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What is a Financial Plan?

What exactly is a financial plan? When you meet with your financial advisor you talk about financial planning, but are you both speaking the same language? Has someone ever told you that they will give you a comprehensive financial plan?  How do you know if what you receive is what was actually promised to you? 

Are you working with a true financial planning professional, or are you dealing with one of the thousands of practitioners who call themselves financial planners, yet prepare plans with missing pieces?  Unlike child’s play, when designing a financial plan in order to assist you in reaching your life’s goals, you cannot afford to have any missing pieces.

In the early 1980's before the great stock market boom, the only place you could learn the art and science of financial planning and earn a professional designation for the efforts invested was through coursework available.  The curriculum consisted of six individual courses, each of which had an exam. Upon completing the exam for each course and fulfilling the industry work experience requirements, you became eligible to use the Certified Financial Planner "CFP" marquee and call yourself a Certified Financial Planner.  Today, there are hundreds of colleges and universities qualified to deliver the CFP Board’s required education curriculum.

From my early days of being in the financial planning industry, I have believed in and supported the concept of comprehensive planning. Financial Planning is a process, not a product and the basis is the Financial Planning Process.

In financial services, and financial planning specifically, there is a process. It has six steps. If you are going to work with someone who calls themselves a financial planner, they owe it to you the ability to perform all six steps—in all the different aspects of financial planning. Otherwise, they should not call themselves a financial planner. This process consists of six steps which are:

  • Establish the client-planner relationship.
  • Gather client data and determine client goals.
  • Analyze and evaluate the client’s financial status.
  • Develop planning recommendations.
  • Implement planning recommendations.
  • Monitor planning recommendations and make necessary adjustments.

Financial planning has, in addition to a six-step process, a specific series of areas where your situation is supposed to be analyzed and evaluated utilizing that six-step process. These areas include insurance, investments, tax, estate, retirement, and cash flow and budgeting.  Therefore the elements of a comprehensive financial plan include the following:

  • Financial statements and cash flow management
  • Insurance and Risk Management
  • Investment management planning including education planning
  • Retirement and retirement income planning
  • Estate and charitable giving planning
  • Income and estate taxation planning
  • Special needs planning (if applicable)
  • Business continuity planning (if applicable)

Some will argue that they do not do comprehensive financial planning because their practices are specialized.  They will use the example of medicine where you have generalists and specialists and say that because they are specialists in certain areas they do not have to worry about the whole package.

I do not accept this comparison for one major reason; it is faulty in definition.  When you become a physician, you complete medical school, and then you work toward a specialization. In other words, you learn all the basics, and then you choose an area where you want to gain additional specialized knowledge.  In so doing you do not set aside everything you learned about those areas not directly related to your specialization.  In most cases, that information and education is, in fact, incorporated into your specialty. Some areas of specialisation include:

  • a qualified life insurance specialist
  • a qualified health insurance specialist
  • a qualified long-term care insurance specialist
  • a qualified critical illness insurance specialist
  • a qualified investments planning specialist
  • a qualified charitable giving specialist
  • a qualified employee benefits specialist
  • a qualified property and liability specialist
  • a qualified disability income insurance specialist
  • a qualified estate planning attorney
  • a qualified retirement income specialist
  • a qualified advisor in senior issues
  • a qualified advisor for families with special needs children
  • a qualified income tax advisor

If all your person does is investments, then they are an investment planner. If all they do is taxes, they are a tax planner. If all they do is advise in areas of retirement planning, then they are a retirement planner.  There is nothing wrong with working with an individual for something specific.  If you wish to engage with a professional for one specific service or product as long as that is the planning engagement you enter into that is fine. The problem, however, as I see it, is having a false belief that the investment planner has analyzed your entire situation and made all the appropriate recommendations for you to follow and enable you to reach your financial goals.

To read about the common missing pieces of a Financial Plan click HERE

To see the video associated with this blog click HERE

Kevin Cahill Guelph