Peggy called me one afternoon to ask me if she could afford to buy a new car. I told her she could buy two. I knew this because we had just completed a financial plan for her and her husband. Buying a new car, let alone two, wouldn’t make a dent in their financial situation. Twenty-five plus years later her plan is still bearing fruit. It has allowed her to live a life free of financial worry and turmoil, which is my definition of financial planning.
The text book definition of financial planning is “the process of determining whether and how an individual can meet life goals through the proper management of financial resources.”
The planning process comprises of six steps:
- Establishing and defining the client relationship.
- Gathering the client data and identifying client goals.
- Analyzing and evaluating the client’s financial status.
- Developing and presenting recommendations.
- Implementing the recommendations.
- Monitoring the recommendations.
The key section, to me, is gathering the data and identifying the client’s goals. These items are vital to the success of your plan. Wrangling up statements from Social Security, your bank, investment firm, employer, insurance agent, credit card company, and accountant should be easy, if you’re organized. Items listed on a statement are easy to quantify. It’s much harder to value personal property, collectibles or a business interest. Furthermore, trying to put a dollar figure on your life goals may be impossible. What is it worth to you to spend time hiking with your daughter in Yellowstone? Priceless?
After your information is captured, the financial planner will go to work analyzing your data using powerful software from Money Guide Pro, eMoney, or Right Capitol. If a planner has been creating plans for years, they will also rely on Excel, Word and their trusted HP-12c calculator.
Your plan will consist of several pages quantifying your financial goals, dreams and concerns. It will highlight your risk level, investment management fees, cash flow projections, insurance needs, estate options, investment suggestions, college cost data, and much more. At the heart of the analysis is the Monte Carlo simulation. Most financial planning software providers include this in their analysis. The plan will run hundreds, or thousands, of scenarios to give you a probability of success ranging from 0% to 99%. Of course, a higher number is preferred.
Are all financial professionals created equally? No, definitely not. It’s imperative to hire a Certified Financial Planner® practitioner. An individual who has obtained the CFP® designation has spent years studying to become certified. Once certified, the planner must adhere to strict guidelines which includes obtaining 30 hours of continuing education every two years. Beware of brokers or insurance agents who offer financial planning, because, often, their end game is to sell you a product. And, to be clear, financial planning is not a product.
I’ve done thousands of financial plans over the years and there is no good plan and there is no bad plan, there’s only your plan. Your plan is customized to you and your current situation. It’s a moment in time, like a photograph. But, once completed, it gives you a road map, a guide to help you obtain your financial goals. It will affirm your financial situation allowing you to maintain the status quo or make some serious financial decisions.
Does financial planning work? According to one study, individuals who completed the financial planning process had three times the assets of those individuals who did little or no planning.
Several years ago, a client wanted to retire early. He approached me with a scenario that he thought might work for him and his family. After I completed his plan, I told him he could retire early. He was elated, but he wasn’t so sure – yet. He sent me another scenario and the plan confirmed his adjustments; he could still retire early. Still not sold, he sent me another request. It produced the same result. In short, we ran ten different scenarios and they all confirmed he could retire early. After the tenth and final plan he gave his notice to his employer and retired. He’s still retired.
“Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? ~ Luke 14:28
April 2, 2019
Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.