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The Financial Planning Process

A Financial Plan. It seems like something nearly everyone ought to do, even if many people don't know exactly what is involved in creating one. People frequently imagine it means the Planner will look at their situation and make some comprehensive informed recommendations based on their situation, and that is part of it.

But what exactly is the process of a Financial Plan, and what is the reasoning behind the steps? I will attempt to outline what happens in a general sense and describe the why behind the what.

Step One: Form and Specify the Client-Planner Relationship

What does this mean? First of all, both the client and the planner need to agree on the extent of what is to be done. Certainly the Planner will suggest courses of action, and the client, once informed, can agree or disagree. At this point the Client and the Planner will determine the services, discuss the fee for those services, and outline the mutual responsibilities.

Why? Everyone benefits when both parties understand what is going to happen, how much it costs, and what each party is supposed to do.

Step Two: Assemble Client Information, with a Focus on Goals

What does this mean? The Planner will request numerous items from the Client. Depending on the scope of the job, that may include bank and brokerage statements, stock option tables, paycheck stubs, Life/Disability/Long-Term Care Insurance Policies, Annuity Contracts, Trusts, Wills, other Estate Planning Documents, Tax Returns, Home/Auto/Umbrella Policies, and more. The list can be long. Depending on the goals and the scope of the planning, the quantity and depth of information required from the Client will be different.

The most important element from which all recommendations flow are the Goals of the Client. At this point, goals should be made clear and quantified if possible.

Why? Planners need to put all the pieces of the puzzle on the table. Certain elements may affect other elements. Without knowing everything, a Planner's suggestions may not be the best they can be or at worst counter-productive. Without establishing objectives suggestions are likely to lose their coherence. Said another way, if you don't know where you're going, how will you know when you get there?

Step Three: Analyze and Assess the Client's Financial Situation

What does this mean? This is an analysis of all the important data, and an evaluation of the strengths and weaknesses in the Clients finances related to achieving the stated goals.

Why? Often people have a hazy idea of their overall financial picture. Multiple accounts at multiple places with no overall view is a typical Client condition. If a client is not organized, how on earth are they going to know if they have a shot at realizing their goals, even if they are vague goals?

Looking at the situation with a clear objective eye and a unified view can help the client see what needs to be done, what goals are achievable, which might need to be reassessed, and whether or not the breadth of the planning engagement should be increased or decreased. It is simply a view of reality that many times requires a third party to take a professional look at what is and what could be.

Step Four: Develop and Introduce the Financial Recommendations

What does this mean? The Planner now works on putting it all together. It is possible some elements are fine as they exist and can be left alone. He or she will work to improve the other parts. Once complete, the Planner will present the work he or she has done to the client, and talk about the methods that might be used to put the plan into place, especially in regard to the current market situation.

Why? The Client, with the help of the Planner, should have a solid understanding at this point of the Financial Plan. The plans need to be communicated and understood well by the client so that they are fully informed and in agreement with all the advice.

Step Five: Executing the Recommendations

What does this mean? The Planner will put into place what you both agreed upon. Products and services will be purchased or engaged. There may be some items that need to be done by the Client, as well as tasks to be done by other professionals you work with, including Attorneys, Insurance Agents, Accountants, etc. The Planner acts as the coordinator of your team. If you do not have a professional for a particular discipline, the Planner should be able to recommend the necessary professionals, and to provide you with a rationale for why he thinks each one would be a good fit.

Why? Planning is important, to be sure, but without executing the plan it doesn't do much good for the Client.

Step Six: Monitoring the Recommendations

What does this mean? A Planner should have a system in place to keep track of what's going on and communicate it to the Client. This may include performance reviews, progress reports, revisions (if necessary), and integrating Client circumstance changes into the existing finances in relation to the Client goals.

It is also important for Planners to stay on top of changes in tax laws, the market, and the economy. The frequency of Client reviews is up to the individual practitioner, but at least once a year is advisable. A review session should include a discussion on the Client's financial changes, risk tolerance, investment objectives/goals, asset allocation and/or account holdings.

Why? The Planner should stay on top of the Client situation to keep them on track over time.