FINANCIAL PLANNING
The Board of Certified Financial Planners defines financial planning as “the process of
determining whether and how an individual can meet life goals through the proper
management of financial resources. Financial planning integrates the financial planning
process with the financial planning subject areas.”
There are six steps to the financial planning process:
1. Establishing and defining the client-planner relationship
2. Gathering client data including goals
3. Analyzing and evaluating the client’s current financial status
4. Developing and presenting recommendations and/or alternatives
5. Implementing the recommendations
6. Monitoring the recommendations
“Financial planning subject areas” denotes the basic subject fields covered in the financial
planning process, which typically include, but are not limited to:
• Financial statement preparation and analysis (including cash flow analysis/planning and
budgeting)
• Insurance planning and risk management
• Employee benefits planning
• Investment planning
• Income tax planning
• Retirement planning
• Estate planning
In planning for Retirement, your income, expenses, assets and debts need to be carefully
considered. They all play a role in developing and managing your Net Worth.
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Income typically comes from four sources: savings, investment portfolio, pensions
or retirement vehicles, and Social Security. Continued employment, sale of a
business or consulting income may provide additional sources.
Your expenses in retirement may well change as well. The cost of health care and
Long Term Care will likely become a larger percentage of your total spending as you
age. Housing and travel costs may also change considerably as well.
Inflation can ravage the best-laid plans. It is important to understand the effects of
inflation on plans for longer and longer periods of retirement.
Of course, taxes play a large role in any planning and are critically important in
planning for distributions from tax-advantaged retirement accounts.
For those not already drawing from Social Security, the timing of commencement of
payments can significantly alter some plans.
Net Worth can be created, managed, preserved and transferred. All require
planning. Many specialists will likely be involved. Your financial planner or
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“Personal CFO” should help you coordinate the activities of all of your advisors to
optimize results.
Final note: Who will pay your bills when you are not able to do so? Make it easy for
them.
INVESTMENT MANAGEMENT
Investment Management should begin with a fundamental conversation of your goals,
needs, aspirations, issues, and concerns and how you define success. The conversation
builds on your financial plans. Your investment portfolio may well be the dominant source
of retirement income, and needs to be carefully managed and monitored.
An honest assessment and understanding of your risk tolerance is critical to the success of
your plan and the relationship with your investment manager.
Asset allocation – to equities and fixed income securities, with many sub-categories of each
– is the most important determinant of long-term success. The individual securities
involved are the tools of the investment manager. Each asset class has its own risk and
return characteristics. Diversification is essential.
Avoid the most pervasive causes of the erosion of portfolio value – losses due to excessive
volatility, management and transaction fees, and taxes. Develop an expectation and
understanding of each.
An Investment Policy Statement (IPS) is critical. It will spell out the agreement you reach
with an investment advisor on how your funds will be managed. It should address your
needs, risk tolerance, investment horizon, tax budget and other important elements of the
relationship.
Custodians play a critical role in protecting your assets. They are generally large
institutions that hold and trade securities as directed by the investment manager. You
should understand who the custodian will be, who has powers to trade, and who has
powers to withdraw funds from the account. You should receive statements and
confirmations directly from the custodian as well as from your investment manager. They
should be clear, concise and timely, and available electronically if you so desire. Monitor
your accounts regularly.
Be very careful in naming beneficiaries of retirement investment accounts. This will control
the flow of funds regardless of other intentions or estate plans.
General “rules”:
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Stay invested
Diversify and rebalance regularly
Shorten duration of fixed income portfolios during periods of rising rates
Individual bonds give you greater control over interest rate volatility, tax planning
and management costs than most pooled vehicles.