I think that most people have a preconceived notion of what financial services professionals do and I think that the term “financial planning” usually gets lumped in with that idea. However, financial planning is probably far from what you think it is if you lump it in with the jobs of most other financial professionals. It isn’t managing someone’s portfolio through buying and selling stocks for them (although this can be part of a financial plan) and it isn’t selling someone a financial product. True financial planning involves taking a deep dive into every aspect of a client’s financial life, helping them to organize, set goals, and create a plan to reach those goals, and helping the client follow through on their plan. A financial plan should paint a picture of where you are, help you figure out where you want to go, and define the steps that you’ll need to take to get there. Succinctly, financial planning involves helping others allocate their money and other financial resources in a way that aligns with their goals and values.
Financial Planning Process
Financial planning does not start with someone selling you a product. While a financial salesperson can engage a client in financial planning, they’re proving to you up front that they’re not working in your best interest by selling you a product that they’re set to make a nice commission on. As outlined by the CFP Board, the financial planning process includes 6 steps:
- Establishing and defining the client-planner relationship
- Gathering client data including goals
- Analyzing and evaluating the client’s current financial status
- Developing and presenting recommendations and/or alternatives
- Implementing the recommendations
- Monitoring the recommendations
If someone comes to you selling a financial product such as life insurance or an annuity before completing these first three steps, then they’re not helping you with financial planning and they’re not acting as a fiduciary for you (not everyone who calls themselves a financial planner is obligated to always act in your best interest). There’s a big difference between a fee-only financial planner and someone who is selling you a financial product (Here are some tips to find a qualified financial planner).
The process of financial planning involves taking an extremely deep dive into a client’s financial situation and helping them develop achievable financial goals. It should be a collaborative process between the financial planner and the client and can sometimes take just as much work from the client as it does from the planner. The beginning steps require a client to provide a lot of information to a financial planner that they oftentimes don’t know where it is or don’t have organized well.
Once the information is gathered, it’s time for the financial planner to go to work evaluating everything they’ve been given and seeing where they can fill holes in the information. A financial plan is created taking into consideration all of a client’s current financial resources, the goals that they have, and what they can and are willing to do to get there. Finally, a client and financial planner meet to review the information, tweak anything that was lost in translation, and define follow-up tasks.
Once these steps are complete, it’s time to implement and monitor recommendations. While the recommendations are probably the most important outcome of the financial planning process, they too often fall to the wayside and don’t get completed. It’s understandable – people have busy lives and they’re not always motivated to think about what they need to do to improve their finances. Life gets in the way. That’s why it’s important that their financial planner is there to help them with the tasks that they can and to continue to remind the client to complete the tasks that the financial planner can’t complete for them.
Financial Planning Subject Areas
What exactly do financial planners help clients with? Depending on the scope of the engagement with a client, a financial planner should be able to help with all the following:
- Financial statement preparation and analysis (including cash flow analysis/planning and budgeting)
- Insurance planning and risk management
- Employee benefits planning
- Investment planning
- Income tax planning
- Retirement planning
- Estate planning
A financial plan should be a condensed version of all of the steps and financial planning subject areas above that tells you where your current financial situation is, where it needs to go/how you can reach your goals, and the steps and recommendations to get there.
However, some financial planners will do modular financial planning for clients where they will complete one of the aspects of financial planning listed above such as a college funding analysis or life insurance analysis. A comprehensive financial plan would include an analysis of all of the subject areas.
How Do You Pay For A Financial Plan?
There are many ways to pay for a financial plan outside of paying a commission for purchasing a financial product. These include being charged as a percentage of your assets that a financial planner manages for you, paying a one-time fee directly for a standalone financial plan, or paying a retainer for ongoing advice such as you would with a lawyer, among many, many other payment structures.
Financial planning is a growing field separate from traditional investment management and financial product sales and the ways to pay for financial planning services are growing in number along with it.
A Financial Plan Is A Map
Financial planning is more than just trading stocks. While most financial planners do manage clients’ investments, the financial plan should be where they start. How can your financial planner know how to properly manage your investments for you without first knowing your goals and your comprehensive financial picture? Investment management without a financial plan is like going on a cross country road trip without a map or a GPS. You may know where you want to go, and you may know generally how to get there, but it will be much easier and much more straightforward with a proper plan in place.
