Temperament & Tools

Most practitioners divide the financial planning process into six distinct steps. I prefer to use three phases; 1) the initial phase, 2) the implementation phase, and 3) the monitoring phase. The initial phase includes gathering and verifying the data, inputting the data, putting the plan together, and presenting the results to the client. The implementation phase is where the plan is put in motion and the monitoring phase consists of checking the progress through periodic updates. Let’s take a closer look at each phase.

Phase One: Gathering Client Data

There are basically two types of information you’ll gather: quantitative and qualitative. Not only will you need to know the facts and figures pertaining to their assets and liabilities, but you should also understand how they feel about certain issues. Look beyond the obvious. When you’re gathering information about a client’s goals, ask why that goal is important. Try and discover the “why” or motive behind the answer, not just the “what.” If you do this, it will separate you from advisors who are simply looking for the next sale.

How do you gather client data? Do you wing it or do you use a pre-printed questionnaire? In the past, I used a legal pad, but sometimes failed to get all of the data I needed. So I created a standardized questionnaire to assure I would capture everything necessary to create a comprehensive plan. When developing this questionnaire, it’s important to have a clear idea of the output you desire. For example, if your financial plan will incorporate the income tax benefits due to the depreciation on real property, you’ll need to know what type of property it is, the fair market value at the time of purchase, and the date of purchase. It’s better to gather more than you’ll need than not enough. This will assure the input is as accurate as possible.

Phase Two: Creating the Plan

During this step I have a few standard forms sitting on my desk so that I can make notes along the way. These notes include: scenarios to run, gaps in the client’s situation, additional information needed, and possible recommendations. It’s very important to keep track of your thoughts as you proceed. After you finish the input, and prior to preparing the final document, verify the data. This is extremely important and will assure that you haven’t missed anything. After all, you wouldn’t want to be in the middle of a plan presentation and discover an error, right? To verify the data, I send an e-mail to the client with the client’s financial statement and a cash flow summary attached. Once the client validates the information, I prepare the final document. Running multiple scenarios, I will stress test various metrics to assure we have a viable plan. Let’s look closer at this.

Stress testing is just what it sounds like, a test to determine the breaking point of something. Let’s assume your client asks how much they can safely spend each year and not exhaust their funds. They further stipulate that a 10% probability of running out of money is acceptable, but would be uncomfortable with anything higher. Clearly Monte Carlo simulation is well suited to answer questions addressing the probability of some future occurrence, but it is not particularly adept in this case, which is better suited for optimization. This is because Monte Carlo uses a series of inputs to forecast future probabilities and optimization works in reverse. Optimization uses a desired future outcome to determine an optimal input. What if the client needed or wanted to spend more than the optimized amount indicated? He could increase his savings, delay retirement, or perhaps seek a higher investment return. Your goal is to find a realistic solution, and that’s where having a quality tool can help.

Phase Three: Putting it All Together

After you have completed all scenarios and performed the appropriate stress tests, it’s time to put the plan together. The last item I prepare is the recommendations. I use a Word document which is divided into various headings such as retirement, risk management, estate planning, and so forth. Each section contains my thoughts on the proposed recommendations. The final page of the template includes a table with a list of abbreviated recommendations.

Financial planning is as beneficial to the advisor as it is for the client. Obviously, the client receives peace of mind, but the advisor now has a complete view of the client’s situation. This puts the advisor in the best possible position to provide quality advice which is something the client will greatly appreciate. Remember, clients aren’t buying a book, they’re buying advice.

Presenting a financial plan to a client is the point where you, the advisor, can shine. Clients need to see you really care and that you have a comprehensive understanding of their situation. I present most plans in my conference room. I display their plan on the hi-def TV and a printed version is available on the table.

After reviewing the plan, I present the recommendations to the client. The last column of the final page of the recommendations has a place for the client to indicate whether they agree, disagree, or need more explanation. Moreover, I have them initial each recommendation to confirm that it has been discussed. This is very important. For instance, let’s say your client did not have a will. You prepare the financial plan and recommend that he obtain one. You might even recommend a few attorneys. After procrastinating for six months he gets hit by a bus and dies. His heirs learn that you prepared a financial plan for him. Furthermore, the absence of a will created a squabble over his estate and the heirs ask why you failed to recommend a will for their dearly departed loved one. Can you prove what you recommended? You can if the client initialed each recommendation. Remember, it’s not what you say you did; it’s what you can prove that matters.

Implementing and Monitoring the Plan

Once the plan has been presented, it needs to be implemented. This is often where the process bogs down. If it just sits on a bookshelf or in the filing cabinet, it has not accomplished anything. In addition, tracking the implementation phase is crucial. Who will be responsible for each task? How will you, as the advisor, keep track of what has been done and follow up on those items which are outstanding? Managing this process can be challenging and the potential for something falling through the cracks is high.

I use an implementation schedule which estimates the time it will take to complete this phase. I also recommend that a copy of the plan be given to their CPA and attorney. With this, they will be able to see how the client’s assets are positioned. This may even reduce the attorney’s fee. The attorney will usually gather a list of a client’s assets, but will not project their growth. Since I’ve already gathered a great deal of data, if the attorney charges by the hour, it should take fewer hours. Plus, if the plan is of high quality, placing it in front of the client’s other advisors may lead to additional referrals.

The implementation phase can be more easily managed with appropriate technology. Very soon I will have the ability to post the recommendations on a private client portal of my Web site where the client–or I–can simply check off items as they are completed. Then, when an item is checked, an automatic e-mail will be sent to the other party.

Finally, at the end of the implementation phase I will verify that each item has been sufficiently addressed.

Once the implementation phase has been completed and verified, it’s important to monitor the client’s progress. For instance, if we assumed their assets would grow at an annual rate of 7% in the absence of any withdrawals, then a year later their value should be higher. What if the markets were unkind during this period? Then the value of their assets would be less than projected. If the required return was 7% and the portfolio underperformed, then the new required return would increase. To the contrary, if we exceeded our target and thus were ahead of projections, the required return would be less than 7%. Hence, the planning process is ongoing and dynamic and we should never leave the results to chance.

Getting Paid for the Plan

There are various opinions on the appropriate amount to charge for planning services. Moreover, the amount will vary based on geographic location, level of wealth, plan complexity, and the planner’s view of her services. Many planners are shy about charging planning fees. If you are providing something of value, why shouldn’t you be compensated? I charge one fee for planning and a separate fee for asset management. They are, after all, two distinct services.

Whatever you charge for the initial planning engagement, annual retainer fees are something to consider. This is especially relevant if you are serious about providing ongoing progress updates.

My retainer fees are 35% to 50% of the first year fee. So if the first year’s fee was $4,000, the retainer fee might be $1,400 to $2,000.

Using a comprehensive approach to a client’s situation is a win-win for everyone involved. By placing the client’s interests first, as a fiduciary, we are also helping ourselves. If we exceed the client’s expectations we will have happy clients and happy clients will refer their friends and associates.

If you want to develop the very best marketing plan possible, serve your clients as you’d like to be served. Sounds like the Golden Rule, does it not?