What is a financial plan?


A financial plan is at the heart of the financial advice process. It is in a way the card of your customers …

A financial plan is at the heart of the financial advice process. In a way, it’s your customers’ money map, there to guide them financially from where they are today to where they want to be. Without a plan, investors are just paddling the open sea, hoping their direction and speed will be enough to get them to their destination.

Given the importance of the financial plan in the planning process, advisers and clients need to understand what a financial plan is and the key elements that make it a good one.

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What is a financial plan?

A financial plan is a document that takes a holistic look at a client’s entire financial situation and shows how to achieve their financial goals, says Dan Keady, chief financial planning strategist at TIAA in Charlotte, Carolina. North. It will integrate the “needs, wants and wishes of your client, while taking into account her level of comfort in the face of risk”.

Financial plans are typically created using financial planning software and can integrate many facets of planning. For example, the retirement plan element often includes an analysis showing the impacts of taking money from different accounts, qualified and unqualified, on income and a comparison of the tax implications of each scenario, says Kelly Campbell, planner. chartered financier and president and CEO of Campbell Wealth Management in Alexandria, Virginia.

“Many plans will also look at the required rate of return a person needs to meet their goals,” Campbell said. “It can give someone a good indication of how to invest their portfolio.”

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Create a financial plan

A financial plan requires the right elements to reach its full potential. To create a good financial plan, be sure to include the following:

A statement of net worth or a detailed cash flow analysis. Financial planning begins with understanding your client’s current finances. “This may mean that a plan needs to include, among other things, a net worth statement or a detailed cash flow analysis to understand how funds come and go,” says Martin Schamis, manager of wealth planning at Janney Montgomery. Scott in Philadelphia.

Your client’s assets and liabilities. A good financial planning strategy includes documenting all investable assets that can be used to meet a client’s goals as well as detailed liabilities and current and planned expenses, says Tammy McKennon, financial advisor at Edward Jones at Newport Beach, California.

A strategy for achieving short and long term goals. “Most plans only think about retirement and the future, but a good financial plan thinks about your life goals from present to future,” says Aditi Javeri Gokhale, Chief Commercial Officer and President of Products and Services at investment at Northwestern Mutual in Milwaukee. “Too often, consumers see financial planning as something that sets the stage for the future, which is abstract. Financial planning should also include how people can live their dreams today, whether it’s buying a new car, planning a family vacation, or financing school fees, all while getting ready. long-term goals like retirement.

Hypothetical simulations and risk assessment. The challenge of connecting the dots on your client’s financial roadmap is that a lot can happen between today and tomorrow. “This is where what-if scenarios, Monte Carlo simulations, risk assessments and other common tools come in,” says Schamis. By running these simulations, you can test a financial plan to determine its chances of success.

Use conservative assumptions. “I always ask clients to project their anticipated spending, and then we use conservative assumptions about their asset growth to document a very realistic expectation of results,” McKennon explains. “We are adding additional layers of ROI sequencing, which gives additional confidence to our results. “

A holistic review of your client’s finances. During the entire financial planning process, you will often find other aspects of your client’s finances that need to be considered, says Greg Wells, regional director and partner at EP Wealth Advisors in Torrance, Calif. This can include checking to see if your client is saving enough and performing a tax analysis to ensure that what is set aside is being saved in the most tax efficient way. You may need to review the estate plan to ensure that future wishes will also be taken into account.

“A financial plan should help people protect themselves and prosper,” says Javeri. “In other words, both protecting what someone has with insurance while increasing wealth through investments.”

After all of this, a financial plan may seem like a purely analytical endeavor, but financial planning isn’t all about numbers, says Daniel Crosby, director of behavior at Atlanta-based Orion Advisor Solutions.

“A good financial plan relies on a thorough understanding of a person’s psychology and includes choosing sufficiently motivating goals, achieving those goals over time, anticipating behavioral barriers to success, and creating contingencies. when life doesn’t go as planned, ”Crosby says. “Even the best-designed financial plan will encounter obstacles along the way, and at that point an understanding of investor psychology becomes essential.”

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How to make a financial plan

Financial planning begins with active listening and often ask deep questions to really understand what matters to your customer, says Javeri. “Financial plans cannot take a one-size-fits-all approach. During the conversation, it is important to identify the life goals that are most important to the client, so that a financial roadmap can be designed to achieve them.

You can follow these steps to create a personalized financial plan:

1. Get to know your customers : Getting to know your customers is critically important when creating the financial plan, says Keady. “A client’s family, culture, environment and career will help the advisor navigate the client’s views and relationship with financial planning. “

2. Ask questions to understand your customers and their goals: Keady tells advisers to ask about estimated retirement age, pay down debt, college funding goals, or plans to leave a legacy. You should be as thorough and detailed as possible when gathering information. “It’s often cumbersome, and most customers say we’re asking for more information than anyone has ever asked,” Wells explains. “But the more data we have, the better the output we can provide. “

3. Use a form to collect information about the customer: Keady recommends having a form to help you collect all of this information as well as your client’s financial data, such as risk tolerance, income, estimated expenses, insurance policies, and bank and investment account statements.

4. Be systematic in your data collection: Despite the highly human element of financial planning, collecting data as part of creating a plan should be done systematically, Campbell says. “Ad hoc planning is not very useful for the client or the advisor. Having a systematic planning process usually uses certain software packages, and the process is usually streamlined.

5. Communicate how you create the plan with the client: After you have gathered the necessary data, you can create the financial plan. “Make sure you understand and communicate all of the Monte Carlo assumptions and results,” says Wells. “Keep the details in place for future reviews and comparison plans. “

6. Provide the final plan with a list of actions to accomplish: “Tracking what action to take is also very important to ensure that the plan is followed and continues to move forward on track in the future,” says Wells.

Tracking is essential, because the financial plan is just the start of your client’s financial journey – and it might not be an easy journey, even with that plan in place.

“With the current level of financial fragility that we are seeing, clients are unlikely to be able to meet all of their financial goals,” says Keady. “The best advisor will be able to examine when a client fails (and, more importantly, explain to a client the steps they can take to move on a successful financial path.”

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What is a financial plan? originally appeared on usnews.com

Update 9/23/21: This story was posted at an earlier date and has been updated with new information.


Louis R. Hancock

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