How to create the ultimate financial plan to allow clients to live their best lives.
If a client’s wish list includes traveling abroad, you probably wouldn’t advise them to go to the airport without a plan. You have the opportunity to get the right flight at the best price, pack the right clothes for the weather, and arrive with a safe, clean bed. While some brave souls will inadvertently cross the ocean, most understand that the ultimate journey requires planning.
Many also dream of a great retirement, helping their children achieve their educational goals, or building a successful business. Just like someone can consult a travel expert before going abroad, they can hire a financial advisor to create a roadmap to achieve their personal goals. As their advisor, your goal is to define their goals, develop timelines, reduce risk and ultimately get your clients there.
What is a financial plan?
A financial plan is a document typically created using financial planning software to view a client’s overall financial situation and provide a roadmap to achieve goals. While it sounds simple, a solid financial plan is highly personalized to reflect the unique circumstances that each person brings – including their personal aspirations, family stress, their risk-to-money ratio, and their appetite for saving and investment expectations. The plan combines needs and aspirations for the future.
Any funding gaps will also be addressed in the financial plan. Few people have enough savings when they first hire a financial planner. Financial advisors can demonstrate the amount of savings a client needs to achieve their goals and the investment risks that lead to a given return. Most importantly, advisors help clients weigh whether their risk tolerance can support their dreams, or whether they need a new, more realistic perspective.
Develop a financial plan
Any plan should include the following essential elements to reach its full potential:
Cash flow analysis: To reach your goals, you must first understand your starting point. For financial professionals, this involves examining a client’s monthly income stream. Few clients have ever analyzed their cash flow, and it’s often instructive for them to see how much they can safely spend each month to effectively meet their short-term needs and long-term goals.
Wealth Analysis: Good financial planning also includes creating asset statements. This report identifies the customer’s assets and liabilities. This analysis is later used in planning to identify investable assets and liabilities that can be repaid before retirement.
Strategic Goal: Retirement remains an abstract goal for most people. Over a long period of time, people often move from purely economic decisions to behavioral economic decisions that appear irrational and introduce loss aversion thinking. Therefore, it is important that financial planning takes into account both short-term and long-term goals. This can include short-term goals, such as planning your next vacation or buying a new car, as well as long-term goals to save money for college and retirement.
Hypothetical risk simulation: A sound financial plan addresses known risks and mitigates them if they arise. However, it is not possible to plan for all risks, especially new types of risks whose probability of occurrence is so low that it is not economical to deal with them. The COVID-19 pandemic is that kind of “black swan” event. However, financial advisors model so-called Monte Carlo simulations to show the impact of various known risks on a portfolio. The goal is to see how the program performs in various economic scenarios.
Assumptions used: Financial planning requires documenting the underlying assumptions used in all risk scenarios. This information is important to ensure that investment advice is consistent with the client’s stated risk appetite. Many advisors use risk tolerance questionnaires to determine appropriate investments that match the test results.
Tax analysis: Income tax is an important part of financial planning because income taxes and wealth taxes can eat into long-term savings. This analysis can not only show the impact of taxes on various fixed assets, but also devise plans to mitigate known taxes.
Risk Mitigation: While not all financial planners offer this service, they may work with others to provide this information. Longevity programs remain critical as more people live longer than expected. Medical and complementary care becomes necessary as you age, and these costs can be significant. Additionally, estate planning can help clients have more available assets to cover their living expenses while ensuring that important assets flow to the next generation and are not lost to estate taxes.
While these basic components are analytical, they provide a structure that, when the human element is added, can really bring planning to life.
How to Personalize Your Financial Plan
Many advisors use behavioral analytics to understand the subtle power of financial planning and help their clients achieve their goals. You can create a personalized financial plan by following these steps:
Understand the point of view: Clients come to the negotiating table with their culture and family dynamics. The client’s culture may expect children to take care of their parents as they age, which affects their financial planning. Asking questions and learning about customs and norms can be especially powerful in our multicultural society.
Learn from past experience: A client may be trying to save for a long-term goal, with mixed results. Recognizing what happened before without judgment can motivate them to make better current plans.
Understand motivation: Clients often have an incomplete idea of what they want to achieve. They read that they “should” worry about long-term goals, but never really take the time to understand what that means to them. Creating a plan about the client themselves uncovers the thought processes that might keep them from implementing your recommendations.
Use a fact finder: the best information is in the space between questions. Fact-finders allow you to ask sensitive questions that would otherwise seem too personal. For example, fact-finders ask for the names and ages of spouses or children. Armed with this information, savvy advisors can ask about possible goals, including a 529 college savings plan or a lifetime spousal trust deed. When approached in this way, the client’s response is often candid and insightful.
Explain the importance of each component: When you ask a client for a list of documents, they may refuse the effort required to collect them. However, when customers understand why details matter to the big picture, they are more willing to collect and share those important details.
Create a picture: As the plan is developed, you can let your clients understand how each part plays a key role in the larger picture. This will help them understand the analytical aspects, but also how they are reflected individually in the overall plan. As you explain each section, go ahead and align it with your fulfillment goals and how it aligns with your risk tolerance. Document your work for future review and compliance purposes.
Create actionable steps: Clients love being able to take immediate action and see clear results when a plan truly reflects their needs. By producing actionable projects, you empower your clients to take proactive steps to achieve the results they want. This both increases customer satisfaction and ultimately, loyalty. The latter is equally important for improving a company’s valuation and assets under management (AUM).
Financial planning is often viewed as a loser by many financial advisors to allow them to accumulate AUM. However, when done right, it can often be a catalyst for building long-lasting relationships with customers, as each program needs to be continually followed up and adjusted to meet current challenges.
Also don’t underestimate the value of an advisor’s financial plan. The ultimate compliment is seeing your clients live their best lives and taking items off the list because of the work you do for them.
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