Master the Art of Financial Planning Just Like the Experts Do
Certified Financial Planners (CFPs), who follow a certain process to develop recommendations for their customers, call these seven steps the "financial planning process." The CFP community generally agrees that these procedures constitute the practice standards. Suppose both the planner and the client agree that the standards are a part of their engagement scope. In that case, they must be adhered to to comply with the Certified Financial Planner Board of Standards' Code of Ethics and Standards of Conduct.
Suppose a person wished to act as their nonprofessional financial planner. In that case, they could study these procedures and put them into practice for their benefit to operate as their nonprofessional financial advisor.
Can You Walk Me Through the Seven Steps of Financial Planning?
The process of financial planning consists of seven parts, the first of which is learning about the client's financial condition and goals. The process culminates with the customer regularly monitoring their progress toward those goals and revising them as required.
- Acquiring a thorough understanding of the client's personal life and financial situation.
- Establishing and prioritizing specific objectives.
- Conduct an investigation into the client's current plan of action and any future alternate plan(s) of action.
- The process of developing the advice for financial planning.
- The presentation of the advice for financial planning.
- Putting into action the proposal about financial planning.
- Maintaining vigilance and providing updates.
The Consumer Financial Protection Bureau (CFPB) defines financial planning as "a collaborative process that helps maximize a client's potential for meeting life goals through Financial Advice that integrates relevant elements of the client's personal and financial circumstances." In other words, financial planning is a way to enable clients to maximize their chances of meeting their life goals.
The First Step: Acquiring a thorough understanding of the client's personal life and financial situation
The Certified Financial Planner (CFP) will begin the process of financial planning by asking their clients questions geared to assist them in obtaining a better understanding of who the client is and what they want from the relationship. Some of the questions are qualitative and contribute to a deeper understanding of the client's health, family relationships, values, earnings potential, risk tolerance, objectives, needs, priorities, and existing financial plan. Other questions focus on the client's financial plan.
Some of the questions are quantitative and lead to a better understanding of the client's income, expenses, cash flow, savings, assets, liabilities, liquidity, taxes, employee and government benefits, insurance coverage, and estate plans. Other questions focus on the client's assets, liabilities, and liquidity.
In order to unearth the information required to get the strategy off the ground, the advisor could ask open-ended inquiries. This information may cover a wide variety of subjects, such as financial goals, thoughts about market risk, and even dreams about retiring in the Caribbean.
The advisor will also analyze the financial information provided by the customer to ensure that they comprehensively comprehend the client's current situation.
For instance, if you are working on planning for your retirement, some of the critical pieces of information that you will need are your annual income, your savings rate, the number of years until your intended retirement age, the age at which you will become eligible to receive Social Security or a pension, the amount of money that you have saved up to this point, the amount of money that you will save in the future, and the rate of return that you anticipate on your investments.
The Second Step: Establishing and prioritizing specific objectives
The advisor will use their knowledge of finances to assist the client in setting goals for themselves. They will ask clarifying questions in order to assist in determining those objectives. For instance, how far out do you see yourself looking? Do you wish to complete this objective in five years, ten years, twenty years, or thirty years from now? What is your comfort level with taking risks? If you want to attain your investment goals, are you prepared to take on high relative market risk, or do you think a conservative portfolio would be a better choice for you?
The customer and the financial planner will collaborate to decide which goals should take precedence and in what order.
The Third Step: Conduct an investigation into the client's current plan of action and any future alternate plan(s) of action
Next, the advisor will examine the client's existing plan of action to determine whether or not it is bringing the customer closer to achieving their monetary objectives. If it is not, the advisor will determine other potential courses of action and discuss with the client the benefits and drawbacks of each decision.
The Fourth Step: The process of developing the advice for financial planning
The financial planner will choose one or more recommendations that, in their professional opinion, will assist the client in meeting their objectives. They analyze each recommendation taking the following into consideration:
- Which presumptions were utilized in the formulation of the recommendation?
- How the recommendation aligns with the objectives of the customer
- How it fits in with the client's other financial plans overall and how it works with those plans
- How urgently they should implement the recommendation
- Whether you can execute the recommendation on its own or whether you must do so in conjunction with other recommendations.
The Fifth Step: The presentation of the advice for financial planning
In this stage of the process, the financial planner will provide the suggestions as well as the reasoning that went into making the recommendations. This enables the customer to make an educated choice regarding whether or not the recommendations are a good fit for them.
The Sixth Step: Putting into action the proposal about financial planning
Putting a strategy into action is what is meant by "implementing" that plan. However, despite the seeming ease of this stage, many people realize that it is actually the most challenging part of the financial planning process. Even if you have the strategy prepared, in order to put it into action, you need to have the discipline and the drive to do so. You can start to wonder what might happen to you if you don't succeed. At this point, inaction has the potential to develop into procrastination.
Suppose the financial planner is responsible for implementation. In that case, you will also define those responsibilities so that you are aware of the specific actions being taken on your behalf by your CFP.
Investors who have brought about success in the past would tell you that the most critical step toward success is getting started. There is no requirement for you to begin with a significant amount of savings or an advanced level of investment strategy. You could learn how to invest with only one fund or start saving a few dollars every week to build up to your first investment. Both of these options would allow you to get started in the world of investing.
The Seventh Step: Maintaining vigilance and providing updates
There's a reason why this process is called "financial planning": much like life, plans must adapt to new circumstances. Once the plan has been formulated, it can be considered a part of past history. Because of this, it's essential to keep an eye on the strategy and make adjustments to it as necessary. Think of the things that can change in your life, such as getting married, having children, switching careers, and many other things.
These occurrences in your life may cause you to view your financial plans from a different viewpoint or make adjustments to them. Now think about events or changes that are out of your control, such as tax regulations, interest rates, inflation, stock market swings, and economic recessions. These factors can have a noticeable impact on your financial situation.
Your certified financial planner will work with you to ensure that your plan is reaching your goals and will recommend changes if it is not meeting your goals.
The Seven Steps of Financial Planning –– the bottom line
You can use what you've learned about the seven processes of financial planning for any aspect of your personal finances, including insurance planning, tax planning, cash flow (budgeting), estate planning, investing, and retirement planning, now that you are familiar with these steps. While it is possible to handle everything on your own, relying on professionals for guidance and an objective point of view about your finances can be highly beneficial.
Remember to keep returning back to the steps if big life or financial changes occur, regardless of whether you want to handle it yourself or engage a professional advisor. You should also consider doing what certified financial planners do: regularly schedule meetings with yourself to revisit your strategy at regular intervals, such as once a year.
Frequently Asked Questions (FAQs)
What exactly does financial planning entail?
Planning your finances involves establishing both short-term and long-term monetary objectives and devising a strategy for reaching those objectives. Financial planning is something that can be done on your own or in conjunction with a professional advisor such as a certified financial planner (CFP). You have access to a wide variety of resources that can assist you in achieving objectives such as reducing your debt, analyzing your spending, and organizing your retirement savings. Seeking the advice and services of a financial planner can be helpful if your situation is complicated, if you have a substantial amount of assets, or if you want an objective party to review your situation. All of these are good reasons to seek out the assistance of a financial planner.
How much does it cost to hire a financial advisor?
There are a variety of fee schemes used by financial advisors. There are many who bill an hourly rate for their planning and advice services. Others base their fees on a proportion of the client's total assets while providing management services. Some financial advisors may employ a hybrid model that combines the two approaches described above, in which they charge a one-time, flat fee for the plan and an ongoing fee for the management of the funds.
