Financial Planning

This can be broken down into two core concepts namely financial matters and planning

Financial – everything to do with money and assets that have a monetary value

Planning – Defining goals and objectives, qualifying them and quantifying them, then determining how these goals and objectives can be achieved. This can only be achieved through rigorous analysis of all financial facts.

Once the analysis has taken place then the plan should be implemented. 

In essence a financial plan is a plan of action. In order to achieve defined goals and objectives, it will often be necessary to rearrange some or all of a client's financial affairs. A plan that is not acted upon can never succeed.

Financial Planning recognises the causal effect that one action can have upon other circumstances or objectives. In this sense, Financial Planning must be comprehensive, i.e. it must deal with a client's affairs holistically (unlike financial advice, which may be restricted to one or two areas of financial concern addressed in isolation).

Financial Planning is about meeting a client's financial and lifestyle objectives and any advice offered should be relevant to the goals and objectives agreed.

The Financial Planning process

A financial plan may be very simple or very complex. However, the production of a plan will always result from following the Financial Planning process.

Financial Planning is a cyclical and dynamic process.

The process includes at least six steps:

1.      Identifying financial objectives or problems.

2.      Collecting and assessing all relevant personal and financial data (including attitudinal data).

3.      Processing and analysing information.

4.      Producing a written plan which describes how to make the most effective use of financial resources to meet the agreed objectives.

5.      Implementing the plan.

6.      Reviewing progress and modifying the plan, as necessary, to take account of changed circumstances.

 

As time goes by, a client's financial circumstances will obviously change, as well as the cost of living and other external factors, all of which will tend to be at differing rates or by differing amounts.

At any review the objectives must be revisited to see they are being achieved, or indeed whether they are still relevant to the client, and any changes made as required.

The financial plan produced for a client is a snapshot of the client's financial goals, current financial situation and the action planned to bridge the gap between them.

In order to produce a financial plan, the planner must first carry out a detailed information gathering exercise to ascertain the client's problems, concerns, needs, desires and objectives.

Once identified, these must be prioritised and timescales established to fulfil them.

They must also be qualified (i.e. restrictions identified) and quantified (i.e. amounts).

This will involve the collection of relevant hard data (facts and figures about age, finances, health, earnings etc.) and soft or attitudinal data (about attitudes, values, beliefs etc.).

The next step is to agree a way forward and to organise and analyse the information that has been gathered and from it to synthesise other information that may be needed. This may involve the construction of schedules, cashflow or budget summaries and calculations to show surpluses, shortfalls or liabilities (e.g. to taxes).

Financial Planning vs. Financial Advice

Financial Planning and Financial Advice are often seen as the same thing but this is not the case.

Financial Planning is an evolving action plan resulting from a cyclical process, whereas financial advice is a recommendation regarding a financial transaction at a fixed point in time.