What Is a Financial Planner? An Example of Their Role and Services

Managing money effectively can be overwhelming, especially when balancing saving, investing, debt, and taxes. A financial planner helps individuals create a structured plan to meet their financial goals, providing expert guidance tailored to their needs.

To understand what a financial planner does, we’ll explore how they assist with budgeting, investments, debt reduction, insurance, taxes, and estate planning.

Example Budgeting Approach

A financial planner begins by assessing a client’s income, expenses, and spending habits. They review pay stubs, tax returns, and bank statements to determine net income after deductions like Social Security (6.2%) and Medicare (1.45%). Fixed expenses such as rent, utilities, and insurance are categorized separately from discretionary spending like dining out and entertainment.

Once spending patterns are identified, a planner may suggest the 50/30/20 rule: 50% for necessities, 30% for lifestyle choices, and 20% for savings and debt repayment. If cash flow is an issue, they might recommend automating bill payments and savings contributions. For freelancers or those with irregular income, maintaining a buffer fund equal to three months of expenses can help manage fluctuations.

Adjustments are made based on financial priorities. If a client wants to buy a home, a planner may recommend cutting discretionary spending to build a down payment fund. They might also suggest tax-advantaged accounts like a Health Savings Account (HSA) for medical expenses or a 529 plan for education savings.

Sample Investment Strategy

A financial planner tailors an investment strategy based on risk tolerance, time horizon, and goals. They assess risk appetite using a questionnaire, categorizing clients as conservative, moderate, or aggressive investors. A conservative investor nearing retirement may prioritize capital preservation, while a younger investor might focus on growth-oriented assets.

Asset allocation is structured accordingly. A moderate investor might have a portfolio with 60% equities and 40% fixed income, balancing growth with stability. Within equities, a planner may recommend a mix of large-cap stocks, mid-cap funds, and international exposure. Fixed-income holdings could include government bonds, municipal bonds for tax efficiency, and investment-grade corporate debt.

Tax efficiency is a key consideration. A planner may place tax-inefficient assets like real estate investment trusts (REITs) or actively managed mutual funds in tax-advantaged accounts such as a Roth IRA, where qualified withdrawals are tax-free. Meanwhile, tax-efficient index funds and municipal bonds might be held in taxable brokerage accounts.

Rebalancing ensures the portfolio stays aligned with financial goals. If market swings push equities beyond the target allocation, a planner may shift funds into fixed income. Tax-loss harvesting can also be used to offset capital gains and lower tax liabilities.

Hypothetical Debt Reduction Plan

A financial planner reviews a client’s outstanding debts, considering interest rates, minimum payments, and loan terms. High-interest debts, like credit card balances with rates exceeding 20%, are prioritized due to their compounding costs. Lower-interest debts, such as federal student loans with fixed rates around 5%, may be managed differently, especially if income-driven repayment options are available.

To reduce debt efficiently, planners may recommend the avalanche method, which targets the highest-interest debt first, or the snowball method, which focuses on smaller balances to build momentum. For example, if a client has a $10,000 credit card balance at 22% APR and a $5,000 personal loan at 10%, the avalanche method would direct extra payments toward the credit card while maintaining minimum payments on the loan. The snowball method, in contrast, would tackle the personal loan first for a psychological boost.

Refinancing or consolidation may also be considered. A client with multiple high-interest credit cards might consolidate them into a single personal loan with a lower fixed rate. Homeowners with sufficient equity could explore a cash-out refinance or home equity line of credit (HELOC) to replace high-interest debt with a secured loan at a lower rate. However, planners caution against this if spending habits remain unchanged.

Insurance Coordination Example

A financial planner ensures clients have adequate insurance to protect their assets and income. They review existing policies, identify gaps, and recommend adjustments based on financial needs and long-term goals.

Disability insurance is a key area of focus, as it replaces income if an illness or injury prevents a client from working. Employer-sponsored plans often provide short-term coverage, but long-term disability policies may be necessary to replace lost earnings.

Life insurance is also important, particularly for individuals with dependents. A planner helps determine the appropriate coverage amount by calculating outstanding debts, future income needs, and potential education expenses for children. Term life policies are often preferred for their affordability, while permanent options like whole life or universal life may be suitable for those seeking a cash value component. Beneficiary designations are reviewed to ensure assets are distributed as intended.

Illustrative Tax Scenarios

A financial planner helps clients minimize tax liabilities by identifying deductions, credits, and tax-efficient strategies. They assess income sources, filing status, and potential tax-saving opportunities.

For self-employed individuals or those with fluctuating earnings, planners may recommend quarterly estimated tax payments to avoid underpayment penalties.

For clients with investment income, tax-loss harvesting can offset capital gains. If a client realizes $10,000 in capital gains from stock sales but has $7,000 in unrealized losses, selling the underperforming assets can reduce taxable gains to $3,000.

Planners may also suggest maximizing contributions to tax-advantaged accounts like a 401(k) or Traditional IRA, which lower taxable income. High earners might benefit from Roth conversions, transferring pre-tax retirement funds to a Roth IRA during lower-income years to reduce future tax burdens.

Example Estate Organization

Estate planning ensures assets are distributed according to a client’s wishes while minimizing legal complications and taxes. A financial planner collaborates with estate attorneys to structure wills, trusts, and beneficiary designations effectively.

They review asset ownership structures to ensure that jointly held properties, payable-on-death accounts, and retirement funds have proper designations to avoid probate delays.

Trusts can be useful for estate planning, particularly for individuals with complex financial situations. A revocable living trust allows assets to bypass probate while maintaining control during the grantor’s lifetime. For those seeking to reduce estate tax exposure, an irrevocable life insurance trust (ILIT) removes life insurance proceeds from the taxable estate.

Planners may also recommend gifting strategies, such as using the annual gift tax exclusion ($18,000 per recipient in 2024), to transfer wealth efficiently without triggering federal gift taxes.