In my post “The Big Flaw in Retirement Calculators”, I discuss the risk of using an assumed, fixed rate of return in the typical retirement calculator. However, many financial advisors use this flawed calculation every day to plan their clients’ future. This begs the question, “If this practice puts their clients at risk, why is it commonplace for advisors to do it?” The answer to this is part of a larger, overlying issue: financial advisors are focusing on the wrong things when it comes to creating financial plans for their clients, and it may have substantial impact on their clients’ lifestyle today and in the future. This is the first entry of a multipart series to delve deeper into this issue.
The intent of this series is not to attack the financial planning industry. Often, financial advisors aren’t even aware they are compromising their clients’ lifestyle; they are simply following methods that have been used for decades. Instead, my intent is to share what I believe to be the best way to plan one’s financial future and also identify practices to avoid.
In this post I’ll frame the primary issues:
- Many financial advisors are fixated on investments and little else. In their minds, investments = financial planning, so it is the first and principal topic to address and discuss with clients. This could not be further from the truth. In fact, this is what I call “financial planning malpractice.” Investment selection is the last and least important step of the financial planning process.
- No one can see into the future to know what will happen in the investment markets. This creates uncertainty regarding your financial future.
- Your goals and priorities change over time, thus your financial needs and wants change along with them. Your priorities and lifestyle at age 75 will be much different than your priorities and lifestyle at age 30. This contributes additional uncertainty. Advisors often ignore this and assume spending is constant year to year.
- Life is short. You have better ways to spend your time and energy than selecting investments, rebalancing your portfolio, and creating/monitoring a sustainable long-term financial plan. Yet because of frustration with advisors who focus on investments and past performance instead their clients’ life goals and future, many people choose to go it alone or jump from advisor to advisor. This eats valuable time that could be dedicated to more enjoyable pursuits.
My next post will explore the consequences of not properly addressing these issues.
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