 THE PROCESS OF FINANCIAL PLANNING
Personal financial planning is a coordinated, continuous process that is subject to review and modification as client objectives, family and business circumstances, and economic conditions change. Although usually described in terms of stages, the financial planning process should be viewed as the coordinated, integrated, and ongoing management of your financial concerns.
Because of the comprehensive nature of financial planning, I face numerous interdependent
decisions. For example, you may need to delay starting an education fund until an adequate emergency
fund is established. The immediate implementation of risk management recommendations may be required to
protect you against potential losses that could adversely affect your financial situation. In such a situation,
investment decisions may have to be postponed.
In another situation, the existing portfolio may need modification to be consistent with the your stated risk tolerance level. Selecting a retirement plan that will maintain or improve a your standard of living can have an
impact on your estate distribution plans. Tax law changes can affect decisions relating to insurance,
investments, retirement planning, and estate planning.
The financial planning process can be divided into six stages: (1) gathering data, (2) establishing financial goals and objectives, (3) processing and analyzing information, (4) recommending a comprehensive financial plan, (5)
implementing the plan, and (6) monitoring the plan. While stages 1 and 2 could be reversed or even combined, they are presented here as distinct stages to emphasize the importance of establishing your objectives.
STAGES OF THE PROCESS
Gathering Data
I gather quantitative and qualitative data by asking you about:
Quantitative Data
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General family profile including names, dates of birth, addresses, Social security numbers |
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Names, addresses, and phone numbers of financial advisers |
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Assets |
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Liabilities |
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Cash inflows |
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Cash outflows |
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Insurance policies |
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Employee benefits |
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Tax returns for last several years |
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Details on current investments |
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Retirement benefits available |
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Client-owned business information |
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Copies of wills and trusts |
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Lifetime gifting programs |
Qualitative Data
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Goals and objectives |
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Health status of client and family members |
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Interests and hobbies |
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Expectations about employment, the economy, etc. |
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Risk tolerance level |
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Attitudes about current/future lifestyle, certain types of investments, etc. |
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Other planning assumptions. |
Establishing Financial Goals and Objectives
I assist you in establishing realistic goals and quantifying them in terms of measurable objectives.
Goals such as "to be successful" or "to live the good life" may not produce efficient results because of their
nebulous nature to achieve such goals. Financial goals should be quantified in dollar amounts and time frames instead of remaining general.
Because you may have many objectives that you would like to attain, the objectives should be ranked in order of
priority. Depending upon the nature of the objective, certain constraints, or limiting factors, need to be considered. Some constraints, such as available resources, have already been identified to a degree in the data gathering stage. At this point I must consider all factors restricting the range of alternatives appropriate to
meeting your needs and to achieving your objectives.
For example, your need for liquidity, marketability, and diversification affects your portfolio construction
process. Regulatory constraints impact upon all areas of financial planning.
My nearly thirty years of experience will help you in every stage of this process.
Processing and Analyzing Information
In this stage of the planning process, I gather and review relevant legal papers and contracts, such as
wills, trust documents, and insurance policies. In addition, I prepare a statement of financial position, a
current cash flow statement, and, if appropriate, a projection of cash flow and/or taxes. It may become necessary at this point for me to request your help in obtaining missing data needed to develop the financial plan.
Once all the information is available, I analyze it to identify strengths and weaknesses in the your
total financial situation. I might find some areas that need immediate attention, such as the adequacy of
the emergency fund or the existence of risk exposures that are not adequately covered. Identifying existing or
potential problems that can negatively affect your ability to achieve objectives is an important part of your financial planning.
When available resources are compared to your objectives, it may be necessary to modify the priority order of
objectives, the objectives themselves, or your attitude about current lifestyle or available resources. Economic
conditions, both current and forecasted, are evaluated in this stage of the process.
Recommending a Comprehensive Financial Plan
In this stage, first I identifie appropriate techniques for achieving your objectives. In portfolio
construction, for example, asset categories consistent with the your objectives and constraints are identified.
Next I select alternative investment vehicles within those categories. A similar selection process is used
in identifying appropriate insurance products, business forms, intra-family transfers, tax strategies, retirement plans, and estate planning techniques.
The alternative solutions are evaluated further, and an integrated set of recommendations is developed. The comprehensive plan is then presented to you. It is possible that even at this stage of the process, your objectives may be subject to reordering or change.
Implementing the Plan
In this stage of the process, you and I implement the plan, using the assistance of other professionals when needed.
Monitoring the Plan
At some point earlier in the planning process, I establish your personal financial file and a system for periodic review and revision. I monitor the performance of your investments, changes in the tax law, and the general economic environment. At regularly scheduled reviews with you, I update the plan for changes in your situation. Objectives, health status, income, or other factors may have changed.
Let my nearly twenty-five years of experience work for you.
Walter E. Nygaard, EA, CFP™
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