The financial services industry has evolved over the years. For decades, nearly everyone who worked in the industry was a stock broker and the job was to sell stock. Ideally, the stocks went up more than other stocks, but if they didn’t, successful brokers always had a hot tip on a new stock an investor could chase.

Financial Platform

In the last few decades, the industry has, thankfully, shifted to more holistic advice. You almost never hear the phrase stock broker any more, and the most common titles now are financial planner and financial advisor. While these titles are a step up from stock broker, for those individuals who do their job well, they are a bit misleading.

A good financial planner doesn’t just deliver a static plan, and an accomplished financial advisor isn’t focused on providing ad hoc advice. Instead, what they offer is a financial platform that serves as a foundation for your financial goals and provides you the framework, knowledge and tools to help you make better financial decisions. Whether you are considering working with an advisor (or planner) or want to build this platform on your own, it is helpful to understand what the platform should include. Here is our list:

A Plan Framework– The plan framework should be a mathematical model that maps a path from where you are now to your financial goals. The model should be clear about what you need to do – how much you should save, when you can retire, what you can spend, and so on – to make it likely you will meet your financial goals. The reason a good advisor uses the language of probability as opposed to certainty is that we can’t predict market returns with certainty. What we can do is run a series of stress tests modeling unfavorable market returns for a time to see what the impact is on your ability to meet your goals. Ideally, the goal is to construct a plan that weathers a period of poor returns while still allowing you to meet your financial goals.

The plan framework is also useful because it allows you to answer what-ifs. The what-ifs might be driven by current questions – what if you retire a bit earlier – or it might be driven by some unforeseen event that occurs years down the road. Having this framework allows you to understand the impact of the event and respond accordingly.

Knowledge – A strong financial platform includes both external knowledge and internal knowledge. The external knowledge covers a number of different areas, from understanding taxes to knowing how to construct a portfolio to being aware of strategies to mitigate risk. If you are looking for an advisor that has that knowledge, looking for a CFP is a good place to start, and you can find other tips on finding an advisor in these articles I wrote.

Understanding yourself – internal knowledge – is key as well. For most of us, a financial plan unfolds over decades and requires hard work, so knowing what financial goals are likely to motivate you and make you happy is absolutely necessary. At some point during your plan, markets will very likely see some alarming drops, so you’ll need to know how much investment risk you’re willing to accept. Some other questions include how much time you want to spend on financial issues, how you want to invest and what risks you want to insure against. Beyond the questions though, be aware that we all have blind spots, or cognitive biases that can negatively impact our investment performance if we don’t counter them.

Tools– The tools you use for your financial platform are largely driven by the sophistication of your approach. If your plan framework is a simple linear model with simplified tax assumptions and no stress testing, a spreadsheet might be all you need. That could also be the case if your approach to rebalancing – moving your portfolio back to its target allocation – was to do so annually or over some other set timeframe. A more complex approach would entail more specialized software, and in our firm we have separate software for financial planning, portfolio management, rebalancing and investment research.

Defined Processes– Defined processes keep you on task, and also help you maintain a consistent approach. Both are key to sticking to a plan over the long-term, and consistency of process is particularly helpful when it comes to investments. Not only can a process focus help you avoid making emotion-driven investment decisions when the market is at extremes, but it also makes it easier to identify flaws in your investment approach.

By putting together a platform with the elements outlined above, you have not only a financial plan, but an approach that allows you to make better financial decisions. Whether you work with an advisor or build the platform yourself, having the platform in place will provide great financial benefit through the years.

Micah Porter, CFA CFP is a financial advisor based in Decatur (Atlanta).

Minerva Planning Group is a fee-only financial advisory firm based just outside Atlanta in Decatur. You can contact them here.