26.2.1 Steps In Financial Planning Process

Steps In the Financial Planning Process

Typically, financial planning is a six-step process as follows:

1. Establish the Client–Advisor Relationship.
2. Collect Data and Information.
3. Analyze Data and Information.
4. Recommend Strategies to Meet Goals.
5. Implement Recommendations.
6. Conduct a Periodic Review.

Financial planning involves the same set of steps for each client. However, within that framework, a plan must address the unique and specific needs of the individual client to be effective.

Step 1: Establish the Client–Advisor Relationship

The first step in the planning process is to interview the client to identify issues, both known and unknown, and determine how a financial plan might help address them. During this process, you and your client will decide whether to embark on a long-term relationship.

Initial Discussion Areas

• The financial planning process and its benefits
• Alternative strategies available
• Specialist expertise required for specific choices
• Disclosure of possible conflicts of interest

If the initial interview is successful, formalize the relationship with either a letter of engagement or a professional service contract. The letter or contract should include:

• Information to be provided by the client
• Services to be provided by the advisor
• Compensation details for the advisor and other involved professionals
• Expected duration of the professional relationship

Step 2: Collect Data and Information

Once the relationship is established, the next step is to gather the information required to prepare the financial plan. Clients should understand the importance of providing comprehensive data.

Essential Information to Collect

• Current financial and personal status
• Investment goals and preferences
• Level of risk tolerance

To build an effective financial strategy, uncover client motivations not always apparent. You might ask questions such as:

• How do they make important decisions?
• How do they prefer to communicate?
• What is their psychological makeup?
• What are family members’ needs, goals, and aspirations?

Communicating with and Educating the Client

Gathering information is just the start of an ongoing relationship involving regular contact and education. Explain your recommendations in simple terms and disclose associated risks.

Additional Information Required

• Personal data: Age, marital status, dependents, health and employment status
• Net worth and family budget information

Advise clients to maintain complete records of their finances, including locations of essential documents like wills, insurance policies, bank and investment accounts, pension plans, and contact information for professional advisors.

Dive Deeper

Refer to Appendix A for samples of Net Worth Statements and Family Budget.

Step 3: Analyze Data and Information

Set investment objectives by assessing clients’ personal strengths and weaknesses, and realistic reviews of their career and earnings potential.

Example Analysis

Objectives and Constraints

Investment objectives commonly aim for income, capital growth, capital preservation, tax minimization, or liquidity. Constraints include risk tolerance, investment knowledge, and time horizon, which should influence the financial plan.

Step 4: Recommend Strategies to Meet Goals

Develop the financial plan based on collected data and analysis. Ensure it is simple, implementable, and easy to maintain. Review the plan with the client, explaining each product, its risks, and rewards. The client must agree with the recommended goals and risk tolerance.

Step 5: Implement Recommendations

At this stage, the client initiates actions based on the recommendations. Immediate actions might include applying for insurance or paying down debt, while long-term plans encompass regular investing in registered accounts like RRSPs. Provide support and referrals to other professionals if needed.

Step 6: Conduct a Periodic Review and Follow-Up

A financial plan should be dynamic, requiring regular reviews and updates to reflect changes in the client’s situation or external factors like economic conditions and tax laws. An annual review is the minimum, but circumstances may require more frequent mini-reviews.

Key Takeaways: Maintain an ongoing supportive relationship with clients, ensuring they adjust their financial plans to new situations and maximize available benefits.

Review recommendations, conduct follow-ups, and ensure implementation of new strategies or adjustments as necessary.

Frequently Asked Questions (FAQs)

What information should be gathered initially from a client?

Initially, collect data about the client’s current financial status, investment goals, risk tolerance, and personal information like age, health, and employment status.

How frequently should a financial plan be reviewed?

An annual review is recommended as a minimum. However, changes in tax laws, economic conditions, or significant personal life changes may necessitate more frequent reviews.

Is the client’s claimed risk tolerance always accurate?

Not necessarily. An advisor should also consider the client’s personal circumstances like job security and financial stability to assess true risk tolerance.

How can client trust be developed?

Client trust is developed through honest and transparent communication, educating the client about risks and rewards, and maintaining regular contact to keep them informed.

Glossary

• Net Worth: The value of all assets minus the total of all liabilities.
• Liquid Securities: Financial instruments that can be easily converted into cash without significant loss of value.
• Blue Chip: Stocks of established companies known for their financial stability and reliability.
• RRSP (Registered Retirement Savings Plan): A retirement savings plan in Canada that offers tax benefits.

Diagrams

    graph TD
	    A[Establish Relationship] --> B[Collect Data]
	    B --> C[Analyze Data]
	    C --> D[Recommend Strategies]
	    D --> E[Implement Recommendations]
	    E --> F[Periodic Review]
	    F --> B

End of Chapter Summary

• Establish a clear, respectful client-advisor relationship
• Collect comprehensive client data and personal information
• Conduct thorough analysis to form a precise client profile
• Develop simple, actionable financial plans and educate clients about them
• Implement recommendations with the client’s active participation
• Conduct periodic reviews and make necessary adjustments to the plan

Improve your financial planning proficiencies by continuing to the next chapter or visiting Appendix A for practical application tools like the Statement of Net Worth.