If a client’s bucket list involved a trip abroad, you likely wouldn’t advise them to head to the airport without any plans. They’d chance getting the right flight at the best fare, packing proper clothing for the weather and having a safe, clean bed awaiting them on arrival. While there are a few intrepid souls who would dash across the ocean without a care, the majority of people understand that the ultimate trip involves planning.
Many people also dream of a living a great retirement, helping their children achieve their educational goals or building a successful business. Just as a someone might seek a travel specialist before setting out abroad, they may also hire a financial advisor to craft a roadmap to meet their personal goals. Your goal as their advisor is to clarify their goals, create a timeline, reduce risks and, ultimately, bring your clients to the finish line.
What Is a Financial Plan?
Financial plans are documents, often created with financial planning software, that look at a client’s entire financial position and lay out a road map for them to achieve their goals. While this sounds fairly straightforward, a solid financial plan is highly individualized to reflect the unique circumstances each person brings to the table – including their personal desires, family constraints, risk relationship to money and expectations for their savings and investments. The plan unites both needs and wants for one’s future.
A financial plan will also look at any shortfall of funds. Few people, when they first engage a financial planner, will have saved sufficiently. The financial advisor can demonstrate the amount of savings a client needs to achieve their goals as well as the investment risk that will produce a particular rate of return. Most importantly, an advisor will help clients reconcile whether their risk tolerance can support their dream or if they need a new, more realistic view.
Creating a Financial Plan
Each plan should include these basic elements to help it reach its full potential:
- Cash flow analysis: If you want to hit a goal, you must first understand your starting point. For a financial professional, this involves examining a client’s flow of monthly income. Few clients have ever analyzed their cash flow, and it is often eye-opening for them to see what they can safely spend each month to efficiently meet both their short-term needs and their long-term goals.
- Net worth analysis: A good financial planning strategy also entails crafting a net worth statement. This statement identifies a client’s assets and liabilities. This analysis will be used later in the plan to identify investable assets and debts that can be paid down before retirement.
- Strategy goals: For most people, retirement is still an abstract goal. Over a long period of time, people often shift from pure economic decisions to behavioral economic decision-making, which can seem irrational and introduce loss aversion thinking. Therefore, it is important that a financial plan addresses both short-term and long-term goals. This may entail including short-term goals, such as planning the next vacation or purchasing a new car, alongside the longer term goals of saving funds for college and retirement.
- Hypothetical risk simulations: A solid financial plan will address known risks that can be mitigated should they arise. However, it is not possible to plan for all risks, especially novel risks that have such a low probability of occurring that they are not economical to address. The COVID-19 pandemic has been this type of “black swan” event. However, financial advisors will model what are known as Monte Carlo simulations to show the impact of different known risks on an investment portfolio. The goal is to see how the plan would perform in a variety of economic situations.
- Assumptions used: It is necessary for the financial plan to document the underlying assumptions used in all risk scenarios. This information is important to ensure that the investment recommendations align with the client’s stated risk tolerance. Many advisors will use a risk tolerance questionnaire to ascertain the appropriate investments that match the quiz results.
- Tax analysis: Income taxation is a key part of a financial plan, as income and property taxes can undermine long-term savings. This analysis can not only show the impact of taxes on different investment assets, but it also can project a plan to mitigate known taxes.
- Risk mitigation: While not all financial planners offer this service, they can partner with others to provide this information. Longevity planning continues to be critically important as more people are living longer than they expected. As one ages, medical and assisted care become necessary, and these costs can be significant. Additionally, estate planning can help a client have more assets available to meet their living expenses, while ensuring that key assets flow to the next generation and not get lost to estate taxation.
While these basic components are analytical, they form a structure that allows a plan to truly come alive when the human element is added.
How to Personalize a Financial Plan
Many advisors use behavioral analytics to understand the subtle power of the financial plan and help their clients reach their goals. You can follow these steps to create a personalized financial plan:
- Understand perspective: Clients come to the table with their culture and family dynamics. A client’s culture may expect children to take care of their parents as they age and that factors into their financial planning. Asking questions and learning about customs and norms can be especially impactful in our multicultural society.
- Understand past experience: Clients may have attempted to save for long-term goals with varying results. Discerning what has previously transpired without judgment can energize them to create a better current plan.
- Understand motivation: Clients often show up with an incomplete idea of what they want to accomplish. They have read that they are “supposed to” be worried about long-term goals, but have never truly taken the time to understand what that means to them. Making the plan about the clients themselves can uncover thought processes that might otherwise derail them from implementing your recommendations.
- Use a fact-finder: The best information can be found in the space between the questions. A fact-finder gives you permission to ask sensitive questions that would otherwise seem too personal. For example, a fact-finder will ask names and ages of a spouse or children. Armed with that information, an astute advisor can then ask about potential goals involving 529 plans for college saving or spousal lifetime access trusts. Client answers are often candid and extremely insightful when approached this way.
- Explain the importance of each component: When you ask for a list of documents from clients, they may balk at the effort needed to collect them. However, when clients understand why detailed information is important for the overall picture, they are more willing to gather and share these critical details.
- Build a picture: As the plan comes together, you can relay to your clients how each piece plays a crucial role in the total picture. This will help them appreciate the analytical pages, but also see how they are individually reflected in the total plan. As you explain each section, continue to tie it back to the goals you fleshed out and how it matches with their risk tolerance. Document your work for both future reviews and compliance purposes.
- Create actionable steps: When the plan truly reflects their needs, clients love to be able to take immediate action and see definitive results. Generating actionable items, you can empower your clients to take positive steps toward the desired results. This creates both client satisfaction and, ultimately, better retention. The latter is equally important for raising your firm’s valuation and assets under management, or AUM.
Financial planning is often seen as a loss leader for many financial advisors so they can gather AUM. However, done well, it is often the catalyst for a long and enduring relationship with your client, as any plan will require consistent follow up and tweaking to meet current challenges.
Don’t underestimate the value of a financial plan for the advisor, too. The ultimate compliment is seeing your client living their best life and checking off bucket list items because of the work you did for them.