Financial Planning Process

As Americans, we constantly face change in the economy that create confusion in our financial lives. At one time, a good pension and/or Social Security guaranteed a secure retirement. Today, however, there are no promises, no guarantees. Inflation, constantly changing tax laws, increasing volatility of investments, job changes and other factors beyond our control can cause havoc with short- and long-term plans and budgets.

How am I going to pay for my children's college educations? Will I have enough money to retire and assure my financial security? Where will I get the money to achieve all my goals?

These growing concerns are prompting more people to seek the help of a financial advisor. But just what does a financial advisor do, and how can an advisor help you coordinate all aspects of your financial life? Answers to these questions lie in the comprehensive financial planning process.

The Comprehensive Financial Planning Process

Financial planning is very individual and personal. It should focus on all the psychological and financial factors that may have an impact on your financial goals and objectives. In short, comprehensive financial planning provides you with a long-term strategy for your financial future, taking into consideration every aspect of your financial situation and how each affects your ability to achieve your goals and objectives.

A financial plan can help you construct the foundation on which to build a secure financial future. Through six distinct steps in the comprehensive financial planning process, a financial advisor helps you:

• Clarify your present situation by collecting the facts.

You will want to assess all relevant personal and financial data such as lists of assets and liabilities, tax returns, record of securities transactions, insurance policies wills, trusts, pension plans, etc.

• Decide where you want to be, financially.

This will require you to identify both financial and personal goals and objectives. The financial planning practitioner helps you clarify financial and personal values and attitudes. These may include providing for your children's college educations, supporting aging parents, or relieving immediate financial pressures that would help maintain your current lifestyle and provide for retirement. These considerations are as important as what is in your bank account in determining your best strategy.

• Identify financial problems that create barriers to you.

Problem areas can include too little or too much insurance or a big tax burden, inadequate cash flow, or current investments that are losing the battle with inflation. These possible problem areas must be identified before solutions can be found.

• Provide a written financial plan.

The length of the plan document will vary with the complexity of your individual situation. It should always be structured to meet your needs and objectives.

• Implement agreed-upon recommendations from your plan.

A financial plan is only helpful if the recommendations are put into action. However, the decision to implement, modify or reject the recommendations presented in your plan remains your sole responsibility. You may request that the planner assist in the implementation of the agreed upon recommendations, including coordination with other knowledgeable professionals as required. Or, you may implement the plan yourself.

• Periodically review and revise your plan.

A financial plan can be no better than the data upon which it is based. Periodic reviews and revisions of the plan are essential to account for changes in personal and economic conditions. While this task may be accomplished without assistance, it is usually advantageous to have your planner provide these services for you.

Your Comprehensive Financial Plan

Your financial plan is the strategy used in achieving your goals and objectives. A comprehensive financial plan should address all pertinent areas relating to your situation. Those areas that the planner does not personally address in the development of the plan should be coordinated by the planner.

You may want your plan to cover only a specific area such as estate or investment planning, or some other area. While a plan for such a goal or objective may be excellent or appropriate in the areas covered, you should be aware it is not a comprehensive plan.

What Does a Comprehensive Plan Contain?

Your financial plan document should contain not only the plan strategies but also all pertinent data relating to the development of the plan.

While order and style of presentation may vary, the plan document should include at least the 13 essential elements described below. This does not necessarily mean your plan will be lengthy, as each area should be addressed so that it suits your personal situation.

1. Personal data, including relevant personal and family data for those covered under the plan.

2. Your goals and objectives, including their priority and desired time frame for achievement, where applicable.

3. Identification of issues and problems, including education costs, taxes, major illnesses and other factors that are or may develop into a problem. These areas may be identified by you, your planner, or other advisors.

4. Assumptions used in plan preparation, such as inflation, investment growth, mortality rates, and other material assumptions.

5. Balance sheet/net worth. An analysis that includes, but is not limited to, a schedule listing assets and liabilities with a calculation of net worth and itemized schedules of liabilities and assets to be included, as appropriate.

    6. Cash flow management. Statements and analysis to include, but are not limited to, a statement of your sources and uses of funds for all relevant years, indicating net cash flow, as well as a separate income statement, where appropriate.

    7. Income Tax Review. A statement and analysis to include, but are not limited to, the income taxes for all relevant years covered in the plan. Projections should show the nature of the income and deductions to permit calculation of your tax liability. The analysis should identify the marginal tax rate for each year, and any special situations such as alternative minimum tax, passive loss limitation, etc., that affect your tax liability.

    8. Risk management. An analysis of your financial exposure relative to mortality, morbidity, liability, and property, including your business if appropriate. This section should list and analyze current policies and problems, including life, disability, medical, property/casualty, liability, and business.

    9. Investments. A listing of your current investment portfolio and an analysis or discussion of its liquidity, diversification, and investment risk exposure. In addition, the suitability of the investments in relationship to your goals should be addressed, including risk tolerance, risk management of investments, suitability, liquidity, diversification and personal management efforts.

    10. Special needs such as retirement planning or education planning. An analysis of the capital needed at some future time to provide for your specific needs. The analysis should include a projection of resources expected to be available to meet these needs at that time.

    11. Estate planning to identify assets to be included in your estate, and an analysis of the control, disposition and taxation of those assets.

    12. Recommendations in writing to specifically address your goals and objectives, all issues and problems identified in the plan, and actions necessary to compensate for any shortfalls.

        13. Implementation schedule to prioritize a list of actions required to implement the recommendations, indicating responsible parties, action required, and timing.

If any area of the financial plan is not within the range of the financial planner's expertise, the planner has the responsibility to coordinate with other professionals and document such coordination in the financial plan report. Documentation of such areas can include the professional's name and then the review will be completed.

The analysis which is called for in all the elements of the plan should consist of a review of pertinent facts,a consideration of the advantage(s) and/or disadvantage (s) of the current situation and a determination of what, if any, further action is required. The plan should include a summary statement providing the planner's comments on the analysis and recommendations, where appropriate, for each element of the plan.

What is a Comprehensive Financial Review?

To complete a comprehensive review and revision of your financial plan, the planner will review and analyze the data pertinent to your changing situation. The planner then will review the strategies to accommodate your current goals and objectives. A written document should be prepared for you which complies with the thirteen plan elements. Those schedules which have not changed since the previous plan don't need to be duplicated; a simple statement that there has been no change will suffice.

How to Select Your Financial Advisor

Once you've made the decision to seek the services of a financial advisor, you may have many more questions: Which professional is right for me? How do I identify a competent financial planner who can coordinate all aspects of my financial life?

Just as you select a doctor or attorney, you should base your decision on a number of factors: education, qualifications, experience, and reputation.

When selecting your financial planner, choose one you can work with comfortably. You are paying this person to help you shape your financial future. It is your responsibility and right to fully investigate the practitioner's background, methods of practice, credentials, references and other relevant information.

Call the practitioner and ask for a short meeting. Use this opportunity to get a sense of compatibility and to discover exactly how the practitioner will work with you. Ask questions about financial planning that will give you a basis for comparison with other practitioners you have contacted. In short, get the information you need to feel confident that this person is right for you and your needs. To work effectively with a planner, you will need to reveal your personal financial information, so it's important to find someone with whom you feel completely comfortable.

By asking the following questions, you should get the information you need to make your decision on which practitioner to hire. As you think of others, add them to your list. Keep in mind how the answers fit your personal needs.

1. What relevant education and credentials does the practitioner have in the financial planning field and/or the financial services industry? Education may be as important as experience and investment history. Typical credentials include: RFC, CFP, CHFC, CLU, APFS, CPA, MBA.

2. How long has the practitioner been working with clients in the comprehensive financial planning process?

3. What did the practitioner do before becoming a financial planner? Most financial planners have come from fields related to financial services.

4. Ask to see a sample financial plan. Actual information is held in strictest confidence.

5. What are the practitioner's areas of expertise? Ideally, these should include investments, insurance and/or tax strategies.

6. Verify that the practitioner has a close working relationship with accountants, attorneys and other competent professionals. Most of the financial planning practitioners are generalists, but also may be specialists in certain areas. They frequently consult with other professionals from related fields for added expertise in specialty areas.

7. What type of clientele does the practitioner serve? It is not uncommon for a planner to work primarily with particular professional groups, income levels or age groups.

8. Will the practitioner you meet be the person who will work directly with you, or will an associate handle your account? If you will be working with an associate, ask to meet that person and ask about qualifications.

9. One of the practitioner's roles may be to suggest financial products to implement your plan. Will the planner provide generic or specific investment advice? Will the planner do independent analysis on the products, or be dependent on another company's research? Does the practitioner have any vested interest in the products recommended?

10. Find out how the financial planning practitioner is compensated and whether or not there is a charge for the plan or for periodic review and/or revision. Most financial planning practitioners are compensated in one of five ways:

Fee Only - Some planners bill you a flat or hourly rate for the time spent developing your plan and provide advice about implementation.

Fee and Commission - Many other planners charge a fee for the time spent developing and communicating a financial plan.  They then may help you implement the plan by offering investment or insurance for sale. A commission is charged on the sale of these products, if you decide to buy them through the planner.

Commission Only - Still other planners are compensated solely by commissions named from the products and services necessary to implement the recommendations made.

Salary - Many banks, credit unions, and other organizations offer financial planning services provided by salaried financial planners. Of course their salary will depend on the extent of planning and product sales.

All four compensation methods have their advantages. You must choose the method which, combined with the other qualities of the practitioner you select, best meets your needs.

Keep in mind that compensation is one piece of information among many important elements, which were mentioned earlier in this brochure, that make up the complete picture of a qualified financial planner.