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Introduction
Titles such as financial planner, financial advisor, and investment manager are often used interchangeably, leading to confusion for those seeking financial guidance. The reality is there isn’t a universally accepted distinction between “planners” and “advisors”, and you must look deeper into the services they provide to understand their approach and judge what suits your needs.
There are two main types of financial planning approaches: investment-focused and goals-based. Differentiating between investment-focused and a goals-based approach is crucial to enable consumers to make informed financial decisions. This article aims to clarify the distinction and highlight the benefits of goals-based financial planning through illustrative examples.
Definitions
Goals-based financial planning considers the entirety of an individual's financial situation, aiming to optimize long-term financial outcomes. Decisions made in financial planning can significantly impact wealth accumulation over one's lifetime, an impact that is amplified due to the power of compounding.
Compare this to investment-focused planning, which aims to accumulate wealth by focusing solely on asset appreciation and income generation, and may not take into account other aspects of an individual's financial situation. Both are important endeavors, but investment planning is a subset of comprehensive, goals-based financial planning.
Illustrative Example of Goals-Based Financial Planning
Meet the fictional family, Sarah and Joe, who face multiple financial goals. These goals include purchasing a home, starting a business, and career changes. The family struggles to rank and prioritize these goals.
Below is an image of Sarah and Joe’s current net worth for your reference:
We analyzed the following two scenarios:
Scenario 1: Impulsive Decision Making
In this scenario, the family prioritizes buying a home, leading to impulsive financial decisions. Savings are parked in cash and Joe's student loans are paid off in preparation for a home purchase, but then Joe quits his job for trade school. Please note, that even though impulsive, this family is making decisions we would typically think of as "responsible" including paying off debt and investing in his career. However, these financial decisions are made without considering long-term implications, leading to delayed retirement contributions and home purchase.
Scenario 2: Intentional Planning with a Goals-based Financial Planner
Seeking guidance from a financial planner, the family aligns their decisions with their long-term goals. Their goals didn't change, but priority is given to Joe's career change, with savings kept in a secure account. Investment is made in Sarah’s new business, delaying the home purchase but allowing for earlier retirement contributions and greater financial stability over the long-term.
Goals | Scenario 1 | Scenario 2 |
Retirement Monthly Expenses | $4,000 | $4,000 |
Home purchase | $450,000 in 2027 | $450,000 in 2030 |
Joe’s Trade School Tuition | $15,000 in 2024 | $15,000 in 2024 |
Sarah Starts a Business | $5,000 in 2034 | $5,000 in 2024 |
Joe Jr.’s college | $27,940/yr age 18 - 21 | $27,940/yr age 18 - 21 |
Key Differences and Outcomes
Scenario 1 focuses solely on immediate needs, while Scenario 2 considers long-term goals. We kept constant the investment returns, earning potential and inflation estimates.
Both scenarios maintain low expenses, but Scenario 2, with goals-based financial planning, results in significantly higher invested assets for retirement (about $1.5M higher, or 26% more).
Scenario 1
Scenario 2
The Role of Holistic Financial Planning
Holistic financial planning may be challenging to grasp, as its benefits are not always immediately tangible. However, running models and making informed decisions within the broader financial context can lead to life-changing wealth accumulation. Holistic financial planners guide clients through such decisions, aiming for optimal long-term outcomes.
Conclusion
While investment management is crucial to building wealth, goals-based financial planning is crucial for those seeking to optimize their financial resources across their lifetime.
At FWA we offer holistic, goals-based financial planning services with the option to add on investment management services, because we believe the optimal business model for consumers is to manage all of the aspects of your financial life with a single financial planner. To discuss how holistic financial planning can support your unique financial situation, schedule a free introductory meeting here.
Disclosure:
The information provided in this article is for educational and informational purposes only. It should not be construed as financial advice, nor is it intended to replace the advice of qualified professionals. The fictional examples and scenarios presented in this article are for illustrative purposes only. Any resemblance to actual persons, living or dead, or actual events is purely coincidental. Readers should be aware that financial planning involves risks, and the outcomes of financial decisions may vary based on individual circumstances. Past performance is not indicative of future results. Readers are encouraged to conduct their own research and due diligence before making any financial decisions. In conclusion, while the concepts discussed in this article may provide valuable insights into financial planning, readers should exercise caution and seek personalized advice from qualified professionals to address their individual financial needs and circumstances.
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