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Financial Planning > Tax Planning

A Vocation to Serve Others: Financial Planning - The Process and the Person

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What is financial planning? In defining what financial planning is not, let me quote from Mark Twain: “When your outgo exceeds your income, your upkeep will be your downfall.” Financial planning is a calling to serve others, whether in helping a client with a single transaction, or creating an all-inclusive plan for an individual, family, or business.

Recent research has found that the general public is confused about who truly is a financial planner. On the positive side, however, the public has begun to understand that whoever a financial planner is, they (the public) had better “get on the bandwagon,” because he or she must be important!

Young people, in particular, ascribe a high level of importance to financial planning. More and more of them are realizing that they must be more attentive in planning their future and their retirement, since they believe they no longer can depend on the government, Social Security, and employer pension benefits to help them attain desired goals and objectives.

In recent years, financial planning has rapidly evolved in response to the demand for assistance in working through the increasingly complex web of tax laws and financial strategies and products. People also are gaining a better basic understanding of what their needs are, and this has also fostered the growth of financial planning.

Whether the financial planner helps solve a single issue or develops a comprehensive lifetime plan, the financial planning process addresses all aspects of a client’s financial circumstances, goals, and objectives. The planner examines income production and management, asset accumulation and protection, tax management, and retirement, education, and estate planning. Financial planners have recently expanded their services to address family values, philanthropy, and family management through financial strategies. The financial planner may sometimes work with a team of related professionals, who together integrate and coordinate strategies for attaining the overall objectives of the client.

Financial Information Analysis
The steps in the financial planning process are:

  • Have the client establish financial goals and objectives.
  • Collect and analyze relevant personal and financial information to form a knowledge base of the client’s current financial position.
  • Relate the current financial position to the client’s stated goals and objectives.
  • Develop a plan of action and secure the client’s agreement to the plan.
  • Implement the plan of action.
  • Monitor the plan for results over time to determine whether any adjustments are needed.

Understanding the client’s balance sheet – assets, liabilities, and net worth that represents his or her financial wealth – is critical to evaluating a client’s current financial position. With a thorough analysis of the balance sheet, including liquidity, profitability, solvency, and asset utilization ratios, the planner can evaluate the effectiveness of the client’s financial activities.

It’s equally important to study and understand the client’s cash-flow statement. Unlike the balance sheet, the cash-flow statement converts all aspects of an individual’s or a business’s wealth to a cash basis. The management of cash flow has three basic components: cash-flow analysis, cash-flow planning, and cash-flow budgeting. Cash-flow management is especially helpful when a client wants to accomplish any of the following objectives:

  • Measure periodic progress toward achievement of specific goals.
  • Monitor complex elements of economic activity
  • Evaluate the economic performance of cash flow.
  • Plan a budget and control household expenses
  • Develop guidelines for multiple financial investments and activities.
  • Monitor performance of securities investments, rental property, or a closely held business.
  • Reposition assets as necessary to help accomplish objectives.

Investment Advice
Every client wants the highest possible investment returns over time–within their risk tolerance. Effective financial planning requires determining a client’s risk-taking propensity and recommending investments consistent with that risk profile. There are three basic risk profiles: risk tolerance, risk indifference, and risk aversion. One is no better or worse than the other. The planner’s job is to identify a client’s profile and then offer advice based on it.

The majority of investors are either risk indifferent or risk averse. They may accept risk within strict limits, but only if they can obtain more than a proportionate increase from investment returns. A good financial planner never loses sight of the truism that “the higher the risk, the higher the return.” Risk averse clients usually select safer investments with a higher current income flow, such as CDs, Treasury bills, and bonds, rather than investments with greater long-term growth potential and less current income. Factors for assessing a client’s risk profile are his or her

  • ratio of higher risk to lower risk investments
  • ratio of liabilities to net worth
  • ratio of liabilities to gross income
  • ratio of life insurance to annual salary
  • number of voluntary career changes
  • percentage of annual income spent on recreational gambling

Tax Management
A professional financial planner must maintain an in-depth knowledge of current state and federal tax laws and keep informed of any changes in the law.

Appropriate tax planning involves many techniques, some of them quite complex. After data gathering is completed, the financial planner must analyze the information for opportunities that would save taxes for the client and help him or avoid costly tax blunders. One of the most important aspects of financial planning is educating clients to consider the benefits and costs of every transaction before engaging in it.

Retirement Planning
Typically, investing before retirement, during the accumulation period, emphasizes capital growth and deemphasizes current income. Investments after retirement, in the liquidation or distribution phase, emphasize current income and deemphasize capital growth.

Retirees facing the transition from accumulation to distribution of their assets tend to follow a more conservative path, such as a fixed-income approach. Unfortunately, that may actually be a risky strategy because of inflation. To maintain a certain lifestyle, retirees often draw down principal, not realizing they may be killing the goose that lays the golden egg, because eventually the income and principal can disappear. A critical part of a financial planner’s responsibility is successful long-term retirement planning for a client, before and after retirement. This does not necessarily mandate a total overhaul of a retiree’s portfolio. Although retirement does have more significance for portfolio management than other transitions in life, the risk-return concepts that governed decision making throughout one’s working career should still remain applicable.

Ethical Behavior
Ethical behavior is absolutely vital to financial planning, whether the planner is working alone with a client or as part of a professional team. There can be potential for conflict with members of the team, or conflict-of-interest issues. In all situations, the same high ethical standards apply. Some of the potential conflicts that could arise within a team of professionals include:

  • Compensation considerations for the various professionals
    matters of confidentiality and legal privilege in communications between a client and one or more of the professionals.
  • Conflicts of interest between one or more of the professionals and the client or among the professionals themselves
    the competence of one or more professionals in accomplishing a particular task assigned or expected in serving a client
  • Legal and regulatory compliance with all applicable laws, regulations, and ethical standards by each member of the professional team
  • Issues of cooperation, coordination, and communication among the members of the professional team

Charitable Planning
Within the array of personal and family wealth matters, pursuing philanthropic goals and supporting specific valued charities have become increasingly important in a financial planner’s role.

The federal government permits an income tax deduction for charitable contributions to organizations operating exclusively for religious, charitable, scientific, or educational purposes; to societies for the prevention of cruelty to children and animals; and to organizations that promote national or international amateur sports competition. These types of organizations are classified as 501C (3) tax-exempt organizations. Section 170 (b) of the Internal Revenue Code classifies such organizations as either “public charities” or “private foundations.” This distinction is critical because it determines whether an income tax deduction will be limited to 50% of adjusted gross income for a public charity or 30% of adjusted gross income for a private foundation.

Certain types of contributions, such as a gift of property or stock from a closely held corporation, are more difficult to plan than others. Both the gift of stock and the type of corporation are subject to tax rules and valuation issues; the IRS rules for property contributions that defer the transfer of ownership to a charity are very stringent and must be carefully planned. With the contribution of appreciated property, the current market value is recognized in the calculation, and there is no recognition of capital gains. A financial planner’s expertise in these and similar philanthropic issues can be a key part of fulfilling a client’s goals and objectives.

Even though different clients at different ages have widely different preferences and goals, some personal and family wealth objectives are almost universal in financial planning. These include:

  • to maintain a specific lifestyle
  • to ensure that lifestyle for a surviving spouse and other loved ones
  • to accommodate the special needs of a spouse, children, and other loved one
  • to ensure flexibility and control over assets during life and thereafter
  • to ensure family values
  • to attain philanthropic goals that are considered important
  • to support specific charitie
  • to prevent the potential negative impact of wealth on heirs and loved one
  • to preserve identified assets for the benefit of particular individuals

Simply put, the ultimate goal of the financial planner is to tell the client, with all confidence, just the reverse of Mark Twain’s quip: “Your inflow will exceed your outflow, and your upkeep will not be your downfall.”

Charles S. DiLullo, CPA, CLU, ChFC, holds the Jarrett L. Davis Distinguished Professorship in Finance and Accounting and is an associate professor of accounting at The American College. His areas of expertise include finance, financial/fund/statutory accounting and reporting, business statement analysis, business valuation, and other specialized financial and business issues. Professor DiLullo is responsible for two courses in The American College’s Master of Science in Financial Services (MSFS) degree program, a boot camp for the Masters of Science in Leadership (MSM) degree program and one designation course in The College’s Huebner School. For more information about Mr. DiLullo and The American College visit


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