1. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company1 The Financial Planning Process The Foundation of Professional Financial Planning The financial planning process is a systematic way to manage the financial resources of the client to help the client achieve needs, goals and desires in a manner consistent with client values.

2. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company2 The Financial Planning Process The financial planning process consists of disciplined steps: Tools and Techniques lists six steps; The CFP Board of Standards also lists six; Other authors list five, six or more. However, all the versions reflect the same strategic management concepts.

3. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company3 Two Views of the Financial Planning Process Tools & Techniques of Financial Planning CFP Board of Standards Establish and define the relationshipEstablishing and defining the client-planner relationship. Gathering Background Information.Gathering client data, including goals. Establishing financial objectives. Developing financial plans.Analyzing and evaluating the client’s financial status. Developing and presenting financial planning recommendations and/or alternatives. Controlling and executing plans.Implementing the financial planning recommendations. Measuring PerformanceMonitoring the financial planning recommendations.

4. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company4 Establish & Define the Client-Planner Relationship The CFP Board of Standards recommends that the client-planner relationship be defined in writing. Careful disclosure of all relevant information and a client signature of agreement and understanding protects both the client and the planner. http://www.cfp.net/learn/knowledgebase.asp?id=2 http://www.cfp.net/learn/ethicsforms.asp

5. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company5 Financial Management Model DEVELOP FINANCIAL PLANS: Budget Income & Expenditures Forecast Financial Positions Determine Financial Media CONTROL & EXECUTE PLANS: Select Specific Financial Instruments Appraise Activity Construct Financial Portfolio MEASURE PERFORMANCE ACCEPTABLEUNACCEPTABLE Hold Steady UntilReconsider Objectives Next Measurement& Revise Plans ATTAIN OBJECTIVES END START ESTABLISH RELATIONSHIP Agree to Meet Clarify Planner and Client Responsibilities Provide ADV BACKGROUND ANALYSIS: Financial Position Income and Expenditures Demographics Risk Attitudes ESTABLISH OBJECTIVES Financial Terms Priorities Time Horizons

6. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company6 Establish the Relationship Client and planner agree to meet Outline the responsibilities of both the planner and the client Conflicts of interest, compensation arrangements, length of agreement period, and products and services to be provided disclosed and agreed upon

7. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company7 Gathering Background Information This step is sometimes combined with setting goals. The better the job you do in this stage, the better plan you will produce. Identifying the client’s risk preference is particularly important.

8. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company8 Gathering Background Information Details Comprehensive Financial Information –Record of Income & Expenditures –Statement of Financial Position Personal Parameters –Age, sex, health –Lifestyle & Tastes Attitudes toward risk –Feelings about Financial Security –Independence –Investment risk Some clients don’t keep very good records, leaving the financial planner to straighten it out.

9. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company9 Establishing Financial Objectives Goals must be clearly stated. Goals MUST be quantified. Goals must be rated according to priority. Not every goal will be reachable.

10. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company10 Establishing Financial Objectives Areas to Address Standard of Living Savings Protection Accumulation (Investment) Financial Independence (Retirement) Estate Planning No matter how good an analyst you may be, you will not succeed as a financial planner if you cannot communicate well with the client. Put yourself in the client’s shoes and really LISTEN to what he or she has to say.

11. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company11 Developing Financial Plans There are three sub-steps to developing financial plans: –Analysis –Development –Presentation The CFP Board breaks this step down into two steps: –Analyzing and evaluating the client’s financial status. –Developing and presenting financial planning recommendations and/or alternatives.

12. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company12 Developing Financial Plans - Analysis Budgeting for near term Projection of client’s financial position after next several years Identification of strengths and weaknesses Identification of external threats and opportunities

13. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company13 Developing Financial Plans - Development Develop strategies based on SWOT analysis Identify financial instruments for these strategies and savings media for emergency fund –Appropriate types of investments –Appropriate insurance Note: Financial planning is much more than investment advice. You may find yourself investigating strategies concerning career decisions and health care and provisions for dependents. The client has hired you to be the CFO of their personal enterprise.

14. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company14 Developing Financial Plans - Presentation This is the “What you need to do” part of the report. The quality of your presentation can determine whether or not the client will execute the plan Present the plan from the client’s point of view –What will it accomplish for the client? –What are the consequences of not executing the strategy? –What will be the client’s responsibility and what will you do for them? Big books do not make good financial plans – clear reports do. At this stage, you need to get the client’s consent to execute the plan.

15. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company15 Controlling & Executing Plans Set the plan in action. Purchase or sale of assets Purchase or replacement of insurance Changes in lifestyle Closely monitor the execution to be effective in accomplishing the client’s objectives.

16. The Financial Planning Process Chapter 3 Tools & Techniques of Financial Planning Copyright 2007, The National Underwriter Company16 Measuring Performance – Monitoring the Plan Is the client making progress toward their goals? If results are acceptable, continue If performance is not on track, reevaluate the plan. It may be necessary to revise some goals as being unrealistic in the external environment. You may have to create an entire new plan.