The universally accepted 6 stage process for financial planning is depicted below:
The core of any financial planning software deals with the analysis of data gathered and creation of solutions and plans for goals that have been articulated. But, beyond what most software will do in terms of number crunching, here are 7 aspects that you as a financial planner should delve deeper into:
Predictability and frequency of income: You will need to assess how variable is the income of your client. Its not just business persons who have variable income - even salaried professionals have significant portions of their compensation as variable pay. Variable pay can be monthly/quarterly incentives for sales persons to annual bonuses and stock options for others. Getting a history of income over the last 5-7 years can give you a sense of how much can be reasonably assumed as "fixed" or predictable income and how much should be treated as unpredictable. The frequency of the unpredictable component must also be factored into your cash flow analysis - some may be monthly, others quarterly and still others annual.
Categorization of expenses: We know that planners should ideally break down expenses into discretionary and non-discretionary. But this classification should not be based on the planner's perspective of what he/she considers as discretionary - rather it should be a function of how your clients see their expenses. A planner may conveniently put annual vacation into discretionary, whereas more conversations with the client may reveal that they believe that an annual vacation is mandatory - but that they will cut it down to a domestic holiday in lean times and an overseas holiday in good times. Your analysis has to be guided by your clients' lifestyle choices, not yours.
Contingent inflows and outflows: You need to ensure that you have had sufficient open ended conversations during your data gathering phase to be able to pen down contingent inflows and outflows that can materially impact the plan, which you need to keep a tab on from time to time. Could there be a responsibility to provide for monthly payments to parents at some stage in the future? What could be the amounts involved and what indicative timelines must one keep in mind for such eventualities? Is there a pot-of-gold possible in the employment contract after serving out a 5 or 10 year period in the present job, in the form of some deferred compensation? You know you cannot put this in the plan for sure, because your client may change his job, but it is something to pencil in and keep a tab on because it can materially impact the plan should a tidy amount accrue at some point of time.
Prioritization of goals: Almost always, resources will be scarce to meet all goals, dreams and aspirations. That's what keeps us motivated to keep working harder! Your job as a planner is to engage in a meaningful conversation with your clients to help them clearly prioritize their goals. Frank conversations on the payoffs and sacrifices involved in different alternatives will help your clients set priorities that make sense to them.
Risk tolerance vs risk capacity: Most questionnaires aim to ascertain an investor's risk tolerance - his appetite to deal with market volatility and his attitude towards risk. One of the key aspects of a planner's role is to go beyond stated risk tolerance and understand the actual risk capacity of the client. If you find a young couple, both with steady well paying jobs, no loans, no major financial outflows over the next 10 years - and yet unwilling to consider equity because they are petrified by market volatility and have been told horror stories by their parents about stock markets, it becomes the planner's responsibility to help them understand that they do have significant capacity to take risk, but are shortchanging their wealth creation potential only due to an ultra conservative attitude.
Optimal asset allocation: Finding an equilibrium between risk tolerance and risk capacity will enable the planner to steer clients towards an optimal asset allocation. It is important that your client buys into the suggested asset allocation completely rather than being pushed reluctantly into it. This buy in is what will help your client remain committed to the agreed allocation through market cycles and through periods of volatility in different asset classes.
Scenarios and options: One of the biggest lessons planners should imbibe is to move away from the desire to present one solution that the planner himself believes most in, and go towards an approach where he provides scenarios and options within each scenario. Your goal is to help your client make an informed, wise decision - not to push your decision down his throat. Its your client's money. He has to "own" the plan for the plan to succeed. For him to "own" it, he has to make a decision from alternatives that you present to him. Your job is to gently guide him towards the optimal decision, without making the decision for him.
Once you have completed your analysis and developed your strategies taking into account all the 7 aspects discussed above, you are now set to begin the 4th step - which is often the one that planners pay the least attention to: Present your solutions and build the plan. Presentation is as important as the analysis - an insight that only few successful planners have truly imbibed. The next article will delve into some detail on this aspect.
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