Chapter 5The Systematic Process:

An Overview

The Process of Financial Planning: Developing a Financial Plan

Lytton, Grable & Klock 2006

Why Is a Systematic Process Needed? Business models and “deliverable

products” vary:• Comprehensive financial plan• Per-project analysis or modular plan• Product sales

• Analysis to establish product need, but no plan• Analysis and a plan to establish product need

A Systematic Process Offers a standardized approach to

• Collecting and using client information• Analyzing the data• Presenting the plan• Implementing the plan• Monitoring the plan results

Offers a consistent approach to the planning process and client service

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 1: Establish & Define the Relationship Initiating the client relationship (by referral

or marketing) Meeting with prospective clients Formalizing the scope of the planner-

client agreement

Step 2: Gather Data & Frame Goals and Objectives Contingent on the scope of the

agreement, gathering needed data• Qualitative• Quantitative

Outcome: Framing measurable client goals• Time• Cost, funding strategy

Step 3: Analyze & Evaluate the Client’s Financial Status “Essence of financial planning”

• Fact-based and solution oriented as well as person oriented – goals and assumptions

• Repeated for each of core content planning areas:

*Financial situation *Income tax*Risk management *Investment planning*Retirement planning *Estate planning *Education or other special need planning

Step 3: 3 Primary Sub-steps X 71. Analyze the current situation

• “Know your client”• Anticipate present and future planning issues• Strengths and weaknesses• Identify aspects for change• Identify opportunities for future planning

Step 3: 3 Primary Sub-steps X 7 (cont’d)

2. Review prospective planning strategies• Brainstorm the universe of solutions

3. Develop client-based recommendations to optimize the situation and lead to goal achievement• Client situation + Strategy• Answer the “5 Ws,” how, and how much

Step 4: Develop a Comprehensive Plan & Present Recommendations Integrate and prioritize across the 7 core

financial planning areas to develop a realistic, workable plan to protect and grow assets

Issues to consider• Recommendations competing for funding• Must track discretionary cash flow and net worth• Time staggering of recommendations• Priority for complementary recommendations that

satisfy more than one goal

Step 5: Implement The Plan Implementation varies with the advisor’s

business model and the engagement:• Planner implements• Client implements• Both planner and client implement• Client directs the implementation with planner

or other service providers• No one implements

Step 6: Monitor the Plan, Implementation, & Goal Progress Review for short-, intermediate- and long-term

goal progress Review for threats, opportunities, progress Review for responses, made or needed, to

changes – both in client situation and the marketplace

Review for advisor support for the client to help the client feel in control

Professional Judgment Expertise

Advanced level of competence

Compliance with regulations and guidelines

Integrity, objectivity and independence

Advanced level of expertise

Expertise that goes beyond competence

Fairness

Professional Judgment in Financial Planning

“the subjective nature of exercising professional

judgment”

CFP Board of Standards, Inc. Practice Standards

“exercise reasonable and prudent professional

judgment”

CFP Board of Standards, Inc., Code of Ethics and

Professional Responsibility

Professional Judgment

“[A] goal-oriented decision-making or problem-solving process carried out in the interest of

one’s client wherein one gives reasoned consideration to relevant information, criteria,

methods, context, principles, policies and resources.” (Facione, 1990)

A Framework for Understanding Professional Judgment Stakeholders Setting Problem framing & problem resolution Abiding by standards of practice

“subjective nature of exercising professional judgment”

Stakeholders: Acting in the Best Interests of the Client Both client and planner must be actively

involved and fully informed Client, as primary stakeholder, should be

offered alternatives, when possible Planner’s responsibility to

• Disclose, explain and educate the client in support of recommendations

• Safeguard confidentiality of client information

Stakeholders: Acting in the Best Interests of the Client (cont’d)

Secondary stakeholders are other individuals, groups who may be affected by the outcome of the professional relationship to serve the client• Planner• Planner’s employees or partners• Client’s family• Others?

Stakeholders: Some Examples Lower fee structure for a “big” client Churning or inconsistent fee structure Interests of primary vs. secondary

stakeholders

Ethics, Professional Judgment: What’s Important? Commitment to professional ethics and

professional behavior An awareness of “normative principles” or

accepted practice standards “Willingness to think,” question and

critically evaluate the issue/decision and ramifications for all stakeholders

Setting Characteristics or dimensions of the

problem/issue/decision that the planning professional must address on behalf of the client

Advisors must be aware of the client’s and their own “definition” of the setting

Low Stakes

HighStakes

TimeConstrained

TimeUnconstrained

Novel Very Familiar

Unexpected

Planned

SpecializedKnowledge

KnowledgeCommonlyShared

Solely by theProfessional

Collaborationwith otherProfessionalsRoutine Unusual

Decisions, Problems Or Issues

Setting=72 or Infinite PossibilitiesMany options….

To Exercise Professional Judgment Regarding Setting Recognize that the setting may be viewed the

same or differently by advisor and client. Be alert to these nuances.

Business practice model may define the setting.

Education for advisors needs to be case-based – technical competency + client-centered planning.

Consider how the setting for the client and the planner impact the financial planning process.

Problem Framing & Problem Resolution Problem resolution: Baseline competence

Problem framing: Experience-based attention to situational data elements and key data patterns that lead to problem identification AND resolution.

Problem Framing & Problem Resolution

“Problem identification, interpretation, differentiation,

and diagnosis”

(Facione, Facione, & Giancarlo, 1997)

The medical analogy: Do the symptoms suggest a zebra or a horse?

Problem Framing in Financial Planning Discern an ill-defined or complex situation Gain the necessary information – from the

client or other sources• Attend to client verbal/non-verbal clues

Generate potential planning solutions

See the “big” picture and the details

“Other” Issues of Problem Framing Defining the scope of the engagement

• Limit the scope to the advisor’s expertise• Seek other professionals when needed

Carefully matching products and services to the client’s situation, including alternatives

Recommendations consistent with other advisors

Standards of Practice

Standards of Practice: Consequences & Effectiveness Is the recommended product or service a cost-

effective alternative with a relatively high probability of success for the client?

Is the plan built on valid assumptions representative of the legal, tax, and broader economic environment?

Does the plan allow for readjustment in response to changing situations?

Are the client alternatives and proposed solutions socially and culturally acceptable?

What Standards of Practice Apply to Financial Planning?

“Subjective nature of exercising

professional judgment”

CFP Board of Standards

Documentation• Transparency

Business practice model

Fiduciary responsibility

Full disclosure

What is Professional Judgment? Stakeholders

Setting

Problem framing & problem resolution

Abiding by standards of practice

Professional skepticism: self-reflectionself-correction

Avoidance of complacency— “the way

we always did it”“paralyzing

perfectionism”

Professional Judgment in Plan Development

Analysis of Strategies for Each

Core Planning Content Area

PlanningGoals

Recommendation 1

Recommendation 2

Recommendation 3

Recommendation X

PlanningRestrictions

PlanningChoices

Developthe

Plan

Professional Judgment

Planner

Client

Goals

Spiraling Professional Judgment & the Planner-Client Relationship

Strategies Recommendations Plan

Client

Planner Goals

Relationship PlanPresentation

Two Issues that Ground Financial Planning Goal Orientation to Planning

• Client-centered focus for planning• Basis for sustained client commitment

Cash Flow Orientation to Planning• Discretionary income, available assets• Maximize and stabilize cash flow

Summary Six-step financial planning process is

• Founded on the planner-client relationship• Controlled by the advisor’s professional

judgment• Based on a goals orientation + a cash flow

orientation• Recursive