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Chapter 3

Beginning the Planning Process

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Chapter Goals

Start the financial planning process smoothly. Determine how human behavior influences the PFP

process. More easily ascertain personal goals that people

have. Employ the data-gathering process in common

planning situations. Improve your communication skills. Develop desirable interviewing and counseling

techniques.

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Behavioral Finance

Behavioral finance: The study of human actions in financial matters.

Behavioral financial planning strives to understand and improve people’s decision-making abilities so that they can more easily achieve the goals they set.

Knowledge of people’s behavior patterns and how they influence PFP are required parts of curriculums such as the CFP® Certification.

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Cultural Background

Cultural background: the social and ethnic and religious backgrounds that contribute to our beliefs, material possessions, values and goals.

Peer group: a group of friends and associates with similar backgrounds.

Our actions are influenced by our cultural backgrounds.

We tend to measure ourselves against our peer group.

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The Life Cycle

Age strongly influences our interests and preferences.

Life cycle stages:– Young: 18-42 – Middle Aged: 43-67 – Seniors: 68 and beyond

Let’s consider each in turn.

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The Life Cycle, cont.

Young: 18-42– Tend to place great emphasis on their current standard

of living and fairly often on their career advancement. – Savings are sometimes given lower priority. – Risk tolerances can often be high. – Borrowing is fairly common.– With dependents, the major concerns may include:

The accumulation of real assets for a home and its possessions.

Life insurance to protect other household members.

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The Life Cycle, cont.

Middle Aged: 43-67– Emphasize planning for retirement. – Better defined career parameters.– More consistent cost of living. – Financial assets are accumulated and expended for

children’s educations.– Risk tolerance tends to decline.– Debt as a percentage of assets generally declines.– Once children’s college obligations are satisfied, annual

savings often increases markedly.

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The Life Cycle, cont.

Seniors: 68 and beyond– Seniors may maintain a part time job (active

retirement). – Spending of assets replaces accumulation. – Risk tolerance declines sharply.– Use of debt declines sharply. – Estate planning is given a high priority.– Tax rates may decline and help contribute to a decline

in cost of living where uninsurable medical and eldercare costs are not excessive.

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Family

Family background can influence lifestyle. Those who have had a happy childhood and a strong

family bond may continue the patterns set by their parents.

Some people feel birth order is another influential factor:– Eldest child more likely to be conservative.– Younger children more likely to become more

creative and rebellious.

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Personality

Personality: The sum total of all the attributes, including emotional, mental, behavioral-awkward attributes, that distinguish people from each other.

Personality influences tolerance for risk, which influences financial planning.

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Some Principles of Communication

Often it is insufficient to be honest, knowledgeable, and concerned.

We must also be able to have others believe that we possess these traits in order to establish a relationship.

Communication: The ability to transmit a message successfully to another person.

Success communication occurs when your message is received and understood in the manner you intended it to be conveyed.

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Some Principles of Communication, cont.

Verbal communication: Transmitting thoughts and emotions through the spoken word.

Verbal message: The content of the message. The verbal message can convey a message that

extends beyond the specific information. For example, tone, intensity, and passion also

convey information.

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Some Principles of Communication, cont.

Nonverbal communication: Transmitting thoughts and emotions without or in addition to the words you use.

Your body language may communicate an entirely different message than the one you’re speaking about.

For example, folding your arms across your chest and other tight gestures and facial expressions may convey a lack of receptivity even though you nod your head in agreement.

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Some Principles of Communication, cont.

Examples of body language:

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Some Principles of Communication, cont.

Reasons for communicating with another person: – To express your opinion or feelings about a

matter. – To convey some specific facts. – The desire to develop a relationship with another

person. If you are acting as an advisor, your intent can fall in

any of those categories, as well as to persuade someone to hire you or to follow your advice.

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Listening

Facets of listening: – It allows you to gather the information that you are

interested in. – It enables you to develop an understanding of the

other person’s thoughts and feelings beyond the facts given.

– It can transmit your interest in the person or the topic at hand.

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Listening, cont.

Rules for effective listening:– Focus your full attention.– Do more listening than talking.– Try not to be judgmental; instead, be understanding. – Try to get into the other person’s way of thinking.– Keep your responses to the topic being discussed.– Try to respond occasionally. Speak positively about the person’s

strongly held beliefs.– Look for the principal points of the topic from both your own and

the speaker’s perspective and acknowledge understanding.

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Show Empathy

Empathy: Attempting to place yourself in the other person’s position - trying to identify with what he is experiencing, his thoughts, feelings, and attitudes.

Empathy requires listening, understanding, feeling, and communicating with increased sensitivity to someone else’s perceptions.

Showing empathy has the potential to not only help you establish a relationship with a person but also to provide more expert advice.

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Establish Trust

Trust: The belief that you can rely on someone or something to perform as expected.

Create trust through:– Having a strong educational background and experience in a

given area. – Being truthful.– Putting aside potential conflicts of interest and acting in the

best interests of that person. – Presenting a confident manner and appearance.– Demonstrating your particular understanding and concern for

the other person.

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Interviewing

The client interview can be the first activity performed in the financial planning process.

It is at this meeting that goals are talked about and often established, and data gathering begins.

This meeting also allows the clients and the advisor to determine if they wish to continue the relationship.

Many advisors offer a free initial interview. The interview process calls upon the communication and

listening skills and the establishment of trust necessary for a strong relationship.

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Preplanning

Advisors should preplan:– The purpose of the meeting. – The topics to be covered.– An outline of the questions to be asked.

The interview room should be neat and free from distraction.

The client’s background should be reviewed to help direct the question and to help establish rapport.

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Beginning the Interview

The interview should begin by making the client feel comfortable and relaxed.

For example “small talk” can be used to place the client at ease.

The planner should: Mention the purpose of the interview. Mention the approach and topics to be discussed, if

appropriate. Encourage frank two-way communication.

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The Substance of the Interview

The substance of the interview should begin with a simple question.

Open questions permit open-ended answers. For example:– “What interests you in your life?” – “What are your goals?”

Closed questions ask for specific information. For example:– “How much money are you making currently?” – “Do you expect to go to graduate school?”

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The Substance of the Interview, cont.

Primary questions are the first ones in a new area. For example:– “How much life insurance coverage do you have?”– “Do you have a listing of your investments?”

Probing questions seek to develop further information about a primary question. For example:– “What types of life insurance do you own and why?”– “What does money mean to you?”

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The Substance of the Interview, cont.

Leading questions bring a client toward an intended answer. For example:– “Would like a better performing investment portfolio?”– “Are you satisfied with your financial planning?”

Interruptions of any type other than for clarification should be discouraged.

The advisor will typically be nonjudgmental, and will strive to develop genuine interest and empathy.

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Interview Conclusion

Every meeting should have a conclusion. It may happen through covering all questions intended

or through an advisor’s indication that the time is drawing to a close.

One way to conclude a meeting is through asking whether there is anything else that should be covered at the meeting.

The advisor should sum up the points covered during the meeting and establish a date or other plan for action.

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Financial Counseling

Financial counseling: The mechanism for assisting people in making their financial decisions.

In contrast, financial advising is sometimes considered making the decisions for the client.

Financial counseling provides personalized service, perhaps including non-financial support, with the ultimate decisions in the hands of the client.

As a practical matter, financial counseling and advice are often combined with little distinction made between the two.

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Financial Counseling, cont.

Factors that increase the effectiveness of counseling include:– Providing a structured presentation that is simple

to understand. – Providing advice that is not abstract, but tailored

to the interests of the person. – Requests for feedback at all points during the

presentation or exchange.

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Financial Counseling, cont.

If clients show some resistance to the advice, then:– The planner should attempt to understand fully the

cause of the resistance.– If appropriate, the planner should persuade the clients

that their ways of viewing the matter aren’t accurate, or isn’t in their interest.

– The planner should consider changing the advice. Advisors should make sure that their advice is not

extending beyond hard financial practices and the client’s wishes to their own preferences.

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Goals

Goals: The results you would like to achieve. How are goals established?

– Sociologists may believe our goals are influenced by the way we were raised by our families and other groups of people in our environment.

– Biologist may believe that we are programmed through our genetic makeup to strive for certain objectives.

– Psychologist may believe that the underlying goal of most human behavior is to have as many pleasurable experiences as possible.

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Goals, cont.

Some work to achieve the most money or fame. Others strive to allocate the greatest proportion of

their life to leisure activities or to have fulfilling personal relationships.

Goals can change over time.

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Goals, cont.

Economics and finance translates goals into utility (pleasure) terms, and quantifies utility by placing a dollar value on it.

Economists and finance people know that limiting goals to dollar terms simplifies human motivations.

But doing so permits scientific measurement, which enables us to gain additional insight into how human beings operate and how to improve their operations.

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Approaches to Goals

The psychologist Abraham Maslow believes that people first to satisfy their needs in the following order:

– Basic, or physiological, needs, such as food, shelter, and clothing.

– The need for safety.– Social needs, such as the need for belonging. – Higher needs, such as the need for esteem. – The need for self-actualization, which involves achieving

your personal goals in life.

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Approaches to Goals, cont.

More pragmatically, we can identify three goals for each part of the financial plan:– Minimum goals. If not achieved, client will be

distinctly disappointed. – Satisfactory goals. If achieved, the client will be

pleased.– Higher-level goals. If achieved, the client will

receive pleasure beyond expectations.

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Approaches to Goals, cont.

Goals can be separated into three time frames: – Short-term goals are those you intend to achieve

within one year. – Intermediate goals are to be completed in one to

four years. – Long-term goals are those you expect to

accomplish in five years or more.

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Approaches to Goals, cont.

Rouse (1994) lists life values, some of which can be identified as goals. They are as follows:

1. Achievement: to accomplish something important in life.

2. Aesthetics: to be able to appreciate and enjoy beauty’s for its own sake.

3. Authority: to be a key decision maker directing priorities.

4. Adventure: to experience variety and excitement.

5. Autonomy: to be independent, have freedom.

6. Health: to be physically, mentally, and emotionally well.

7. Integrity: to be honest and straightforward, just and fair.

8. Friendship: to have close personal relationships, share with family and friends. (life values continue next slide.)

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Approaches to Goals, cont.

9. Pleasure: to experience enjoyment and satisfaction from activities in which I participate.

10. Recognition: to be seen as successful, receive acknowledgement for achievement.

11. Security: to feel stable and comfortable with few changes or anxieties in my life.

12. Service: to contribute to the quality of life for other people.

13. Spiritual Growth: to have harmony with the infinite source of life.

14. Wealth: to acquire an abundance of money/possessions; to be financially independent.

15. Wisdom: to have insight, to be able to pursue new knowledge.

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Data Gathering

Data gathering: Accumulating the information that is needed to perform personal financial planning objectives.

We must ascertain needs where they differ from goals and develop a sense of priorities among goals and needs.

The categories for information for a comprehensive financial plan or comprehensive review follow the major parts of a plan.

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Data Gathering, cont.

Some of the key areas for which data must be gathered are as follows (based on Levin, 1996).

Background of Household Members

Balance Sheet Cash Flow Planning

Income Tax Planning Debt

Investments Retirement Planning

Estate Planning Risk Management

Employee Benefits Family Planning

Educational Planning Specialized planning

Other

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Data Gathering, cont.

Toward the end of data gathering the advisor should be aware of any factors that distinguish this situation from others. For example:– Are there a particular focus on client education or on

providing children who have severe learning disabilities with lifetime support?

– Will there be a particular difficulty in obtaining reliable revenue and operating cost figures?

– Do the clients have particular personal problems such as excessive gambling, drinking, or perhaps excessive spending habits?

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Chapter Summary

Our objective is to begin the planning process smoothly. This involves:– Understanding the particular needs and behavior of

the people for whom planning is to be done. – Developing sound communication skills.– Establishing trust.– Preplanning your interviewing procedures.

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Chapter Summary, cont.

Goals are the focal point of PFP. There are normally many types of goals, and these depend, to a great extent, on a person’s life values.

Data gathering is developing the information necessary to perform PFP. Each area of the plan contributes.