What is Financial Planning?

America really is a nation of investors. In fact, a report by the Investment Company Institute (ICI) showed that as of 2019 more than half of all U.S. households had financial assets under the management of investment firms and individual managers. That year, actively managed funds combined held some $23 trillion in personal financial assets across the spectrum of investment vehicles.

According to a survey done by the Certified Financial Planner Board of Standards, nearly a third of American households reported using a financial planner. Financial planning is an area with strong potential for growth as Americans become more savings-minded and work to eliminate credit card debt and discretionary spending in favor of peace of mind and a more comfortable retirement.

Financial planners help clients prepare financial plans and then assists them with finding the resources necessary to follow the plan. Financial planning is the process of using financial tools to balance the goals of the future against the needs of the present. It involves making smart decisions about budgeting, investing, and borrowing. The Financial Planning Association offers an outline of the process, breaking it down into six steps:

  • Establish goals
  • Gather data
  • Analyze and evaluate financial status
  • Develop a plan
  • Implement the plan
  • Monitor the plan and make necessary adjustments

Financial planners guide clients through this process by identifying what they hope to do with their money, and then determining what strategies and financial products will be best suited to accomplishing these goals. Financial planners have a detailed knowledge of financial products, which allows them to determine the right mix of annuities, mutual funds, stocks, bonds and insurance options necessary for clients to meet their objectives.

Saving money to put kids through college is one of the most common financial objectives that American families set for themselves. Financial planners will be able to project what this will cost, look at what the family can afford to save for this future expense, and identify the right savings vehicle to reach the goal after considering the potential rewards and risks. Student loans may also factor into the planning, since debt can be used wisely in certain circumstances. This planning helps the family balance their current expenses with their future dreams.

Career Paths and Specialization

The roles of financial planners are varied, and there are ample opportunities to specialize. Some financial planners become experts in a single product, while others will focus on the needs of a certain client group. Specialized financial planning careers often partner with other specialists to round out the financial planning services they can offer their clients.

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Generalists can also prosper in this business, serving the needs of varied clients and offering a full line of products. Areas of specialty include:

  • Insurance planning and risk management
  • Employee benefits planning
  • Investment planning
  • Income tax planning
  • Retirement planning
  • Estate planning
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Stocks and bonds are specialized investment vehicles, and traditional stockbrokers often earn a CFP (certified financial planner) designation so they can fit these investments into a complete plan for their clients. Mutual funds can also become an area of expertise, and mutual fund portfolios form the core of financial plans offered by many planners. Many individual stock pickers lost their chance to retire early when markets crashed in 2000, and unfortunately many shell-shocked investors missed the recovery after the 2009 stock market bottom. Professional financial planners adhering to ethical standards stay focused in turbulent market conditions and help clients realize their financial goals even during tough times.

Less well understood than stocks and mutual funds are life insurance, annuities, and alternative investments. These products require a great deal of analysis, and some are loaded with fees that make profits a distant dream. Financial planners can specialize in matching the right annuity or alternative investment to meet clients’ investment goals.

Financial planners also become experts in the financial needs of a particular group. A family looking to buy their first home or pay off student debt will have a different level of cash flow and specialized needs than people who are preparing for retirement after having already put their children through college. The vastly different financial planning needs of different types of clients offer savvy financial planners the opportunity to develop specialized marketing tools and services.

Some CFPs will also teach industry education courses for new CFP candidates or offer continuing education courses. Research is a part of the job for many financial planners, and there are many publications that carry the latest information from practitioners dedicated to the continued evolution of the profession.

CFP Certification

An arduous examination process ensures that only well qualified candidates earn the Certified Financial Planner (CFP) designation offered through the Certified Financial Planner Board of Standards, Inc. The CFP Certification Examination is a 10 hour exam that is completed over a day and a half. The exam fee is $595. Successful candidates have reported that it takes up to 1,000 hours of study time to prepare for the exam, as it covers 100 different, but closely related, financial planning topics.

Before earning the CFP designation, professionals must show that they have three years of financial planning-related experience. This is often accomplished by working as an associate with a financial planner who already holds the CFP designation.

After earning the designation, all CFPs are required to complete 30 hours of continuing education every two years. This ensures they stay current on the constant changes in the field of financial planning. Ethics training is a required part of the continuing education process.

Financial Planning Degree and CFP Programs

A bachelor’s degree in any discipline is required of CFP candidates. Many colleges offer coursework designed to prepare undergraduate students to take the CFP exam. Those pursuing a Bachelor of Science in Financial Planning, which is offered at some colleges and universities, would take specific courses intended to prepare them for the CFP credential through a very targeted curriculum. These classes would cover topics in all major areas of financial planning:

  • General principles of financial planning
  • Insurance planning and risk management
  • Employee benefits planning
  • Investment planning
  • Income tax planning
  • Retirement planning
  • Estate planning
  • Ethics

Although not required, many professionals find additional education to be helpful, and more than a third of CFPs actually hold an advanced degree. A Master of Science in Personal Financial Planning is available for those interested in graduate level study. Programs at this level expand on the body of knowledge necessary to be successful in the CFP testing process and also include more advanced courses in investment analysis and economics.

Some schools offer postgraduate certificates or minors in financial planning. All programs specific to financial planning will include courses in finance, accounting, statistics, and psychology.

Professional Ethics and the CFP Designation

Financial planners can practice without earning the CFP; however, consumers often look for planners with the CFP credential, as this indicates proven expertise. Consumers also tend to feel that professional testing and standards impose a higher ethical standard on the person being entrusted with their personal financial resources. For this reason, the general public is more likely to do business with a CFP than a planner who doesn’t hold the designation. A recent CFP Board survey found that 85% of respondents considered successful completion of a certification examination to be either “very important” or “extremely important”, and 97% said the most important standard for financial planners was adherence to a professional code of ethics.

CFPs have the ethical responsibility and the professional obligation to put their clients’ best interests first. They are required to provide all the relevant facts to clients and potential clients, including information on all fees and commissions. Many consumers are surprised to learn that their best interests are not actually protected by the laws that govern most financial transactions. A financial planner operating without a personal and professional code of ethics could build a plan that recommends the products that pay them the highest commission, even though these products may not be in the client’s best interest. However, a CFP operating within the code of professional ethics will often encourage clients to hold large cash emergency funds that deliver no commissions. Integrity and ethics in financial planning results in higher client satisfaction and for this reason CFPs often enjoy long-term relationships with their clients.

Salary and Employment

According to the U.S. Bureau of Labor Statistics, financial planners nationwide earned a median salary of $89,330 as of May 2020. Planners with the CFP designation are known to earn significantly more, and likely fall at the higher end of the salary range reported by the Bureau, which shows those within the 90th percentile earning more than $208,000.

Financial planners are compensated in a number of different ways. Some work for large financial services firms, including major national investment advisors like Edward Jones that have thousands of neighborhood offices where planners meet with clients face to face. Working for firms of this sort almost always means earning a commission for getting clients into different investment products.

Though securities firms and brokerages represent the biggest employers in the financial planning industry, accounting for 58% of all employment, nearly 19% of financial planners are self-employed, working closely with wealthy individuals and families and getting most of their business by word of mouth. More often, these independent investment advisors are paid a percentage of the total client assets they manage. Self-employed CFPs are, however, in the unique position to decide how they want to structure billing for their services. Some offer their services on an hourly basis by charging a flat fee for planning, while others elect for a percentage – usually 1%-2% – for total client assets under management

May 2020 U.S. Bureau of Labor Statistics salary and labor market information for Personal Financial Advisors is based on national data, not school-specific information. Conditions in your area may vary. Data accessed April 2021.

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