Financial Planning Process

By: Chris Bowmer
Director
Fortitude

Many people focus on making money rather than discovering how much they actually need during the course of their lifetime. Imagine how you would feel if you knew you had enough money, not just to do the things you want, but to help others too. It’s a powerful business proposition; it’s what life-focused or Lifestyle Financial Planning is all about.

A life-focused Financial Plan gives clients a framework against which they can make some smart decisions about their life and their money. It allows understanding of how each decision that’s made might affect other areas of their personal finances. Different scenarios can be tested before any big decisions are made.

The process of Financial Planning helps clients answer:

• What is it you really want to do?

• When do you want to do it?

• How much will it cost?

• Can you afford it now?

• If not now, when will you be able to afford it?

Our focus is entirely on exploring aspirations, future lifestyles and career wishes before thinking of money.

When we take on a new client we adopt a three-stage process:

Stage one: establish life goals

Stage two: prioritise financial objectives

Stage three: the selection of financial instruments that enable clients to live the life they have articulated.

One useful tool we have adopted when talking to clients at the early stages of our relationship is the bucket analogy. In the bucket we put assets such as: bank accounts, savings accounts, investment bonds and shares and where the bucket empties through expenditure on items such as food, mortgages and rents and fills through inputs such as salaried income and pension income. The bucket is also used to discuss the client’s life objectives such as holidays, giving to charities and carrying out volunteering work.

During a client’s life the inputs and outputs into the bucket change as life stages and choices change. This is why Financial Planning is a life long process rather than a one off event.

It takes time to find a process you and your team can be happy with and improvement and refinement of this process should never stop as refinement of your whole Client Experience should never stop.

A revolutionary approach

Over many years I experienced very poor service from financial advisers trying to sell me products. Only gradually did I realise there was no overall strategy tailored to my changing needs. I was flying blind. I discovered Financial Planning in 2004. Thirteen years later my plan is still clear, realistic and updated regularly. I feel in control. I wish I’d had this experience 45 years ago!

Andrew Humphries, Financial Planning client

A Global Six Step Financial Planning Process

Many organisations and individuals have documented what they believe to be the right Financial Planning process. There are as many criticisms with these processes as there are processes written mainly because the delivery of life-focused Financial Planning is personal and takes on the personality of the individuals and the businesses delivering it.

A good place to start is with the Financial Planning Standards Board (FPSB), a US body that has developed a Financial Planning process model – www.fpsb.org/about-financial-planning

Although I would probably use different words, I’m comfortable that these steps are all appropriate and necessary but not always separate steps or meetings. I understand at the time of writing, the FPSB may be looking at adding a seventh step and there are steps to take before the actual relationship starts in a marketing phase and when very first contacts are made.

Initial contact is important to get right. You cannot serve everyone who knocks on your door. We can filter some by phone but, as few clients come in asking for a Financial Planning relationship, it is easier to get a feel for the client and explain face to face.

ESTABLISH and define the relationship with the client

  • Always meet both parties of a couple
  • Ask the right questions, stop talking and listen
  • Set expectations, make it clear what Financial Planning can do over a lifetime
  • Communicate we have no right to talk about money until we understand what the money needs to do
  • Talk about fees and confirm we can work together

COLLECT the client’s information

  • Soft data about goals, objectives and problems to solve is usually collected at the first meeting
  • Once engaged, we will use our back office team to collect hard data about the current financial position
  • At the same time we will collect expenditure details and other factual data like Wills
  • We will also ask clients to complete Risk Tolerance questionnaires online
  • We usually also explore life objectives more carefully with the help of George Kinder’s three questions
  • These are all inputs into the creation of the first draft of a lifetime cash flow – not yet a plan

ANALYSE and assess the client’s financial status

  • The method for assessing financial status is a matter of choice, but I cannot see how a proper assessment can be done without a lifetime cash flow. I have been using cash flows exclusively since 2004 and the most significant change to my thinking came when I realised I could no longer actually advise anyone without one.
  • Cash flow helps with clarity and understanding for adviser as well as client, used face to face it creates the clarity needed to understand what risks are important and what risks are not. What risks can be tolerated and what risks are just there and need to be understood as they are entirely out of the client’s control.
  • We prepare a draft cash flow for the planning meeting, this is an opportunity for the planner to see what happens if nothing changes, to look at alternatives and to consider scenarios.

DEVELOP Financial Planning recommendations and present (planning meeting)

  • This is where I diverge somewhat from the FPSB in terms of their process. My feeling is that recommendations cannot be developed without the input of the client; the plan should always belong to the client. It is their plan after all.
  • The planning meeting is a critical and iterative process. Clients often only know what they want once they can see what choices they might have first.

Our planning meetings start with a consideration of the answers to the Kinder questions: a couple may have different views but they will feel excitement and empowerment when they start to get a picture of their ideal life and what might be possible; what could really bring about life changes. It often takes several years for a client to really get the hang of thinking about what really is important to them and being prepared to talk about it, not just to us but to each other.

The first draft of the cash flow will usually need some immediate modifications, especially in terms of planned spending and short-term goals, but we know what resources are available. A discussion of risk is really important, we know that the biggest problem with investment returns is client behaviour and this is often the result of a risk mismatch. Our Risk Tolerance questionnaire is a starting point for a discussion, maybe clients have not understood the importance of inflation, perhaps the couple have disparate feelings and these all need to be explored and understood.

This issue with risk

The biggest challenge for a Financial Planner is to put the client’s objectives at the top of the ladder. Why would you take more risk than you need to (increasing the chances of loss) or less risk than you need to and expect not to achieve your objectives at all? The opportunity to understand risk in your own context is all-powerful and creates acceptable outcomes for clients with sufficient resources.

We explore ‘What if’ Scenarios as we would explore the risks and whether or not the initial cash flow supports the objectives. Clearly a current state cash flow may work (or fail to work) because there is a mismatch of investment risk and the implications of the management of client behaviour will be key (an interesting question might be what they did in the 2008 crash). We would want to discuss the minimum return required and how this fits with the current resources, we would talk about longevity risk and we will talk about inflation and the uncertainty of future investment returns.

Clarification and the next steps agreed form an Action Plan – a course of action required to make it all happen.

IMPLEMENT the client’s Financial Planning recommendations

  • Issue our Meeting Notes which include an agreed Action Plan
  • Suggest that delegation to us means clients can concentrate on much more interesting things, living their life!
  • In the broadest terms though the client knows that the plan is what they need to do
  • Depending on complexity, we may follow up with focussed meetings on investment, protection or estate planning
  • Or issue any specific recommendations in writing
  • Always leaving our meetings solely to talk about the plan.

REVIEW the client’s situation

  • We might have more than one meeting with the client in year one
  • All will be focussed on forward planning
  • Unless situations are particularly complex, our review (forward planning) meetings are annual.

We have had many conversations with clients about the value of the annual meetings, they confirm the feeling of comfort, confidence and control that knowing everything is on track gives them and this is everything – worth every penny whatever the fee.


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