By FPA member Joy Slabaugh, CFP®
Last Updated: February 22, 2010
Some investors relish the intricacies of personal finance and see each nuance as a challenge to be mastered. Other investors, terrified of overlooking critical elements, live in a constant state of financial anxiety, checking and double-checking their plan. And others hate every bit of financial planning but do it anyway. Whether you love it or you hate it, if you do your own financial planning, here are some recommendations from financial planning professionals to increase your success.
"The devil is in the details and for many do-it-yourself planners, the details go unnoticed," says FPA member Eric D. Brotman, CFP®, with Brotman Financial Group in Timonium, Md. and author of "Debt-Free for Life: The Tools You Need to Free Yourself From Debt." "Financial literacy is a must. Whether you are in dramatic debt or building wealth, you still need to be financially literate."
The financial literacy movement is growing and with it, opportunities to educate yourself. This site offers a variety of educational tools and services on financial planning including a free starter roadmap, email hotline, how-to guides and videos, articles, and much more. In addition to the FPA Web site, the Council for Economic Education provides online financial education resources for students and teachers.
"The internet is changing the way investors can learn," says FPA member Christine S. Fahlund, CFP®, and senior financial planner with T. Rowe Price in Baltimore, Md. Fahlund believes constant exposure to new information is a critical part of successful self-directed investing and that the internet can help. "Articles, calculators, retirement income simulators, and white papers are easily accessed online and can provide exposure to valuable information."
Brotman agrees that deliberate exposure to new information is essential and encourages thorough study. "The problem with articles is their brevity; they can only provide a few simplistic examples and a reader may not even realize there are enormous implications in his or her particular situation." For this reason, he recommends more comprehensive reading, preferably books written for financial planners. "Anything by Nick Murray or Michael Kitces is going to have solid, credible information and discuss financial planning techniques that anyone can apply, not just financial planners," said Brotman.
Brotman and Fahlund both caution investors that the most daunting challenge is not in assimilating information, but applying it accurately. "Developing a theory and applying it to real life are two very different challenges," Fahlund said.
One of the greatest hindrances to good planning is lack of objectivity. Fahlund has observed, "The most effective self-directed investors are very reflective and continually examining where they are headed and why." She points out that even then, success is difficult. "2008 was a disaster for self-directed investors who discovered they really didn't grasp what it meant to be diversified. There were educated people who thought they were doing the right thing but their portfolio design was not able to rebound as well as a properly diversified portfolio would have."
With so many nuances to planning, Brotman personally believes everybody should look for a second opinion. "There is no way anyone can or should do all of this alone," said Brotman. Fahlund agrees, "Having a second opinion verifying your application is an excellent idea." Fahlund, who has over 25 years of experience in financial planning, applies this belief to her own work. "I never work alone and any ideas we develop are vetted exhaustively before we make a recommendation."
Brotman developed his own system of review over 16 years of planning. "I meet with a study group of planners and we take turns picking apart one another's financial plans and looking for flaws." For his own financial planning, Brotman sets up yet another layer of objectivity and meets twice a year with another adviser. "I have another planner in my firm who takes a dispassionate look at what my wife and I are doing with our finances."
Because objectivity is so easily compromised, it is good idea for do-it-yourself planners to set up their own version of accountability. Think of it like an annual physical for your finances; prevention is generally cheaper and less painful than the cure.
"I had a couple come to me who had sixty thousand dollars of credit card debt, they were behind in their payments, but were prepaying their mortgage," Brotman shared. "I asked them how they got into the situation and they told me, 'The mortgage is our largest debt and we want it paid off.'" Brotman continued, "The mortgage interest was five percent and deductible and the credit card interest was over 20 percent. Clearly, they had not calculated the real cost of those finance charges." Arranging to meet occasionally with a financial professional can help investors spot mistakes early.
Fahlund and Brotman both encourage investors to avoid an all-or-nothing mentality when it comes to planning. "I see a lot of self-directed investors who have trouble defining their overall strategy," says Fahlund. This doesn't mean they can't direct their own investing instead, "They come to us for advice on a strategy they can implement."
"People have different tendencies and interests," Brotman acknowledged. "I have several clients who have done a great job in certain areas but come to me for help in other areas." He referenced one particular client couple who came to him to double-check their planning. "There were some things they did incredibly well and other areas where they made terrible mistakes. Unfortunately, those problems had detracted from the overall success of their financial plan."
Assess your own interest in financial planning and consider working with a professional on the aspects you dislike. Find a financial planner who can provide the level of input you want in the areas you need. Chances are, if you don't enjoy a topic, you will be less motivated to stay knowledgeable on the subject and thus, more likely to make mistakes. In the areas of planning that interest you, develop a system for staying abreast of information and make it a goal to increase your knowledge base each month. In addition, consider asking your planner to review your work at least annually.
FPA member Joy Slabaugh, CFP®, is a speaker, and writer in Delmar, Del.
Securities and investment advisory services offered through H. Beck Inc. H. Beck, Inc. and EST Financial Group are not affiliated.
