonds is where the finance industry spends 99% of its effort. It’s called the investment management industry and publications like CNBC report financial news 24/7. When most people hear ‘financial planning’ or ‘investments’, they think of this.
When financial goals are integrated into this framework, it becomes more difficult to clearly think through the optimal strategy (and tradeoffs) to achieve those goals. Financial goals include things like paying for your children’s college, retiring at a certain age, leaving an inheritance, or purchasing a second home. All these goals occur at a specific point in time and require resources to pay for or fund. Financial planning aims to prioritize these goals in order of importance, not dollar amount, and then recommend which resources should be directed towards which goals. Integrating your financial goals into this framework means looking at how savings for one goal means there is less to save for another. If your highest priority goal is early retirement at 60, and you also want to pay for college, and both cannot be accomplished based on your projected resources, this serves as valuable guide to decision making. Given the constraint on resources, several approaches can be considered. For instance, you can take more risk in the money earmarked for retirement to obtain a higher return. If that is not compatible with your tolerance for market volatility, an alternative could mean working another year or two (increasing resources by not depleting them). If neither of these make sense, it may mean having a talk with your child about financial aid and student loans (a great potential teachable moment).
Over the course of a lifetime, your life circumstances will change considerably, likely more than you expect. Look back at the last 5 years and you will see exactly that. Look back 10 years, and it will look even more profoundly different. Financial planning is not about predicting how your life will look in the future, it is about making better decisions today to reach your financial goals tomorrow. Making the best possible decisions today requires a complete understanding of your resources, your life circumstances, goals and how they coordinate with one another. The process is iterative because your life circumstances and goals evolve over time and the world evolves as well. The financial planning issues that a medical resident confronts are vastly different than a married couple looking at nursing home options and ensuring their estate planning documents reflect their wishes.
The apex of financial planning is the relationship between the advisor and the client. Up to this point, I have only mentioned the things that can be counted: numbers, facts and figures. The reality is that making decisions around money is not something that can be reduced to a spreadsheet, despite what academia suggests. The psychology of money is personal, and it impacts our decisions around money in a profound way. An advisor’s understanding of someone’s relationship with money, how they grew up, and what money beliefs are ingrained inform which path will make most sense for them. Equally important, the advisor can act as a sounding board and trusted advisor during times of uncertainty and fear to reduce poor, reactionary decision making. The decisions we make or do not make during critical life moments often define our financial future.
Done correctly, financial planning often results in greater levels of trust between the client and advisor. This trust is an incredible liberator for the client. Money worries often cause anxiety; knowing that you have an advisor who has earned your trust over the years can significantly reduce the stress in your life. Why then is it that people always are most interested in a hot stock tip or where the market is going? The reason is that we are not wired from an evolutionary perspective to make good financial decisions. It takes discipline, knowledge, and wisdom to override our natural instincts around money. Rather than focusing on financial planning and what is controllable (savings level, asset allocation, tax strategies, insurance), people are pulled into the noise of financial media, market gyrations and how their 401k did over the past month. This noise profoundly influences our decisions around money. Financial planning reduces the noise.