If you watch Suze Orman’s TV programs you will hear her comment that people can be their own financial planner. Before I answer this question, I think I need to clarify what type of financial planner I believe Ms. Orman is referring to.
There are several types of financial planners, but for simplicity I will group them into two categories: Fee-only planners and “commission planners” who earn commissions by selling a wide range of investment and insurance products and provide financial plans and advice.
Within the fee-based category, there are 2 types of financial planners, those that help advise clients on every financial detail, and those that specialize in areas such as investments or retirement planning.
The type of financial planner that Ms. Orman seems to be referring to are fee-based planners who meticulously advise clients on every financial matter year-in and year-out for a fee. These planning firms use sophisticated planning and investment software, and are staffed by a wide range of highly educated people in many areas of financial topics. Professional planners providing this high level of service charge between 0.5% and 2% every year. There is a wide range of fee structures, but if you have less than $1,000,000, you should expect to pay over 1% of the value of your investment assets, depending upon the firm’s minimum fee and the size of your assets. Usually the fee percentage is smaller for larger amounts. Examples: a 1% on $500,000 would be $5,000. A 0.75% fee on $5,000,000 would be $37,500.
Suze Orman writes:
“we’ve become a nation addicted to contract labor. What past generations did for themselves, we now ‘outsource’ to someone else without a second thought.”
In order to answer the question “Can you be your own financial planner?” Three questions must be addressed:
- Can you afford a financial planner?
- Who ultimately is your real financial planner?
- Can you go at it alone?
Can you afford a financial planner?
The Financial Planning Association answered this question in their May 2007 Journal of Financial Planning article that said only about 2-3% of middle income people have credentialed financial planners, and one of the main barriers is cost. Most firms have required client asset minimums of about $500,000, therefore they target the top 5% wealthiest people.
In order to determine whether you can afford a planner you must consider whether you accumulated enough money to meet their minimums, whether you can afford to pay them out of your budget, and whether you can justify the cost. Will the fees be offset by increased investment performance (higher rate of return or less volatility) or will their advice save you money by better decision making and helping you spot possible problem areas with their educated eye?
Who ultimately is your real financial planner?
Ms. Orman further writes:
“I think it’s imperative for you to do as much of the work as possible, rather than turning control over to someone else: your finances.”
I completely agree with Ms. Orman on this point. Ultimately we are responsible for our own financial future, whether we hire a financial planner or not. It is our decision to hire someone, to implement their recommendations, and to choose to what degree you will be engaged in the process. So whether or not you hire a planner you are still ultimately responsible for your finances. You are your own financial planner by default unless you give complete responsibility over all of your finances to someone else.
How can you be your own financial planner?
Start by learning about financial matters by reading, books, blogs and taking classes. Secondly, manage your finances by budgeting, balancing your checkbook and organizing your records. Lastly, create a written financial plan. All of these are made simpler and cheaper than ever today through financial planning softwareand the internet. It also takes courage to get started. Many people are afraid of financial matters, but if you can earn a paycheck you are intelligent and capable enough to become very financially literate.
I really appreciate the fact that Ms. Orman empowers and equips women to take control of their financial lives, because the research that we have done indicates that women are at a particular disadvantage when it comes to financial planning and retirement.
Can you go it alone?
Do we need professional trusted advisors: financial, investment, tax, legal, and insurance? I believe the answer to this question is yes, but not everyone can afford to put them on retainer and pay them fees every year.
It is my belief that you should do as much as possible of the managing, planning and self-education about finances on your own. When it comes to implementing and reviewing your financial, investment, insurance, estate and tax plans you should hire advisors to help you — but you probably won’t need each of them every year. You should also revisit your plan at least once a quarter, when thinking about buying a car or home, or if you are facing a significant life change.
To find the best financial, investment and insurance advice, ask friends and relatives for referrals. Then determine their experience, service, credentials, fees or commissions, complaints/regulatory infractions, and personality. There are some good financial planners that will advise you and charge you only an hourly rate, and there are some good commission based planners that can help you as well.
When should you hire a financial planner?
There are several situations which probably require the need to hire a financial planner. If you are going through a death or divorce, have a special needs child or spouse, or retirement is soon approaching consider hiring a planner. In addition if your financial life has many moving parts, large investment assets, high income, you own a business or real estate, have a blended family, you probably need the advise of a financial planner. I often meet couples that both have very healthy incomes and are extremely busy between working over 50 hours a week, traveling, and going constantly to children’s activities — they probably need a financial planner.