Step 1: Establish the Goal / Relationship
This is where the adviser introduces himself or herself and typically explains the financial planning process to a client or prospective client. The adviser may ask open-ended questions to uncover anything and everything from immediate financial goals to feelings about market risk to dreams about retiring in the Caribbean.
- What are your feelings about investing in the stock market? Why do you think you feel that way?
- What are some of your earliest memories and resulting experiences of financial planning (i.e., first savings account, first checking account, and first credit card)
- What are your financial strengths? What are your financial weaknesses?
- How do you plan to save enough for retirement?
Now you have an idea of your financial goal–the guiding philosophy to direct investment objectives, cash management, insurance needs, and other financial instruments to help achieve your goals.
Step 2: Gather the Relevant Data
This step is where the information required to make recommendations for the appropriate strategies and financial products to reach your goals is gathered. For example, what is your time horizon? Do you want to accomplish this goal in five years, 10 years, 20 years, or 30 years? What is your risk tolerance? Are you willing to accept a high relative market risk to achieve your investment goals, or will a conservative portfolio be a better option for you? Also, how far along are you in your goals? Do you have any money saved yet? Do you have life insurance? Do you have a will? Do you have children? If so, what are their ages?
Step 3: Analyze the Data
You’ve gathered the relevant data, now analyze it! Following the retirement planning example, the data you’ve gathered can help you arrive at some basic assumptions. Let’s assume you have 30 years until retirement, you’ve already saved $50,000, you expect an 8.00% return on your investments, and you can save $250 per month going forward.
Step 4: Develop the Plan
Let’s say you need $1 million to reach your goal. The previous assumptions (in Step 3: Analyze the Data) brought you just $100,000 short at around $900,000. If you can handle taking more market risk, you could increase your exposure to stocks in an aggressive portfolio of mutual funds and assume a 9.00% rate of return. Assuming all other assumptions remain the same, and by increasing your expected return by 1.00%, your 30-year time horizon, and savings rates would bring you to a nest egg worth nearly $1.2 million!
Step 5: Implement the Plan
Now you simply put your plan to work! But as simple as this sounds, many people find that implementation is the most difficult step in financial planning. Although you have the plan developed, it takes discipline and desire to put it into action. Saving $250 or $300 per month may be difficult. You may begin to wonder what may happen if you fail. This is where inaction grows into procrastination. Successful investors will tell you that just getting started is the most important aspect of success.
Step 6: Monitor the Plan
It’s called “financial planning” for a reason: Plans evolve and change just like life. Once the plan is created, it’s essentially a piece of history. This is why the plan needs to be monitored and tweaked from time to time. Think of what can change in your life, such as marriage, the birth of children, career changes and more. These events all require new perspectives on life and finance. Now think of financial changes beyond your control, such as tax law changes, interest rates, inflation rates, stock market fluctuations, and economic recessions.