What is a financial plan? | Financial advisors

A financial plan is at the heart of the financial counseling process. In a way, it’s your clients’ money map, there to guide them financially from where they are today to where they want to be. Without a plan, investors simply paddle out to sea, hoping that their direction and speed will be enough to get them where they need to go.

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

What is a financial plan?

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

Financial plans are typically created using financial planning software and can incorporate many facets of planning. For example, the retirement plan element often includes analysis showing the impacts of taking money from different accounts, eligible and non-eligible, for income and a comparison of the tax implications of each scenario, says Kelly Campbell, financial planner board member and chairman of the board. CEO of Campbell Wealth Management in Alexandria, Virginia.

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

Creation of 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 net worth statement or detailed cash flow analysis. Financial planning begins with understanding your client’s current finances. “This could mean, among other things, that a plan should include a net worth statement or a detailed cash flow analysis to understand how funds come and go,” says Martin Schamis, head 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 achieve a client’s goals along with detailed liabilities and current and planned expenses, says Tammy McKennon, financial advisor at Edward Jones at Newport Beach, California.
  • A strategy to achieve 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 in Northwestern Mutual in Milwaukee. “Too often, consumers see financial planning as something that prepares for the future, which is abstract. Financial planning must also include how people can live their dreams today – whether that’s buy a new car, plan a family vacation, or fund college tuition – all while preparing for long-term goals like retirement.”
  • What-if 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 into play,” 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 expected spending, and then we use conservative assumptions about their asset growth to document a very realistic expectation of results,” McKennon said. “We add additional layers of ROI sequencing, which gives additional confidence to our results.”
  • A holistic review of your client’s finances. Throughout the financial planning process, you’ll often find other aspects of your client’s finances that need to be considered, says Greg Wells, regional manager and partner at EP Wealth Advisors in Torrance, Calif. This may include checking whether 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 are also taken into account.

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

After all that, a financial plan may seem like a purely analytical endeavor, but there’s more to financial planning than numbers, says Daniel Crosby, chief behavior officer at Atlanta-based Orion Advisor Solutions.

“A good financial plan is rooted in a deep understanding of a person’s psychology and includes setting goals that are sufficiently motivating, 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-laid financial plan will encounter obstacles along the way, and at those times, an understanding of investor psychology becomes essential.”

How to make a financial plan

Financial planning starts with active listening and often asking probing questions to really understand what matters to your client, says Javeri. “Financial plans cannot take a one-size-fits-all approach. During the conversation, it is important to identify the most important life goals for 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, Keady says. “A client’s family, culture, environment, and career will help the advisor navigate the client’s views and their relationship to financial planning.”
  2. Ask questions to understand your customers and their goals: Keady tells advisers to ask about estimated retirement age, debt repayment, college funding goals or plans to leave a legacy. You should be as complete and detailed as possible when collecting information. “It’s often cumbersome, and most clients say we ask for more information than anyone has ever asked for,” Wells says. “But the more data we have, the better results we can provide.”
  3. Use a form to collect customer information: Keady recommends having a form to help you gather all of this information along with your client’s financial data, such as risk tolerance, income, estimated expenses, insurance policies, and bank and account statements. shift.
  4. Be systematic in your data collection: Despite the highly human element of financial planning, the data-gathering part of creating a plan needs to be done systematically, says Campbell. “One-off planning isn’t very helpful for the client or the advisor. Having a systematic planning process usually uses some software packages, and the process is usually streamlined.”
  5. Communicate how you create the plan with the client: After gathering the necessary data, you can create the financial plan. “Be sure to understand and communicate all Monte Carlo assumptions and results,” says Wells. “Keep the details in place for future reviews and plans to compare.”
  6. Provide the final plan with a list of action items to perform: “Following up on action items is also very important to ensure the plan is followed and continues to move forward on the right track in the future,” says Wells.

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

“With the current level of financial fragility that we are seeing, clients will likely not be able to achieve all of their financial goals,” Keady says. “The best advisor will be able to examine when a client is not succeeding (and, more importantly, explain to a client the steps they can take to progress on a successful financial path.”