Financial Planning Process
“Relaxed life, no anxiety, peaceful sleep” - is how a person who has their financial planning sorted out, would describe their state of mind. Financial planning is the process of planning one’s money in such a way that they achieve all or most of their financial goals at some point in the future. It not only helps achieve goals but also prepares one for uncertainties, minimize losses, and enhance gains.And how does one achieve these goals? The answer is simple – having a plan. A plan acts as a guide through one’s financial journey, and even if some turbulences occur along the way it will help one get back on track or they might come up with a new and improved plan altogether.
To formulate a strategy and make recommendations, a financial planning professional would take into account all aspects of a client’s financial situation, their short-term and long-term goals and, then decide whether they are achievable or not. The planning professional would ideally follow the 6-step financial planning process to make the said recommendations. The key idea is that the client is always at the center of the process. It is not always necessary that the planning process moves in a linear order, they might go back and forth with the client numerous times to make sure he/she gives appropriate advice.
The following are the 6 steps he/she might follow.
1. Establishing a relationship with the client
‘Getting the full lay of the land’
Establishing a relationship is where the adviser/planner interacts with a prospective client. He/she introduces themselves and explains the financial planning process to the client. He would also inform the client about his various financial services they can avail, and his competencies and experience in the field of finance. When the advisor and the client come to an agreement on the services to be provided the planner goes ahead and tries to get a full lay of the land. The very first thing he will do is collect all financial and non-financial data about the client. To paint a clear picture, he will inquire about the client’s income, assets, liabilities, employment status, his household or living situation, family, children, parents. He will also check information whether the client owns any insurance or has any retirement savings and other such. This is often an in-depth study of the client and is one of the most important steps. The better picture they paint, the more appropriate advice they will able to give and therefore formulate a better plan for the client. They do this by asking open-ended questions (the questions that can’t be answered by a simple yes or no) from the client. The professional may use any tool for this purpose for instance he may ask the client to fill out a questionnaire either in front of him or take it home. There are also modern technology collection tools for this purpose like mobile applications and websites that could collect this data on behalf of the planner. Or it might just be a straightforward chat with the client while he makes notes. More often than not the planner will have to work with other professionals like the client’s accountant, their current financial product provider, or even their lawyer since the client may not know all the details offhand or have ready access to them. So, he will get the authority from the client and get in contact with these service providers. After all, once the client has decided to hire the planner, the planner describes in writing the scope of their engagement before giving out any advice.
2. Gathering client’s information
‘Where does the client want to go?’
This is probably the most important steps in the planning process. The question to be asked here is - why has the client come to the advisor? As I mentioned earlier, it is about what the client wants and not what the advisor thinks is best for them. It can not be a one size fits all approach, the plan has to be tailored according to the client’s objectives and his risk profile. Therefore, individual circumstances provide for individual solutions. So, what is best for me may not be best for my father or my brother. The advisor will try and enlist the clients short-term, medium-term, and long-term goals at this point. For instance, I might picture myself getting a car 3 years down the line, a house in 10 years, or even an international holiday every 2 years. So, my planner will have to work out what an international holiday for me means and calculate its costs. He will have to draw out particular goals from generalised statements. Because the client may not possess the knowledge to articulate the goals that the specialist planner could articulate themselves. And then they can provide the information on to the client once it has been sorted out. Finally, the advisor will use these goals to tailor their advice.
3. Analysis and assessment
‘Are there any issues getting from here to there?’
By this point, the planner has gathered all the data he needs. He will now analyse it to determine if the client’s goals can be met. He does this by analysing the client’s financial situation. The planner examines the details of the client and some of the goals might not be realistic. So, now what the planner has to do is discuss the gap analysis with the client and seek an agreement on how to resolve this gap. I mentioned that my short-term goal is to own a car in 3 years but am I in the financial position to buy it in 3 years? There are various alternatives with the client. He may change or drop a goal, delay the goal (give it more time), cut his expense or change his lifestyle altogether or move up his risk spectrum. These solutions will make achieving the said goals possible.
4. Developing the plan and making recommendations
‘What should the client do to achieve their financial goals?’
Based on the previous steps the financial advisor will tailor a plan specific to the client’s needs and priorities and his rick tolerance. The plan needs depth and detail for the client to make an informed decision. Some skills are required here. The planner cannot just bombard the client with a lot of information. He needs to present it in a manner that the client fully understands the recommendations to make an informed choice. The planner needs to make a careful trade-off, he can not overwhelm the client with a vast document but it needs to have adequate information as well. In general, the plans may include: the scope of advice, the current client position and background, client goals and objectives, issues and gaps identified, recommended trade-offs and agreed on resolutions, product recommendations, a summary of risks and benefit if advice is implemented, and advantages and disadvantages compared to other strategies.
5. Implement the plan
‘Here's the advice. Do you want to pursue this plan? Okay, let's do it'.
After developing the plan, the advisor presents it to the client. Whatever document he has prepared for the client be it appendices, charts, or diagrams, he will present it to the client. The planner will also answer any questions asked by the client or resolve any concerns the client may have. The client's understanding is key and it is important they understand all the pros and cons of implementing the plan. After the client has understood the plan clearly, he will give the planner a go-ahead to proceed with implementing the plan. Implementing the plan involves collating and completing all the paperwork of the plan. The planner has to work with the service providers and partners to put everything into place. Finally, he will update the client on the implementation and provide guidance on what is needed from the client such as signing documents or funds.
6. Plan review
‘How is the plan going? Anything changed?’
This should not be underestimated. As life progresses, plans evolve and change. Therefore, is important to monitor and tweak plans from time to time. Both formally as well as informally there needs to be communication between the planner and the client. The planner has to keep providing updates on how the products and investments are performing throughout the period. He has to keep checking how the plan is performing, and tracking towards the financial goals. After all the whole point of coming to a financial planner is to help achieve the financial goals of the client. Finally, the planner has to seek information on anything that might have changed during this period and changing the plan to accommodate these changes. It is possible that the advisor might have to start the 6-step process all over again to incorporate these changes into the plan. For example, before buying a car, I meet with a car accident and need to pay for my medical expenses, or I need to chip in for my brother’s marriage that I earlier didn’t account for. Therefore, it is of utmost importance to keep reviewing and updating the plans as life throws curveballs the clients to help them achieve their goals.
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