Personal Financial Planning And Wealth Management

The concept of personal financial planning has had an interesting and somewhat complicated past. Although financial planning has always been about the process of determining whether and how individuals can meet their financial goals through the proper management of financial resources, planners have occasionally been sidetracked and focus too much on the resources component of the definition instead of the process component. In other words, financial products — such as an attractive stock or the newest insurance product — that are necessary to implement the planning process become predominant. Alternatively, some financial planners prefer to think of themselves as wealth builders or wealth managers to differentiate themselves from the product side of the business and, hopefully, attract the client with a higher net income or net worth. There is likely no subject in the personal financial planning process more important than the others, but planners who think of themselves as primarily wealth builders tend to place a large amount of emphasis on investment selection and investment management. As a result, those planners prefer to work only with high-net-worth clients and specify a minimum amount of investable assets (usually in the high six figures or even in the low seven figures) that can immediately be put to work in the capital markets. But wealth managers and financial planners are really beginning at the same place: the client’s financial goals. It is only the amount of financial resources a client can bring to bear in accomplishing their goals that distinguishes a financial planner from a wealth builder or wealth manager.

Regardless of whether these financial professionals think of themselves more as wealth managers or planners, they typically provide six main services for their clients:

• Insurance and risk management
• Employment benefits (often simply referred to as fringe benefits)
• Investments
• Income tax planning and management
• Planning for retirement
• Estate planning.

I suggest that you use these general categories to examine and review your own financial life. Keep in mind that numerous issues need to be addressed within each of these areas. Determining your own status in each category may help you begin the process of record keeping. Additionally, a professional financial planner will orient their work around each of these areas, and some will demonstrate a specialty in one or more of the subjects. Is there any importance to the order in which I have listed the general areas of financial planning? In terms of thinking about your financial life, there is. Your employment status determines whether you have any employment benefits to consider, but think of these benefits as nothing more than a temporary safety net that you can use to protect your financial well-being. When you change jobs, these benefits may or may not be portable (they probably will not be). This is why it is much better to build a permanent safety net constructed from individual life insurance and other benefits that you purchase on your own and that are intended to remain with you throughout your lifetime, regardless of your employment status. Because both temporary and permanent benefits are primarily secured so as to provide protection against possible future financial loss, they should be thought of sequentially as first in the financial planning process.

The PADD approach to building and managing wealth places the general categories of personal financial planning in a real-life context that can be used as a blueprint to financial independence:

• Protect yourself against the risk of catastrophic financial loss.
• Accumulate wealth through investments.
• Defend that wealth through prudent income tax planning and management.
• Distribute that wealth for your retirement and as part of your estate at death. First, however, because of their importance in the overall financial planning process as the “engine” in generating substantial wealth, we need to spend some time discussing investments and investment strategies. This begins with the need for a well-thought-out investment policy statement.