The Financial Planning Process: 5 Essential Steps
The financial planning process involves five basic steps. After the initial meeting with your financial planner, the five steps to the financial planning process include: data gathering, plan preparation, plan presentation, plan implementation, and on-going monitoring.
1. Financial Planning Process: Data gathering.
The data gathering session is one of the most important meetings you will have. This session is typical done in the home, and can takes anywhere from several hours to all day. The planner will want to inspect tax returns, bank statements, account information, retirement plans, insurance policies, trusts, wills, pensions, IRAs, investments, brokerage accounts, and other tangible bits of information.
These physical documents are not all that your planner will need to get from this data gathering session. There is also subjective information that the planner must determine. What are your lifestyle goals? Where do you hope to be in the future? When do you plan to retire, and what are your expectations for that time period? Assumptions of the future must also be established. Your attitudes regarding interest rates, inflation, the economy, and various other factors must be clearly established.
Finally, your financial planner will determine your personal attitudes – toward taxes, risk tolerance, complexity/simplicity of your financial affairs. The primary objective of the data gather is to have a clear idea of where you are currently and where you want to head for the future.
2. Financial Planning Process: Plan preparation.
Your plan will usually take three to four weeks to prepare. During this time the planner does the analysis and diagnostic work. Now that the planner knows where you are and where you want to be, he can find the most efficient path to get you there.
Their recommendation may come in the form of a family partnership, family corporation, family trust, etc… The planner will examine the pros and cons of each scenario, and then prepare written recommendations. Some of the recommendations will be major, while others may be simple day to day things. Properly done, all of the pieces will fit together into a strategic and complete financial plan.
3. Financial Planning Process: Plan presentation.
After all the recommendations are in writing, your planner will present them to you. During the first interview, they’ll present the plan to you and review the major areas. Then you’ll take the plan home. Read it. Study it. Go over it with your spouse. Jot down any questions you may have about it.
You will review the plan in greater detail at your next meeting with your financial planner. At this meeting, ask your questions and make sure that the planner adequately addresses them. This meeting should be spend clarifying the details of the plan, and as each recommendation is approved, your planner will prioritize them into an “Implementation Checklist.” This is simply a “To Do” list for you and your planner.
4. Financial Planning Process: Plan implementation.
The first three steps move quite quickly. In fact, you will probably get through them in about a month.
The next step, step four, generally takes much longer – typically around five or six months. During this period, your planner will discuss topics such as tax planning, retirement planning, estate planning, and insurance issues. Other experts, such as attorneys, may be brought in to work on specific aspects of your plan.
Ultimately, you may have as many as 25 – 30 different recommendations in your plan. Some will be major, broad, strategic recommendations, likely worth many multiples of the fee the planner charged. The rest of the recommendations will assist in fine-tuning your financial affairs — crossing the T’s, dotting the I’s, and ensuring your finances are really in order.
5. Financial Planning Process: On-going monitoring and maintenance.
Here the planner should be retained to provide periodic updates and on-going advice. Perhaps there are a couple of tax-planning sessions each year, portfolio reviews, insurance updates, etc. Perhaps you need some questions answered about whether you should refinance your mortgage, lease or buy a car, etc. Your planner should alert you to changes in conditions that directly affect your plan.
