If a client’s wish list involved a trip abroad, you probably wouldn’t advise them to drive to the airport without any plans. They would be lucky enough to get the right flight at the best price, pack weather-appropriate clothing, and have a safe, clean bed waiting for them when they arrive. While there are a few intrepid souls who would rush across the ocean without a care, the majority of people understand that the ultimate journey involves planning.
Many people also dream of having a great retirement, helping their children achieve their educational goals or building a successful business. Just as a person can seek out a travel specialist before going abroad, they can also hire a financial advisor to develop a roadmap to achieve their personal goals. Your goal as an advisor is to clarify their goals, create timelines, reduce risk, and ultimately get 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 overall financial picture and lay out a roadmap for them to achieve their goals. Although it sounds simple enough, a solid financial plan is highly individualized to reflect the unique circumstances that each person brings to the table – including personal desires, family constraints, risk relationship with money, and expectations. savings and investments. The plan brings together both needs and wants for its future.
A financial plan will also address any lack of funds. Few people, when they first hire a financial planner, will have saved enough. 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. More importantly, an advisor will help clients determine if their risk tolerance can support their dream or if they need a new, more realistic view.
Creation of a financial plan
Every plan should include these basic elements to help it reach its full potential:
- Cash flow analysis: If you want to achieve a goal, you must first understand your starting point. For a finance professional, this means looking at a client’s monthly income stream. Few clients have ever analyzed their cash flow, and it’s often eye-opening for them to see what they can safely spend each month to effectively meet both their short-term needs and their long-term goals. .
- Net Worth Analysis: A good financial planning strategy also involves developing a statement of net worth. 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 off before retirement.
- Strategic targets : For most people, retirement remains an abstract goal. Over a long period, people often switch from pure economic decisions to behavioral economic decisions, 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 involve including short-term goals, such as planning for the next vacation or buying a new car, alongside longer-term goals of saving funds for college and retirement.
- Hypothetical risk simulations: A sound financial plan will address known risks that can be mitigated if they arise. However, it is not possible to plan for all risks, especially new risks whose probability of occurrence is so low that it is not economical to deal with them. The COVID-19 pandemic has been such a “black swan” event. However, financial advisers will model what are called Monte Carlo simulations to show the impact of different known risks on an investment portfolio. The goal is to see how the plan would work in various economic situations.
- Assumptions used: The financial plan needs to document the underlying assumptions used in all risk scenarios. This information is important to ensure that investment recommendations match the client’s stated risk tolerance. Many advisors will use a risk tolerance questionnaire to determine appropriate investments that match the results of the questionnaire.
- Tax analysis: Income tax is a key part of a financial plan because 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 can also project a plan to mitigate known taxes.
- Risk mitigation: Although not all financial planners offer this service, they may partner with others to provide this information. Longevity planning continues to be critically important as more and more people live longer than expected. As one ages, medical and assisted care becomes necessary, and these costs can be significant. Additionally, estate planning can help a client have more assets to meet living expenses, while ensuring that key assets pass on to the next generation and are not lost to debt. inheritance tax.
Although these building blocks are analytical, they form a structure that allows a shot to really come to life when the human element is added.
How to customize a financial plan
Many advisors use behavioral analysis to understand the subtle power of the financial plan and help their clients achieve their goals. You can follow these steps to create a personalized financial plan:
- Understand the point of view: Customers come to the table with their culture and family dynamics. A client’s culture may expect children to care for their parents as they age, which is factored into their financial planning. Asking questions and learning about customs and norms can have a particularly strong impact in our multicultural society.
- Understanding past experience: Clients may have attempted to save for long-term goals with varying results. Discerning what happened before without judgment can energize them to create a better current plan.
- Understanding motivations: Clients often come with an incomplete idea of what they want to accomplish. They’ve read that they’re “supposed” to worry about long-term goals, but have never really taken the time to understand what that means to them. Doing the plan on the customers themselves can reveal thought processes that might otherwise prevent them from implementing your recommendations.
- Use an investigator: The best information is in the space between the questions. An interviewer gives you permission to ask sensitive questions that would otherwise seem too personal. For example, an interviewer will ask for the names and ages of a spouse or children. Armed with this information, an astute advisor can then ask about potential goals involving 529 education savings plans or lifetime access trusts for the spouse. Customer responses are often candid and extremely insightful when approached in this way.
- Explain the importance of each component: When you request a list of documents from clients, they may balk at the effort required to retrieve them. However, when customers understand why detailed information is important to the overall picture, they are more willing to gather and share those critical details.
- Build an image: As the plan comes together, you can explain to your clients how each piece plays a crucial role in the overall picture. This will help them appreciate the analytical pages, but also see how they individually reflect in the overall plan. As you explain each section, continue to link it to the goals you fleshed out and how it aligns with their risk tolerance. Document your work both for future reviews and for compliance purposes.
- Create Actionable Steps: When the plan truly reflects their needs, clients like being able to take immediate action and see permanent results. By generating actionable insights, you can empower your customers to take positive action towards desired results. This creates both customer satisfaction and ultimately better retention. The latter is equally important for increasing your company’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 assets under management. However, done well, it is often the catalyst for a long and lasting relationship with your client, as any plan will require constant monitoring and adjustments to meet current challenges.
Don’t underestimate the value of a financial plan to the advisor either. The ultimate compliment is seeing your client living their best life and ticking off the to-do list items because of the work you’ve done for them.