MONEY TALKS - My previous column discussed the feelings and beliefs that people have about financial planning and how these notions sometimes create a barrier which prevents them from truly understanding the process and concepts involved. Before we get into the specific subject matter covered in a financial planning relationship, I think it’s essential to take a step back and understand the process itself. The Certified Financial Planner Board of Standards has identified six practice standards designed to provide a framework for professionals with the goal of providing a more rewarding experience for the client. The six practice standards, or steps, of the financial planning process are:
1. Establish and define the client-planner relationship - The first step in the financial planning process is to establish and define the client-planner relationship. This step includes identifying the services and scope of the engagement. The planner should also explain the process as well as any relevant concepts or issues. There should also be a clear outline clarifying both the planner’s and client’s responsibilities.
2. Gather client data including goals - The second step in the process involves gathering both quantitative and qualitative data from the client through interviews, questionnaires, and client records. The planner should explore the client’s values, attitudes, expectations, and time horizons to determine how they affect the client’s goals, needs, and priorities.
3. Analyze and evaluate the client’s current financial status - Before making any recommendations, the planner needs to assess the client’s situation to determine the likelihood of reaching the client’s goals and objectives. The client and planner should work together to determine personal assumptions such as retirement age, income needs, and risk tolerance, as well as economic assumptions like inflation rates, tax rates, and investment return.
4. Develop and present recommendations and/or alternatives - The fourth step is the heart of the financial planning process. The planner needs to use both art and science to formulate recommendations to meet the client’s goals, needs, and priorities. This begins by evaluating various alternatives, including continuing the present course of action. Then the planner should present his or her recommendations to the client. Strong communication is critical to ensure the client understands the recommendations as well as the assumptions used.
5. Implement the recommendations - The planner should assist the client with the implementation process including selecting the appropriate products and services as well as coordinating with other financial professionals such as insurance agents, CPA’s, and attorneys.
6. Monitor the recommendations - The final step is to monitor the recommendations. It is critical to clarify the roll, if any, of the planner in the monitoring process. The plan should be monitored to evaluate the progress of the plan as well as any changes in the client’s situation or law changes that could affect the plan.
In my next column we’ll talk about the subject areas and concepts that are generally covered in the financial planning process as well as tips and suggestions on how to choose a financial advisor that is best for you.