The 3 Main pillars of wealth creation are what separates the traditional financial planner and one who is able to show wealth in a financial simulator, projecting out over the years, and showing where the inefficiencies are and how to correct them. Without a clear understanding of these pillars and how to look at your total financial picture through these pillars you will not get a true knowledge of how to efficiently grow your wealth.
What are these pillars? They are Protection, Savings, and Growth, and how do they assist in understanding your wealth? Here’s an example of how to understand them. Before explaining I need to explain how a financial planner would approach clients then I will explain how problems can occur costing people their money based on these actions.
When a person goes to a financial planner and seeks their services one of a few things will happen. The person might be charged a fee, and the planner will also make a commission on the sale. The person/client might be charged a fee and the planner refers the client to another salesperson who sells them products. In all cases, a commission is made by the planner or their associates. The client in turn gets the investment or product that the planner is selling. (There is nothing wrong with getting paid a commission, it’s how it’s done that is at issue. All commissions must come from a 3rd party not out of the client’s money.)
So here is an example of how it might work, but keep in mind that this is just an example from a macro view of the model. If an individual is looking to grow wealth they must have all pillars working otherwise they might lose what they have saved. If one were to focus on wealth building (Growth) without protection they could put their whole plan at risk. So let’s assume that you are saving money in a 401k and things are going well, but all of a sudden something drastic happens, such as needing a new roof, a new car, or anything that requires a large out-of-pocket cost where does that come from? All your money is going into a retirement plan as per your financial planner, so what will you do? You are maximizing your retirement and cash flow is tight so you will have to dip into your retirement to pay for the huge expense, thus causing substantial lost opportunity cost and loss or you will be forced to create debt by taking out a loan. If the protection part of your plan is not perfect the rest of your money is at risk.
This is just one simple way financial planners put their clients at risk. It’s not to say that financial planners are bad, but they just don’t know how to build a true financial plan. Some planners use the Leap System to build models for clients, but most are educated by financial institutions on how to get your money into their pocket.