While it’s common knowledge that creating a suitable financial plan is important to ensure future security, sometimes other pressing matters take precedence. For many busy executives, the demands of career can eclipse the need for personal financial stewardship.
“Many times, business owners are very busy running their own businesses and can ignore their personal financial situations,” points out Stephen Kearns, senior vice president and regional manager of wealth and institutional management at Comerica Bank. “Since both are interrelated, it’s very important to take a look at how one pool of assets affects another.”
Smart Business spoke with Kearns about the importance of having a customized financial plan, what should be included and how to find a financial planner that has your best interests at heart.
Why is it important to create a customized financial plan?
A customized financial plan can literally be the blueprint for a solid financial foundation. As an individual who may be a business owner or be of high net worth, it is important to take a look at your overall financial situation as it relates to assets, expenses, lifestyle currently and beyond retirement and how you want to pass your assets on. It’s not unusual for people to be so concentrated on one particular area of their finances that they ignore another area to their detriment.
What are some of the components involved in developing a tailored plan?
Developing a plan is a step-by-step process that should take a look at, among other things, specific financial objectives. For instance, how much of an education fund will be necessary to see your children through college? What will be needed for a financially secure retirement? How can an individual maximize the bequest to heirs and minimize taxes?
These are the types of questions that one can anticipate being asked during the financial planning process. The quality of the results of a good financial plan depends on the information that is given to the financial planner upfront. Also, it’s important to note that a financial plan should be reviewed regularly. It should not be looked at as a snapshot in an individual’s life; it should be viewed as a fluid, changing document.
How should business owners transition their business when planning for retirement?
They need to answer some very fundamental questions. For example, do they want to pass the business on to a family member or do they want to sell the business outright? What type of control do they want to have in the process?
The sale of a business can be one of the most heavily taxed transactions in the tax code. That’s why it’s important to approach the entire planning process from a perspective that takes into account tax efficiency and one that ultimately helps to determine the best strategy for that particular situation.
What type of impact does inflation have on retirement funds?
When you combine the income that you expect to receive from Social Security, personal savings and investment income, the outlook for retirement may actually appear very healthy. But the impact of inflation over the years can seriously erode the earning power of those resources. For example, if inflation averages 4 percent over the next 15 years, your buying power drops dramatically. In other words, $1,000 today would be worth a little over $500. Over 25 years, that $1,000 may be worth only $350. Part of the planning process should be to develop a strategy that emphasizes preservation of your purchasing power while using all possible means to reduce and control investment risk.
How should one go about screening a financial planner to make sure that he or she has your best interests in mind?
It’s important for a financial planner to be a full-time specialist who is not burdened by the need to sell products or earn commissions. Objectivity is key when developing a proper financial plan.
Some of the questions that one might ask of a financial planner are: Does the financial planner or the financial planning organization have the ability to recommend nonproprietary investment products and services? Do they have a network of tax specialists, CPAs and estate-planning attorneys that they can refer to when working on a financial plan? Do they have experience in creating plans for business owners or high-net-worth individuals? Also, one should not be afraid to ask to see a sample financial plan in order to get an idea of the depth and quality of a typical financial plan that is produced by the individual or the firm they’re speaking with.
STEPHEN KEARNS is a senior vice president and regional manager of wealth and institutional management at Comerica Bank. Reach him at mailto:firstname.lastname@example.org or (310) 281-2428.