During our lifetime we are constantly in the process of making,
managing, banking, investing, protecting, and spending money. More often
than not, we carry on intuitively from day to day, without taking the
time to either plan or coordinate our financial affairs. Financial
issues, problems, and decisions are compartmentalized. Many people, who
would not dream of beginning a cross country road trip without a good
road atlas, never even consider the importance of having a “financial
road map” during the many years they will engage in earning and spending
money. Without an adequate map, they are unlikely to reach a
destination of financial security. The financial planning process should
produce just such a financial road map.
The concept of financial planning cuts a wide swath across what has
been traditionally viewed as investment planning, retirement planning,
tax planning, estate planning, business planning, and risk management.
While it might generally be agreed that financial planning is about
money and financial security, there is no universally recognized
definition of financial planning.
THE FINANCIAL PLANNING PROCESS
The process of comprehensive financial planning is generally recognized to include the following seven steps:
Preliminary Meeting & Evaluation.
During the initial interview, the financial planner and the prospective
client get to know one another. This generally involves a first meeting
during which the planner explains the nature of services to be provided
and the way in which he or she is paid for these services. In turn, the
prospective client has an opportunity to determine whether the planner
has the ability to offer the types of services that are needed. The
planner should take this opportunity to get some general idea of the
prospective client’s current financial position and long-term goals. It
is important for both parties that the relationship begins on a basis of
mutual trust and confidence. If it is determined to proceed, then the
planner should provide the prospective client with an engagement letter
that serves as a contract setting forth the services to be provided,
the charges for these services, and the client’s responsibilities during
the financial planning process. If the planner is a registered
investment advisor with the Securities and Exchange Commission, the
planner will provide the prospective client with a “disclosure brochure”
describing the services offered and the method by which the financial
planner is compensated. SEC Rule 204-3 requires this disclosure.
Gather Information & Establish Goals. Effective
planning cannot be done without gathering a substantial amount of
information about the client. The information gathered can be either quantitative (e.g., financial information about the client’s income, expenditures, and assets) or qualitative
(e.g., non-financial information about the client’s risk tolerance,
expectations as to future standards of living, and health of the client
and family members). Both the short-term and long-term goals of
the client must be identified. Such a goal might be to have “adequate
income in retirement,” or to “provide for a child’s education.” In
contrast to goals, at least one commentator uses the term objectives
to indicate the shorter intermediate steps that must be accomplished in
order to meet a goal. For example, in order to meet the goal of having
adequate income in retirement an individual might establish the
objective of setting aside 5% of net income in a retirement plan. Goals
must be both realistic and well defined. While
“information gathering” and “goal setting” could be viewed as separate
and distinct steps within the financial planning process, in truth they
are probably more effectively accomplished during the give and take of
an interactive discussion between financial planner and client. Once
goals have been determined, it is essential to prioritize or
rank them in order of importance. Some of the key financial and legal
documents that must be secured during the data-gathering phase include:
1. Wills, trusts, and powers of attorney.
2. Personal financial statements.
3. Budgets.
4. Retirement plan statements, brokerage account statements, and mutual fund statements.
5. Insurance policies (life, disability, health, and property and casualty).
6. Divorce settlements.
7. Federal and state income tax returns.
8. Buy-sell agreements.
Analyze Information & Develop Plan. It is here
that the planner takes the information obtained and agreed-upon client
goals and translates them into a specific financial plan intended to
achieve these goals using selected financial strategies and instruments.
In effect, the plan translates client goals into specific action steps.
To assist in the process, the planner will often use computer programs
to supplement a written analysis and recommendations. At a minimum, a
comprehensive analysis generally includes a review of assets,
liabilities, current and projected income, and insurance coverages, and
investments. Legal documents will also be examined and, if authorized by
the client, the planner may seek the assistance of other professionals.
Present Plan. In presenting the plan, the financial
planner meets with the client, explains the recommendations and provides
the client with a copy of the written plan. However, before the formal
plan presentation, the financial planner is well advised to informally
discuss tentative observations and preliminary
recommendations. Such a discussion gives the planner an opportunity to
address additional questions and items that arose during the design
process, such as unrealistic client expectations and incomplete data. It
is also an excellent means of allowing the client to participate in the
design process and get client acceptance of key recommendations.
Without such client “buy-in,” it is unlikely that the final plan will be
implemented. If necessary, the plan can then be revised prior to final
presentation. The key elements of a written financial plan are likely to
include the following:
1. Review of the client’s stated goals.
2. Analysis of the client’s current situation, including both quantitative and qualitative data.
3. Specific recommendations to include actions, strategies and recommended financial products.
4. Action plan designed to implement the financial plan, to include
time frames and assignment of responsibilities to named individuals.
Implement Plan. This stage is probably the most
important of all. Plan implementation involves motivating the client to
take those steps as set forth in the action plan in paragraph
(4) above. Typically, this may involve a variety of tasks, including the
purchase and sale of investments, modification of insurance coverages,
adoption of legal instruments, and changes in spending and savings
habits. It may also include working with other professionals (e.g.,
check with the attorney that the new will and trust have not only been
drafted and presented to the client, but that the client has actually
signed them). Without implementation, the best of recommendations will
fail and the client’s objectives will not be reached.
Monitor Performance. Few, if any, financial plans
are perfect and all clients are subject to changing circumstances. This
stage involves evaluating the effectiveness of the plan in achieving the
client’s objectives. Unsatisfactory progress or performance requires
that corrective action be taken (e.g., the market is down, the client
becomes less risk tolerant, and the client is willing to accept lower
returns and a reduced retirement lifestyle).
Periodically Review & Revise Plan. Financial
planning is not a goal, but rather an ongoing process. The client’s
personal circumstances will change and the financial plan must be
adjusted accordingly. The client may have gotten married, gotten
divorced, had a new child, experienced a change in health, changed jobs,
suffered a financial setback, or experienced a financial windfall.
Outside factors, such as changes in the tax laws or investment climate,
must also be considered. Assumptions underlying the original plan are
evaluated. An annual periodic review will identify these changes by
gathering and updating client information and determining new or revised
client goals. From here, the process and steps repeat themselves.
Attain Goals. This is the “come and get it day.” The
client has sufficient funds to send his child to college, to buy that
second home, or to retire in the desired lifestyle at the intended time.
Financial planning has played a very important part in achieving each
of these goals.
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