I want to use this article to explain the financial planning process. Many competent, well-educated adults readily admit they struggle with even basic financial concepts. This really isn’t surprising since most school curriculums don’t teach financial management principles. But this is where a professional financial planner comes into the picture. Financial planners work with people and help them coordinate and manage the financial aspects of life.
Unfortunately, many people are reluctant to work with a financial planner because they are unfamiliar with how the financial planning process works.
The financial planning process explained
The process of financial planning can generally be broken down into seven basic steps:
Step 1 – Preliminary Meeting & Evaluation
During an 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, the planner should then 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. .
Step 2 – Gather Information & Establish Goals
To be effective, the financial planner must gather 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 also be identified. Such goals might be to have “adequate income in retirement,” or to “provide for a child’s education.” 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 are usually secured during the data-gathering phase include:
Wills, trusts, and powers of attorney
Personal financial statements
Retirement plan statements, brokerage account statements, and mutual fund statements
Insurance policies (life, disability, health, and property and casualty)
Federal and state income tax returns
Step 3 – Analyze Information & Develop Plan
Here is where the planner takes the information obtained, considers the client’s goals, and develops a financial plan intended to help the client achieve his or her goals. To assist in the process, the planner will often use computer programs to supplement his 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. If authorized by the client, the planner may also seek the assistance of other professionals. (e.g. attorney or insurance agent).
Step 4 – Present Plan
This is where the financial planner meets with the client, explains the recommendations, and provides the client with a copy of the written plan. Once the client has a chance to review the plan, the plan may be revised based on client feedback. Key elements of a written financial plan are likely to include the following:
Review of the client’s goals
Analysis of the client’s current situation
Specific recommendations from the financial planner for helping the client get from where he is to where he wants to be (i.e. to help him achieve his goals).
An action plan designed to implement the financial plan
Step 5 – Implement Plan
This stage is probably the most important of all. If the client fails to follow through on the planner’s recommendations, the plan will be useless. Plan implementation involves acting on the recommendations identified in step 4. 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 to ensure the new will has been drafted).
Based on the nature of the relationship, some of the action items will be performed by the financial planner, while others will be the responsibility of the client. Most planners will handle implementation duties for an additional fee.
Step 6 – Monitor Plan
Because circumstances change, financial plans need to be monitored to ensure they remain relevant and useful to the client. This step 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., a new investment mix must be selected).
Step 7 – Review Plan
Financial planning is an ongoing process. Because a client’s personal circumstances will change, the financial plan needs to be changed accordingly. Clients get married, (or divorced), have new children, experience changes in health, change jobs, etc. All of these changes may require updates to the financial plan so that the client stays on track to meet his goals.
Also, as the economy changes, assumptions underlying the original plan need to be re-evaluated to make sure they are still relevant in the current economic environment.