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Personal-Finance
The Key Steps to Financial Planning
By Galen Weston | On November 24,
2006 | In Personal-Finance |
There are six key steps to the financial planning
process, according to the Canadian Association of
Financial Planners (CAFP). The following is
partially adapted from material on the CAFP and FPSC
web sites at http://www.cafp.org and http://www.cfp-ca.org
respectively. It’s an indication of what you can
expect in a comprehensive personal evaluation with a
qualified Financial Advisor.
(1) The financial planner examines your current
financial situation by collecting and evaluating all
relevant information, including:
-*Basic family information (name, age, marital
status, employment history, details of the
children's birth dates and other qualitative
details)
-*Net worth & cash flow statements
-*Investment portfolio
-*Insurance policies
-*Tax returns
-*Wills
-*Powers of attorney
-*Employee benefit plans
-*Trust agreements
-*Pension statements
This tells the advisor what your financial situation
is today. It is a record of all of the financial
decisions and transactions you have made in the past
up until the current time.
The preliminary assessment should include family
obligations, goals and objectives. Although the
advisor may be dealing primarily with one
individual, he or she represents an entire
household. The financial advisor should ensure that
all concepts introduced are fully understood.
Privacy issues, which are paramount to some, should
be addressed at this stage to ensure that the
planner is able to obtain enough accurate
information to develop the financial plan.
(2) The financial planner will help you focus upon
financial and personal goals and objectives as well
as clarify your financial and personal values and
attitudes. These may include providing for
children's education, supporting elderly parents or
addressing immediate financial concerns, which would
enable you to improve your current lifestyle and
provide for retirement. These considerations are
important in determining your personal financial
planning strategy. Goals established should be:
Specific.
If goals are not specifics, they are merely dreams.
“I require $500,000 by my 65th birthday” is an
example of a specific goal. “I want to be rich when
I retire” is a dream, not a goal.
Measurable.
Financial goals are easily measurable since dollars
and cents can be counted.
Realistic and attainable.
Your goals must be achievable, within reason. To
accumulate $1 million by age 65, if you are
currently 60 and have no savings is not
realistically achievable. To accumulate $1 million
by age 65, if you are only 25 is attainable and
realistic.
Time bound.
All goals should be time bound in order to measure
progress towards the goal's completion, with
deadlines for meeting specific objectives. If time
deadlines are missed then changes can be made in the
action plan to improve the probability of success.
If goals are seen to be unattainable and/or
unrealistic, you can do one or more of the following
to get back on track:
-*Reduce discretionary expenditures – i.e. save more
money to put aside for investments,
-*Increase income,
-*Choose more aggressive investments, with the
potential for higher returns,
-*Increase the timeframe over which to obtain the
goal, e.g., push forward your date of retirement
until you have accumulated the funds you need.
-*Reduce the dollar value of your goal.
(3) The financial planner will identify the problem
areas that are preventing you from achieving your
objectives. These can include things like too little
or too much insurance coverage, or an unnecessarily
high tax burden. Maybe your investment portfolio
needs to be upgraded to take advantage of current
opportunities. Problem areas must be identified
before solutions can be found.
(4) The financial planner will provide written
recommendations and alternative solutions. This is
your financial action plan and it should be
structured to meet your individual needs and
circumstances, without undue emphasis on purchasing
certain investment products.
(5) The financial planner will implement your plan,
either by actually executing the recommendations
himself, or in coordinating their execution with
other professionals as required. A financial plan is
only helpful if the recommendations are put into
action. Implementing the right strategy will help to
reach the desired goals and objectives.
(6) The financial planner will schedule periodic
reviews of the plan to assure that the goals are
achieved, and implement revisions to the plan if
required to meet your goals. Your financial
situation and the progress of your plan should be
re-assessed at least once a year to account for
changes in your personal and professional life as
well as current economic conditions.
The initial planning stages normally involve a
meeting with the client to discuss the most
important issues. Often, a questionnaire is used to
quantify cash flow, current financial position, and
goals. The development of a financial plan also
involves an assessment of future expenses,
obligations, earning or income prospects, and
financial risk. Any constraints are noted at this
time in order to facilitate the plan.
Once a draft version of the financial plan has been
produced, your advisor will discuss it with you for
clarity and final approval. All aspects of the plan
should be clear to you at this time. If it appears
to meet your needs and objectives, it may be
implemented.
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