The term “financial planning” is a common one that is often written about in the financial press. Many financial advisors list financial planning among the services that they offer to clients. We believe this is a critical part of the services that we provide our clients.
But what is financial planning? We think its important for our clients and for anyone considering our services to understand what financial planning entails.
The CFP Board defines financial planning as:
“Financial Planning is a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.”
We concur with this definition, especially that it is a collaborative process. Here are the key points in the process from our perspective.
The financial planning process is about financial advisors devising strategies to help their clients achieve their various financial goals. A good financial advisor will ask their clients a lot of questions about their financial goals and then listen to the answers. Beyond any training or certifications that a financial advisor might have, their most important skill is the ability to listen.
Client goals may include saving for retirement, managing their income in retirement, saving for college, a new home or a host of others. Advisors should ask about a client’s goals regarding providing for dependents or family members via estate planning.
Client goals and priorities will vary among clients based on their age, family situation and a host of other factors.
A key part of the process is for the financial advisor to gather data from their client to use in their analysis of the client’s situation. Much of the data gathering concerns gathering formation about the client’s assets and liabilities. This includes retirement accounts, investments, a pension, ownership of business, stock-based compensation, real estate and a host of other types of assets. On the liability side your advisor should ask about any mortgages, business indebtedness, student loans and other liabilities you may have to others.
They should ask about any estate planning documents that are in place as well as any life, disability or long-term care insurance that is in place. Ensuring that all beneficiary designations on insurance policies and retirement accounts are up-to-date is a critical issue that can be dealt with here. Many financial advisors will ask for recent tax returns as well as there is a wealth of information there, and the return may raise some additional questions from the advisor.
Data gathering goes beyond financial information, the data gathering process should include details of the client’s family as well.
Once the financial advisor has gathered the relevant financial and personal data, and they are comfortable that they understand their client’s financial goals and risk tolerance it's time to develop the initial financial plan. This will include the advisor’s recommendations in areas like retirement planning, an investing strategy, estate planning, tax planning and other relevant areas. In the case of a business owner client it will likely include strategies around business exit planning if applicable.
Once your financial advisor has completed the initial version of the financial plan they should share this document with you to allow you time to review it. Once you’ve had a chance to review the plan the next step is generally a meeting with the advisor to review it together.
This review process is a good time to be sure you understand what the advisor is recommending as next steps. It is also a time to ask questions. It's important that you feel comfortable with the plan and the implementation steps that the advisor is suggesting. In some cases a look at the initial draft of the plan might cause the client to review their own goals and make some changes if needed.
This is all positive and any good financial advisor is glad to revise their plan based on their client’s input. The whole point of the financial planning process is to help clients visualize their financial goals and to buy into a strategy to achieve their goals.
Perhaps the most important part of the financial planning process is the realization that this is not a one-time thing. If you are working with a financial advisor on an ongoing basis, part of the periodic reviews they conduct with clients should include reviewing all or part of the financial plan to determine if things are on track.
In addition to determining if a client is on track towards a goal like retirement, the review process will help the advisor understand any changes in the client’s circumstances, or perhaps in their financial goals.
Life isn’t static and neither is the financial planning process. For example, if your investments have performed better than expected, the advisor might adjust your asset allocation to reduce risk a bit to help preserve your investment gains.
Clients change their plans as well. If a client decides to retire early, either voluntarily or due to a layoff, this will have an impact on their financial plan and will likely call for some adjustments. The death of a spouse, a divorce or leaving a job to start a business are all life situations that will likely call for adjustments to your financial plan.
One way to judge if you are working with the right financial advisor is the frequency and quality of their communications with you. Updates in the form of reports or newsletters are great. Beyond this, a key issue to consider is whether or not your advisor asks questions on a regular basis.
This should start with your initial meeting with them and through the process of developing the initial financial plan. But the process of asking questions and listening to the answers is something that a good financial advisor will do throughout their relationship with you.
This might be the most important part of the financial planning process. Asking questions and getting clients to discuss issues of importance to them is the best tool that an advisor has to help them in determining if changes to a client’s financial plan are needed.
If you are looking for a fee-only, fiduciary advisor to help you develop a financial planning strategy now and through the years, please give us a call to discuss your situation and see how we can help you.
Bill Canty, CFP®, CPA
Maureen Walsh, EA, Investment Advisor
Ed Canty, CFP®, Investment Advisor
Joe Canty, Investment Advisor
Tina Alteri, CPA, Tax Advisor