Let Me Explain the Financial Planning Process


I want to use this article to explain the financial planning process. Many competent, well-educated adults readily admit they struggle with even basic financial concepts. This really isn’t surprising since most school curriculums don’t teach financial management principles. But this is where a professional financial planner comes into the picture. Financial planners work with people and help them coordinate and manage the financial aspects of life.

Unfortunately, many people are reluctant to work with a financial planner because they are unfamiliar with how the financial planning process works.

The financial planning process explained

The process of financial planning can generally be broken down into seven basic steps:

Step 1 – Preliminary Meeting & Evaluation

During an initial interview, the financial planner and the prospective client get to know one another. This generally involves a first meeting during which the planner explains the nature of services to be provided and the way in which he or she is paid for these services. In turn, the prospective client has an opportunity to determine whether the financial planner has the ability to offer the types of services that are needed. The planner should take this opportunity to get some general idea of the prospective client’s current financial position and long-term goals. It is important for both parties that the relationship begins on a basis of mutual trust and confidence.

If it is determined to proceed, the planner should then provide the prospective client with an engagement letter that serves as a contract setting forth the services to be provided, the charges for these services, and the client’s responsibilities during the financial planning process. .

Step 2 – Gather Information & Establish Goals

To be effective, the financial planner must gather a substantial amount of information about the client. The information gathered can be either quantitative (e.g., financial information about the client’s income, expenditures, and assets) or qualitative (e.g., non-financial information about the client’s risk tolerance, expectations as to future standards of living, and health of the client and family members). Both the short-term and long-term goals of the client must also be identified. Such goals might be to have “adequate income in retirement,” or to “provide for a child’s education.” Once goals have been determined, it is essential to prioritize or rank them in order of importance.

Some of the key financial and legal documents that are usually secured during the data-gathering phase include:

  • Wills, trusts, and powers of attorney
  • Personal financial statements
  • Budgets
  • Retirement plan statements, brokerage account statements, and mutual fund statements
  • Insurance policies (life, disability, health, and property and casualty)
  • Divorce settlements
  • Federal and state income tax returns
  • Buy-sell agreements

Step 3 – Analyze Information & Develop Plan

Here is where the planner takes the information obtained, considers the client’s goals, and develops a financial plan intended to help the client achieve his or her goals. To assist in the process, the planner will often use computer programs to supplement his written analysis and recommendations.

At a minimum, a comprehensive analysis generally includes a review of assets, liabilities, current and projected income, and insurance coverages, and investments. If authorized by the client, the planner may also seek the assistance of other professionals. (e.g. attorney or insurance agent).

Step 4 – Present Plan

This is where the financial planner meets with the client, explains the recommendations, and provides the client with a copy of the written plan. Once the client has a chance to review the plan, the plan may be revised based on client feedback. Key elements of a written financial plan are likely to include the following:

  • Review of the client’s goals
  • Analysis of the client’s current situation
  • Specific recommendations from the financial planner for helping the client get from where he is to where he wants to be (i.e. to help him achieve his goals).
  • An action plan designed to implement the financial plan

Step 5 – Implement Plan

This stage is probably the most important of all. If the client fails to follow through on the planner’s recommendations, the plan will be useless. Plan implementation involves acting on the recommendations identified in step 4. This may involve a variety of tasks, including the purchase and sale of investments, modification of insurance coverages, adoption of legal instruments, and changes in spending and savings habits. It may also include working with other professionals (e.g., check with the attorney to ensure the new will has been drafted).


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