Can Financial Planning Increase Wealth?

Dana here.

When you tell someone you are a financial planner, you wouldn’t believe how many people still respond with “Oh! What should I be investing in right now?”

The answer to that question comprises about 10% of what a financial planner does. So much of the value lies in the other 90%.

But how do you quantify the value of that 90%? With an investment recommendation, you can measure the outcome. With a planning recommendation, it is more challenging.

In 2013, research firm Morningstar attempted to quantify the value in their paper Alpha, Beta, and Now… Gamma. I love their work. However, they framed the answer in terms of investment returns.

Vanguard did a similar paper in 2019, Quantifying Advisor’s Alpha, and they also framed results in terms of potential increased returns.

But it doesn’t work that way. When you act on a good financial planning decision, you don’t see the result show up in an increased investment return. Instead, you have more money because you paid less in taxes, or less in health care premiums, or you spend less of your own money to maintain your lifestyle because you got more from Social Security or an employer benefit plan.

Since there weren’t any papers that did an excellent job of illustrating the impact of these decisions, I wrote one. Published at the end of 2021 in Investments & Wealth Monitor, a publication of the Investments & Wealth Institute, Demonstrating Advisor Gamma Through the Household Balance Sheet illustrates exactly how smart advice delivers real value. And, how you measure the results!

In the paper, I discuss five metrics you can use to measure success. They are:

• Household fundedness
• Financial capital fundedness ratio
• Coverage ratio
• Liquidation value
• Increase spending

Not sure what each of those items mean? That’s ok, I include easy-to-understand definitions in the paper.

We use the exact planning process outlined in this paper with each financial planning engagement. And we use it for each ongoing client, every year.

We have a way to measure the potential impact of a decision. Does it have the potential to add real wealth to your situation? The metrics show us if it does. And by how much.

Some decisions have the potential to add a small amount of value, in which case you must consider the pros and cons carefully. We call these “yellow” decisions, where we discuss what is most important to you to develop a final recommendation.

Other decisions clearly add value or detract from value. We call these “green” or “red” decisions and we let you know whether you should or should not do it. Check the paper out and see what you think.

If you are looking for the type of planning where decisions can be measured, we may be a good fit. You can learn more about how we structure our services on the Services page of our website.

One thing to note – our current clients are our top priority and so we allocate time carefully to make sure we can take care of their needs first. On top of that, we’ve had a high volume of inquiries for the last few months and have a 4–6-week waiting list for scheduling introductory conversations. If you are thinking about doing a plan in 2022, we’d encourage you to start the inquiry process now and we will get you in the queue.

Our Next Free Online Webinar

Subject:
How to Make a Retirement Income Plan

When:
Thursday, January 20, 2022

What we'll cover:
How much will you need to retire, and where will it come from? 

In this class, we will show you how to make a detailed retirement income plan by creating a series of timelines that chart your future income and expenses. You will see how you can put together a crystal-clear picture of your future retirement income. 

We will go over:

• How to make a retirement budget and the most commonly overlooked expenses
• What a future income timeline looks like
• How to calculate how much you will need to withdraw each year during retirement
• Mistakes people make with their assumptions about inflation and rates of return
• How to see if your retirement money will last

 
We will leave plenty of time for questions and answers at the end.
 
Timing:
Thursday, January 20, 2022 5pm AZ/ 6pm CST/ 7pm EST

You can register at: How to Make a Retirement Income Plan

Podcasts & Video

Control Your Retirement Destiny Podcast
Need a good podcast to listen to?
Based upon the book, "Control Your Retirement Destiny," this podcast equips you with the knowledge you’ll need to avoid big mistakes while providing step-by-step instructions on how to align finances to support a comfortable retirement lifestyle.

Control Your Retirement Destiny

Client Testimonial
As crazy as it may seem, our industry was prohibited from using client testimonials until partway through 2021. We are so happy the rules changed! In the video below, you'll hear from the firm's longest-standing client. They've been working with Dana since 2002! Thank you Bob and Pam for the many years of trust and confidence you've placed in us, and for your willingness to share your experience in this video.

Client Testimonial - Bob & Pam

Financial Sense is an almost-monthly publication of Sensible Money. It's about financial planning and smart money decisions, not sensation and hype. You know.... sensible.