6 Things You Must Know About Financial Planning

  1. The financial advisor should work for you on only a fee basis not on a commission based compensation structure. Advisors who work on commissions are generally more likely to recommend frequent transactions, which may not be in your best interest. Also, an advisor who works on commissions may have ulterior motives because they make money both when you buy and when you sell securities.
  2. A financial advisor working for you must know the risks you are willing to take and stick to those terms. A good way to do this is to look at historical performance of the potential portfolio in bear markets to get a feel for how the value of that particular asset mix can fluctuate. An advisor who knows what risks you are willing and not willing to take will adjust your portfolio as need be to keep it focused on your financial goals.
  3. An advisor should work with you to set goals for your target rate of return. A fee only advisor can show you different models and different types of investments that have the potential for reaching the goals that you have set.
  4. Make sure the advisor writes an investment policy statement (IPS) for you. The IPS should have a well laid out instructions that cover the following goals and risks: target return, tolerance of risk, time horizon, tax restraints, and estate planning needs.
  5. The advisor and client should view the IPS as a long-term instruction manual for your financial future. Portfolio management should be consistent with the elements of the IPS, as related to specific target allocations, rebalancing, asset selection, liquidity, and changes in the risk profile.
  6. The advisor you choose should give you a quarterly report of your financial portfolio’s performance, as related to your financial plan. At least quarterly, your advisor should determine if the market value of your portfolio is growing, at a rate that will allow you to achieve your set financial goals. They should also be up front in recommending changes that they think should be made to achieve your financial goals.