There are five basic steps to the financial planning process. Your financial planner will typically want to have an initial meeting to determine the suitability of any engagement. Afterwards, there are generally five steps to the planning process: data gathering, plan preparation, plan presentation, plan implementation, and on-going monitoring.
1. Financial Planning Process: Data gathering.
Data gathering is a marathon. It usually takes place at your home. It may take two hours or all day. Your planner will need to examine all your documents: Tax returns. Balance sheets. Income statements. Employee benefit plan booklets. Retirement plan documents. Wills. Trusts. Insurance policies. Investment statements. Brokerage house statements. Bank statements. These are the tangible bits of information.
The tangible information is not all that is needed however. A good financial planner will want to know your lifestyle goals. When do you want to retire? What kind of income will you require upon retirement? What type of lifestyle do you want to live? Your answers will need to be calculated into the planning process. The planner must also make assumptions on the future. Where will interest rates go? What direction is the economy headed? What find of inflationary pressure will we see? Your planner needs to learn your feelings on these various assumptions.
Finally, your planner will consider your personal attitudes — toward risk tolerance, toward tax aggressiveness, toward simplicity in your financial affairs. By the time all the data is gathered, your planner has a very good idea of where you are now and where you want to be.
2. Financial Planning Process: Plan preparation.
Plan preparation generally takes around three to four weeks, as the planner does analysis, diagnostics, and research. The planner will locate the most efficient path to get you to your life goals.
Your planner’s recommendations may be varied and come in the form of partnerships, trusts, corporations, etc… The pros and cons of each scenario will be examined and then prepared into a written report. This report will include major strategic recommendations, as well as minor tactical suggestions. Once complete, all of the parts will fit together to create a comprehensive financial plan.
3. Financial Planning Process: Plan presentation.
Once your plan is prepared, your planner will schedule time to present their findings to you. During this first meeting, he’ll present the plan to you and review any major points. You’ll then take the plan home to read and study. It is important that you sit down with your spouse (if applicable) and fully examine the plan. Write down any questions that you have regarding it.
When you meet with your planner again, you’ll review the plan in greater detail. They’ll answer any questions that you have and clarify the details. As you review and subsequently agree to each recommendation, the planner will prioritize them into your “Implementation Checklist.” This becomes a simple “to do” list for you and the planner.
4. Financial Planning Process: Plan implementation.
The first three steps move quite quickly. In fact, you will probably get through them in about a month.
Step four, implementing the plan, takes a lot longer-usually about five or six months. During that time, you’ll meet with your planner to go over tax planning, retirement planning, estate planning, and insurance issues. Your planner may bring in other experts — such as attorneys to help resolve certain issues.
In the end, your plan might have as many as 25 recommendations. A few recommendations will be major, broad, strategic recommendations, each worth thousands of dollars to you. The remainder will be fine-tuning recommendations — crossing the T’s, dotting the I’s, and making sure your financial affairs are really in order.
5. Financial Planning Process: On-going monitoring and maintenance.
Here the planner should be retained to provide periodic updates and on-going advice. Perhaps there are a couple of tax-planning sessions each year, portfolio reviews, insurance updates, etc. Perhaps you need some questions answered about whether you should refinance your mortgage, lease or buy a car, etc. Your planner should alert you to changes in conditions that directly affect your plan.