Chapter 7The Systematic Process:Analyzing the Situation &

Developing the Plan

The Process of Financial Planning:

Developing a Financial Plan Lytton, Grable & Klock

2006

The “Black Box” of Financial Planning

+

=

Systematic Financial Planning

Analyze & Evaluate the Client’s Financial Status

Develop Comprehensive Plan &Present Recommendations

Implement the Plan

Monitor the Plan, Implementation,& Goal Progress

Determine and Quantify the Planning Needs

Document and Evaluate Current Planning Efforts

Establish & Define the Relationship

Gather Data &Frame Goals and Objectives

Review Prospective Planning Strategies

Develop Client-based Recommendations

Analyze Current Situation

· Identify and Select Best Strategies to Meet Need

· Frame Recommendation Into: Who, What, When, Where, Why, How and How Much

Step 3: Analyze & Evaluate the Client’s Financial Status

Three sub-steps for each core content planning area:

• Step 31: Analyze the current situation

• Step 32: Review prospective planning strategies

• Step 33: Develop client-based recommendations

Step 31: Analyze the Current Situation

1.What is the client’s planning need/goal?

• Known needs

• Unknown, but potentially anticipated, needs

• Identified by planner or client

• Quantitative data

• Qualitative data

Step 31: Analyze the Current Situation (cont’d)

2.What assumptions are relevant to the client’s planning need/goal?• Premise, reasoned conclusions, facts,

circumstantial evidence

• Related to • Planning products and strategies

• Current or projected marketplace – tax, economic, political, legal, or regulatory environment

• Client’s personal situation

• Fully disclosed, mutually agreed upon, and realistic

Step 31: Analyze the Current Situation (cont’d)

3.Can the client’s planning need be quantified?

4.How is the planning need currently being met?

• Identify and analyze products or strategies currently used

• Project outcome with current approach

• Project changes, if warranted

Step 31: Analyze the Current Situation (cont’d)

Repeat steps 1 through 4 for each core content planning area (see Figure 7.1):• Cash flow/financial situation

• Income tax planning

• Insurance planning (life, health, disability, LTC, property and liability)

• Investment and asset management planning

• Education or other special needs planning

• Retirement planning

• Estate planning

Insurance Planning: An Example

From Step 2: Data Gathering

• Client’s lifestyle

• Client’s occupation

• Client’s medical condition or history Impact insurance cost, availability, or need

Without a comprehensive client profile, you can’t do a comprehensive job!

Information Available to Process

Insights to the client: the “person” and the situation – quantitative and qualitative

•Who, why, for whom, what, how? Mutually agreed upon goals and outcomes

•Why, what, when, for whom? Results for each core content planning area

•Why, what , when, where, how, how much?

For Each Core Content Area

Quantitative data analysis Qualitative and household needs

assessment that might impact the area Planner’s knowledge of current or

potential needs Scan of marketplace/environmental

factors Planner’s collaboration with others

Step 32: Review Prospective Planning Strategies

Strategies: the universe of possible solutions (see Figures 7.2 and 7.3)

• Product strategies: Use of specific product or product feature to meet the planning need/goal

• Procedural strategies: Focuses on a a process, service, or type of ownership to meet the planning need/goal

Factors Affecting Strategy & Recommendation Development

Step 33: Develop Client-based Recommendations

Goal + Strategy(ies) + Funding + Assumptions + Planning Engagement =

Client-based Recommendation

Answer the “5 Ws,” how and how much?

• Challenges the advisor’s logic and consistency with the client’s goals and situations

• Demands definition of funding and other implementation issues

• Supports sound plan development and client motivation

Step 4: Develop a Comprehensive Plan & Present Recommendations

Well-designed plans have• Thoughtful analyses

• Logical consistency

• Thoroughness

• Clarity of purpose

• Feasible, client-centered recommendations

Developing the Plan

Culmination & Integration of the Planning

Cash Flow Orientation + Goal Orientation

Discretionary cash flow:

• Income remaining after all expenses are met

• Earmarked for goal funding or product purchase

Developing the Plan: Cost-Benefit Options

Fully fund the most important recommendation, prioritize the others and use the remaining funds

Fund all recommendations, over a staggered time and apply “new” assets

Reconsider, “downsize,” and fund all recommendations at some level

Developing the Plan: Options (cont’d)

Integrate recommendations, use multi-purpose strategies

Prioritize, selectively fund, and eliminate or postpone other recommendations

Increase funding• Reduce spending

• Earn more (e.g., income, liquidate assets, reallocate)

Alternative Funding OptionsAre Resources Adequate to Fund Recommendations?

YES NO

Fund All Recommendations

Consider these options:· Prioritize Recommendations for

Immediate Funding· Prioritize Recommendations for

Staggered Funding · Downsize or Partially Fund One or

More Recommendations· Review Funding Options that Could

Satisfy Multiple Recommendations· Eliminate or Postpone One or More

Recommendations· Increase Funding Available for

Recommendations

Developing the Plan:The Planner’s Role

Advisor Educator Mediator

Helping the client decide about competing recommendations and available funding (discretionary cash flow, other assets)

When to Use a Liability Release? When the client’s decision

• Could jeopardize his/her financial future

• Could jeopardize the financial credibility of the planner

• Is clearly detrimental to the situation and repudiates the planner’s advice

Protects the advisor from suitability or legal challenges for malpractice or malfeasance

Impact Analysis

Insures that the results of a recommendation are fully considered

Insures that funding is available, today and in the future

Challenges the logic and assumptions (recall professional skepticism)

See Exhibit 7.3 and 7.5

The Plan: Modular or Comprehensive

For each core content area• Describe the current situation

• Present all recommendations for the respective section

• Describe alternatives or alternative outcomes when one content area is linked with another

The Plan: Modular or Comprehensive (cont’d)

For each core content area• Conclude by illustrating the situation if all

recommendations are implemented by recalculating• Available discretionary cash flow

• Net worth

• Income tax situation (over view)

• Estate tax situation (over view, if applicable)

• Include projections in the plan or appendix, with appropriate disclaimers

Presenting the Plan

Be genuinely warm, open, and welcoming

Practice being an effective communicator

Practice empathy

Make a confident, competent impression by being prepared

Involve the client

Presenting the Plan (cont’d)

Plan the message and anticipate the response

Motivate action with thorough, clearly defined, manageable steps

Time it right

Expect small changes

Don’t make promises

Thinking Outside the Box

Holistic judgments (recall problem framing)“interrelationships - everything influences everything else”

Systematic approach“repeated use of forms and protocols”

• Recommendation Planning Checklist

• Recommendation Form

• Recommendation Impact Form

Thinking Outside the Box (cont’d)

Triangulation (recall professional skepticism)“multiple (typically 3) perspectives”

• For example: information, stakeholders, goals

From Process to Practice

How are the following used by Jane?• Recommendation Planning Checklist

• Planning Recommendation Form

• Recommendation Impact Form

Used by Jane to communicate information to Tom and Nyla?

How would you use these forms with clients?

Summary

Systematic process: a standard approach for comprehensive or modular plans as well as product sales

Key to success: don’t overlook or overweight important client information

Systematic process, holistic judgment, and triangulation support professional judgment