The True Value Of Financial Planning

Written by Hazel Secco, CFP ®, CDFA ®

Financial planning is often misunderstood as a means to solely generate wealth through stock market maneuvers and market timing. However, this perception is contrary to its true essence. At its core, financial planning is about orchestrating your financial future by exerting influence over controllable variables. They can be the duration of your employment, salary increments, bonuses, and even unexpected events like medical leave.

Drawing parallels with health management, one can appreciate the value of financial planning. This analogy allows for a more relatable understanding of its significance. Much like maintaining one’s health, effective financial planning demands proactive decision-making, thoughtful choices, and a forward-thinking outlook. Both endeavors necessitate a deliberate and long-term approach.

1. The Power of Efficient Delegation

It’s hard to put an exact number on the value of financial planning, but its benefits are clear. Financial planning is all about efficient delegation, making sure your energy and focus go where they’re needed most. Think of it this way: imagine you have 100 units of energy each day. This has to cover work, family, personal hobbies—everything that makes up your life. Spending time with family or doing something you love can actually recharge you, giving back some of that energy.

Preserve Your “Energy Bank”

A job you enjoy also adds to this “energy bank” and can boost your financial potential, too. When you feel satisfied and capable at work, it often translates into better performance and, over time, higher earnings. Financial planning helps you balance all these pieces so you’re using your energy wisely and working toward the life you want.

On the flip side, there are those tasks—like cleaning for some of us—that don’t bring joy or energy. They often take more out of us just to get a basic result. The same goes for cooking! If you’re low on energy but push yourself to make dinner, the meal may not have that usual love and enthusiasm behind it. This is why I’m a big believer in focusing on what you enjoy and do well. By sticking to your strengths, you can generate more positive outcomes and save your energy for things that truly matter to you.

My Perspective as a Business Owner

As a business owner, I’ve learned firsthand how crucial this idea of efficient delegation is, especially in the early stages. If you’re earning $200,000 a year and working a 40-hour week, your time is worth about $96 an hour. So, it makes sense to hand off tasks you’re less passionate about—like marketing, HR, or admin work—to someone who thrives in those areas. Not only does this free up your time and energy, but it also lets you focus on growing your business. When you let experts handle tasks in their area of strength, you’re building a stronger foundation for long-term success and growth.

The same idea applies to financial planning. Even if you’re pretty good at managing your own finances, you might not be the best person to handle all the complexities and make sure everything is truly optimized. Given our limited energy each day, it’s hard to put a dollar amount on the benefits of delegating this work to an experienced professional. But the real results—like stronger financial health and a clearer growth path—make it obvious that working with a financial planner can be a big win for your future stability and growth.

2. The Human Element in Financial Decision-Making

Behavioral Biases in Financial Decisions

Finance might seem all about numbers, but it’s actually deeply connected to our emotions. I talk about this in my podcast episode, “Emotions and Financial Decisions.” Different biases can sneak into our investment and savings choices.

For instance, overconfidence bias can cause us to overestimate our knowledge and control. It can often lead to rushed decisions and missed risks. Then there’s confirmation bias, where we tend to look for information that backs up what we already believe, instead of considering all sides. Lastly, herd instinct can make us follow what everyone else is doing, even if it doesn’t really align with our own goals.

These biases can get in the way of making clear-headed choices, which can lead to costly mistakes. However, understanding these tendencies is key to making better, more grounded financial decisions.

Emotional decisions—like buying or selling based on fear or excitement—can keep you from being fully invested, especially when the markets are up and down. A common example is when people panic during a downturn and pull their investments, only to miss out on gains when the market recovers.

Staying Invested with Confidence

To put it in perspective: if you had invested $1,000,000 from January 1, 1999, through June 30, 2023, staying invested would have grown that to 5.72 million. But missing just the 10 best days in the S&P 500 would have meant only reaching 2.62 million. This really shows how staying the course—and sometimes getting guidance to stay calm—is essential in financial planning. It’s why behavioral financial coaching can make such a big difference.

Just like doctors avoid operating on their own family members, you need to approach your own financial planning with caution. Emotions can cloud judgment and increase the chance of making mistakes in important decisions. Staying completely objective about your own finances is tough because we’re all emotionally connected to our money.

3. Opportunity Cost and Timing in Financial Planning

Opportunity cost is a big deal in financial planning. Let’s say you miss the ideal time for a tax strategy like a Roth IRA conversion—it can cost you. Imagine you could have converted your IRA at a lower tax rate, say 19% instead of 24%. That 5% difference in the amount you planned to convert could really add up. Missing this window might also mean losing out on using a strategy like the backdoor Roth IRA. Hence, timing can make a big difference in financial planning!

Think of it like healthcare again. Finding cancer early (like stage 1) versus at a later stage (like stage 4) can make a huge difference. Early detection might mean easier treatment, possibly avoiding chemo altogether, which can make recovery much smoother. When we catch things late, the chance for an easier path is gone, and you’re left dealing with stage 4.

Financial planning is a lot like healthcare. You can’t go back in time to make things better. How do you measure what’s lost when you miss an opportunity? Take the “three-year rule” as an example. If you didn’t transfer ownership of a property into an irrevocable trust three years ago, it’s now too late to exclude it from your estate. Timing is crucial in financial planning, and the choices you make (or don’t make) over the years can have a big impact on your financial future.

Quantifying the Value of Financial Planning

Morningstar’s Gamma

Financial planning offers an incredible amount of value that goes beyond what you pay for the service. In fact, a research paper by David Blanchett from Morningstar introduced a new way to measure this value, called “gamma.” Unlike traditional metrics like alpha and beta, gamma captures the full picture of your financial assets. It doesn’t only consider your portfolio, but also things like pensions, property, and other assets that may change over time due to life events.

While it’s hard to pin down an exact dollar amount, Gamma takes a more comprehensive look at everything you own. For retirees, the value of gamma is estimated at 1.59%, which can be a big boost. So, even if you’re paying an asset management fee of around 1.59%, the extra value that gamma provides makes financial planning a no-brainer. It goes beyond what a portfolio manager alone can offer.

Advisor’s Alpha

Vanguard recently released a research paper on “Advisor’s Alpha.” It explores how the value of financial planning can stack up in terms of asset management fees. According to Vanguard, the overall value of a solid financial planning strategy can be around 3% or even more. This figure includes cost-effective investment management, where investments are handled efficiently without unnecessary expenses. The idea is that it’s not just about having the lowest costs, but about maximizing returns after expenses.

Interestingly, Vanguard, which is well-known for its low-cost ETFs, doesn’t dismiss the value of active management entirely. They point out that, over the long term, both index funds and well-managed active funds with strong returns and reasonable fees can outperform the average mutual fund in their category. Essentially, if an actively managed fund offers value that justifies the fee, then the cost can be worthwhile.

Another point Vanguard emphasizes is the importance of sequencing asset withdrawals, which can potentially add up to 1.2% more in value for clients. Having a well-thought-out withdrawal strategy can make a big difference, especially when it comes to tax efficiency. The approach you take should depend on the types of accounts you have—retirement, non-retirement, or others—so you can make the most of your assets over time.

Work with a Fiduciary Financial Planner

Watching the stock market rise can be exciting, and it’s easy to get caught up in performance bragging, which can make planning seem less thrilling. But given the emotional side of investing and managing money, consulting a professional can be extremely valuable.

Fiduciary Financial planners can help you make the most of your financial assets, whether that means reducing risk, gaining more time, or optimizing what you have. Book a 15-minute intro call with fee-only financial planners and gain clarity and confidence in your financial future.

You May Also Like

Is a Roth IRA Conversion Right for You?

A Guide to Making Better Financial Decisions

References