Chapter 20
Completing the Process
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Chapter Goals
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Complete the financial planning project.
Explain the importance of planning integration.
Demonstrate how PFP theory can improve the
practice of financial planning.
Use overall planning tools such as SWOT, scenario
and sensitivity analysis.
List the keys to a successful plan.
Overview
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Integration: The process of combining, of making
something into a completed whole.
In personal financial planning it means evaluating
costs and benefits over time to find the best path to
our goals. Integration is often overlooked or given
less emphasis than is warranted.
Given limited resources, you cannot make correct
choices without weighing alternatives for spending
your monies.
PFP Theory
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Concepts underlying PFP theory:
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The household is an enterprise that operates like a business.
The goal of PFP is to provide the highest standard of living
possible for household “member-owners” over their life cycle.
For a given time devoted to work, the goal becomes maximization
of discretionary expenditures.
Household finance supports the enterprise, which needs cash
flow and appropriate methods for allocating its limited resources
over time.
Personal financial planning provides the strategic approach for
solving household financial decisions.
Personal financial planning decisions are made on an integrated
basis that takes into account all household assets and liabilities.
Total Portfolio Management provides the solution for personal
financial planning’s overall objective and the household’s overall
goal.
PFP Theory, cont.
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Distinguishing features and benefits of PFP theory:
The Financial Plan
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PFP theory explains how the PFP process should
ideally be done.
The financial plan, using the theory as an
underpinning, is a mapping out of the practical steps
through which a particular goal or goals are to be
accomplished.
For comprehensive financial planning, a detailed
written financial plan is desirable.
The Financial Plan, cont.
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A financial plan has several advantages:
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It imposes overall structure on the process through specific
steps that should be taken.
It compels you to order your priorities and provide a specific
financial solution using integrative techniques. In other words,
it aids decision making.
It presents a document to refer back to so that you can
compare actual with projected results and refresh your
memory as thoughts of the original steps fade.
It provides a numerical base for adjustments as goals and
resources change in the future.
The need for the plan to integrate all financial actions
arises from the limited resources households have.
Actions in one area often affect planning for other
activities.
The Financial Plan, cont.
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The need for the plan to integrate all financial actions
arises from the limited resources households have.
Actions in one area often affect planning for other
activities.
Before making final judgments it is advisable to
examine your work by reviewing each step in the
financial planning process and adding new tools that
can help you in making integrated decisions.
The series of questions we will next consider helps
assure that you will complete the process properly.
The Financial Plan, cont.
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Establish the Scope of the Activity
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Have you analyzed all areas that you intended to?
Is the scope established broad enough?
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Gather the Data and Identify Goals
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Has all information been gathered and is it available for use?
Has the true goal been ascertained?
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For example, in a comprehensive plan, if provisions have been
made for retirement, has long-term care insurance been
considered?
For example, the statement “I am satisfied with my current life
style; my main goal is to have a roof over my head” can mask
larger goals.
The Financial Plan, cont.
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Compile and Analyze the Data
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Has all relevant data been analyzed?
Have you given that data the depth of analysis it merits?
Have SWOT, sensitivity and scenario analysis been
considered?
The evaluation process is the heart of planning
integration in practice.
The household is faced with many choices as to how to
prorate its limited resources.
The financial plan is the response.
It specifies what the household intends to do with its
current and future resources.
The Financial Plan, cont.
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Operating parts of the financial plan:
The Financial Plan, cont.
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The household resource problem can be viewed as a
series of integrated capital expenditure decisions.
Each part of the financial plan competes for capital.
The household has to decide which capital
expenditures to fund and in what amounts.
Importantly, the plan looks at these decisions not only
as current ones but as those that will take place over
the entire life cycle.
The following slide provides a visual portrayal of the
planning process.
The Financial Plan, cont.
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Life cycle source and use of cash:
SWOT Analysis
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SWOT analysis represents an appraisal of all the major
factors that can enhance or detract from the outlook for
goal achievement.
SWOT: Strengths, Weaknesses, Opportunities,
Threats.
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Strengths and weaknesses are part of the internal household
analysis.
Opportunities and threats are identified through an
examination of the external environment.
SWOT analysis provides an overall assessment of the
household’s situation.
SWOT Analysis, cont.
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The external environment has an impact on the
household.
It includes political, legal, tax, social, economic, and
technological variables closer to home as well as the
industry you work in.
Opportunities could arise from new regulations that
result in a decline in income tax rates.
Threats could incorporate:
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The distinct possibility of higher energy prices, which could
result in a decline in your discretionary outlays.
A movement toward larger houses, which could make your
modest sized home less valuable.
Involvement in an industry with declining prospects.
SWOT Analysis, cont.
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SWOT analysis is intended to uncover new information
and form a realistic appraisal for the planning future.
It can also lead to changes in projections or practices.
Our first choice is to overcome our threats by changing
our practices.
Yet we cannot deal with all threats directly nor do we
want to.
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For example, if we have a job that is lucrative and enjoyable
but it is in a highly risky industry, we may counter the threat by
accumulating extra savings in case our income drops or we
are laid off.
We compare the SWOT assessment with our goals
and plans. We may then provide for contingencies by
taking additional risk management steps.
SWOT Analysis, cont.
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SWOT analysis by planning area:
SWOT Analysis, cont.
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Sensitivity Analysis
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Sensitivity analysis is identifying those factors that
could significantly alter anticipated planning results.
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Perhaps the most popular form of this type of analysis
is Monte Carlo simulation.
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It may be performed as part of SWOT analysis or as a standalone supporting analysis.
Sensitivity analysis is sometimes more quantitatively based
than SWOT.
Monte Carlo isolates some key planning variables such as
investment return and inflation and assesses how these affect
planning outcomes.
Scenario Analysis
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Scenario analysis observes the effect of changes in
multiple variables or in one variable that influences
many situations.
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Its stress on creating an overall changed environment
distinguishes it from one-variable scenario analysis.
For example, our projections of financial and other asset
returns may be based on historical returns and the
continuation of a normal economic environment.
We may want to look at the impact of an alternative scenario.
Given that scenario, our ability to save will be altered and we
may have to consider the possibility of a temporary work layoff.
In the event of such an economic outcome, the result could be
a higher level of liquid savings to be drawn down.
Develop Solutions and Complete the
Plan
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Have all feasible solutions been considered?
Some solutions may not give the highest revenues or
result in the lowest risk but may cost significantly less
to implement and therefore be the preferred course of
actions.
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For example, the purchase of a disability policy that doesn’t
cover some less important benefits upon disability but costs 25
percent less may be the best choice.
Once the solutions have been completed in all areas of
the plan and made to agree with current and projected
resources, the plan is almost ready to be written.
At this point a behavioral review can be helpful.
Behavioral Review
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It is often not sufficient to identify a number, a required
annual savings pattern to assure financial success.
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Financial plans need not be restricted entirely to
numbers-oriented goals but can incorporate whatever
goals people may have.
Now is the moment to ask, perhaps for the last time:
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The financial plan must take into account human behavioral
shortcomings.
It can help prospects for ultimate success if the financial plan
deals with all of these factors.
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Does this plan make sense?
Is it feasible to do?
In reality, will it be carried out?
If not, what can be changed to make it more practical?
Writing the Plan
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Plans depend on the style of the writer.
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Whatever the approach, a plan must be descriptive
enough to refer back to and to be communicated to
others.
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Some people prefer long detailed plans with explanations for
each recommendation while others prefer to get right to the
point.
Recommendations should be linked to goals.
Provide the advantage and disadvantages of advice.
Provide the type of future events that could change these
recommendations.
Provide a road map for implementation.
Writing the Plan, cont.
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An ideal financial plan should have:
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A summary at the beginning,
Detail in each planning part, and
A summary perhaps more oriented toward implementation at
the end.
A mix of:
 written information,
 numbers through tables, and
 figures that illustrate and enliven the text.
Delivery of Plan
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Where the plan is to be presented to others the
relationship between recommendations and goals
should be highlighted.
An assessment of the person’s understanding of the
plan should be made and assistance provided when
necessary.
Where it is apparent that the findings have not been
fully comprehended, it is often advisable to let the
person read the plan and “digest it.”
Another face to face or phone meeting may be set up.
Components of the Financial Plan
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Components of the Financial Plan,
cont.
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Keys to a Successful Plan
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Keys:
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A specific statement is made indicating whether the goals are
doable and the current household course is financially
consistent with those goals.
The important assumptions in the plan such as salary growth,
financial investment returns, cost increases, retirement age,
and longevity have been separately disclosed. Growth rates
and inflation rates are coordinated.
Steps have been taken to help with any human shortcomings
and nonfinancial goals are given.
Where appropriate, alternative solutions have been weighed.
Before completing the plan, a review process has been
undertaken that confirms that the financial figures and
recommendations make sense and are attainable, given the
personalities of the individuals.
Monitoring the Financial Plan
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People’s lives can undergo significant change so
financial plans should be reviewed periodically.
In addition, plans should be reviewed periodically to
measure actual results versus projected ones.
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Reviews should identify systematic, not cyclical,
differences.
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When figures are materially different, reasons for the
discrepancy should be found.
If the reason stems from unrealistic plan assumptions, they
should be changed.
For that reason, reexamining plans too often can be
counterproductive.
Chapter Summary
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PFP theory helps understand and sharpen actual practices.
Integration of all household resources as performed through
TPM or other methods can improve decision making and
household performance.
SWOT, scenario, and sensitivity analysis add other dimensions
to the overall review process by providing “what if” analysis.
All steps in the process should be reviewed prior to completion
of the plan with relevant questions asked in each step.
A behavioral review at decision time can provide a reality check
on what can realistically be accomplished.
A financial plan should incorporate among other things clear
specific recommendations made after careful review
procedures, state important assumptions, and weight
alternative solutions to be successful.
Periodic review can assure that initial plans remain relevant.