By The Globe and Mail Custom Content Group
It is recommended that financial planners follow a six-step process with clients to help ensure that financial plans meet specific objectives and are relevant to an individual’s needs, says Anthony Williams, vice president of academic affairs for the Canadian Institute of Financial Planning.
“A holistic approach is far better than piecemeal planning,” he says. “It provides clarity for the client and a platform for constructive interaction with the planner.”
The fundamental components of financial planning are generally considered to be:
- Financial Management
- Tax Planning
- Asset Management
- Risk Management
- Retirement Planning and
- Estate Planning
“In a well-structured financial plan, none of the components should ever be dealt with entirely in isolation,” says Mr. Williams. “It’s the integration and interdependencies among the components and the need to analyze and synthesize information required to formulate strategies that distinguishes financial planning from other forms of financial advice.”
The actual product recommendation should not be the focal point. Rather, it is the financial planning activity, based on the six-step process, that leads the planner and the client to that point that is most important.
The six step process to financial planning
- Establish the engagement: Define the terms of the engagement
- Gather client data: Determine the client’s goals, needs and priorities
- Analyze the client’s financial information: analyze the information with respect to the client’s goals, needs and priorities
- Develop and present the financial plan: Identify and evaluate the financial planning strategies
- Implementation of the financial plan: Agree on implementation action, responsibilities and time frames
- Review the financial plan: Agree on responsibilities and time frames for the review and Re-evaluation of the financial plan.
Establishing a long-term relationship of trust with the right planner and agreeing on the terms of the engagement are critical elements of successful financial planning, adds Mr. Williams.
“The client and the planner will define and agree on the scope of the financial planning engagement including details of each party’s responsibilities, the time frames, compensation, and how potential conflicts of interest will be resolved,” he says. “This should all be set out in writing in a formal engagement letter or in a Letter of Understanding, signed by both the client and the planner.”
Starting out with a formal engagement is important because relationships between clients and their financial planners are often spread over many years during which time different components of the six-step process will be implemented or refined. A good understanding of how the process will unfold is important to keep the relationship on track, adds Mr. Williams.
Once the engagement has been formalized, the planner will gather information from the client to determine goals, needs and priorities and assess them against the client’s current circumstances. The assessment will help determine the strategies needed to achieve the client’s stated goals, needs and priorities.
The client and planner should then agree on implementation of the plan, responsibilities and time frames, including a timetable for monitoring and evaluating the plan to assess its progress, determine if it is still appropriate and revise it if necessary, says Mr. Williams