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Chapter 5The Systematic Process:
An Overview
The Process of Financial Planning: Developing a Financial Plan
Lytton, Grable & Klock 2006
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Why Is a Systematic Process Needed? Business models and “deliverable
products” vary:• Comprehensive financial plan• Per-project analysis or modular plan• Product sales
• Analysis to establish product need, but no plan• Analysis and a plan to establish product need
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A Systematic Process Offers a standardized approach to
• Collecting and using client information• Analyzing the data• Presenting the plan• Implementing the plan• Monitoring the plan results
Offers a consistent approach to the planning process and client service
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Systematic Financial Planning
Analyze & Evaluate the Client’s Financial Status
Develop Comprehensive Plan &Present Recommendations
Implement the Plan
Monitor the Plan, Implementation,& Goal Progress
Determine and Quantify the Planning Needs
Document and Evaluate Current Planning Efforts
Establish & Define the Relationship
Gather Data &Frame Goals and Objectives
Review Prospective Planning Strategies
Develop Client-based Recommendations
Analyze Current Situation
· Identify and Select Best Strategies to Meet Need
· Frame Recommendation Into: Who, What, When, Where, Why, How and How Much
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Step 1: Establish & Define the Relationship Initiating the client relationship (by referral
or marketing) Meeting with prospective clients Formalizing the scope of the planner-
client agreement
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Step 2: Gather Data & Frame Goals and Objectives Contingent on the scope of the
agreement, gathering needed data• Qualitative• Quantitative
Outcome: Framing measurable client goals• Time• Cost, funding strategy
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Step 3: Analyze & Evaluate the Client’s Financial Status “Essence of financial planning”
• Fact-based and solution oriented as well as person oriented – goals and assumptions
• Repeated for each of core content planning areas:
*Financial situation *Income tax*Risk management *Investment planning*Retirement planning *Estate planning *Education or other special need planning
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Step 3: 3 Primary Sub-steps X 71. Analyze the current situation
• “Know your client”• Anticipate present and future planning issues• Strengths and weaknesses• Identify aspects for change• Identify opportunities for future planning
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Step 3: 3 Primary Sub-steps X 7 (cont’d)
2. Review prospective planning strategies• Brainstorm the universe of solutions
3. Develop client-based recommendations to optimize the situation and lead to goal achievement• Client situation + Strategy• Answer the “5 Ws,” how, and how much
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Step 4: Develop a Comprehensive Plan & Present Recommendations Integrate and prioritize across the 7 core
financial planning areas to develop a realistic, workable plan to protect and grow assets
Issues to consider• Recommendations competing for funding• Must track discretionary cash flow and net worth• Time staggering of recommendations• Priority for complementary recommendations that
satisfy more than one goal
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Step 5: Implement The Plan Implementation varies with the advisor’s
business model and the engagement:• Planner implements• Client implements• Both planner and client implement• Client directs the implementation with planner
or other service providers• No one implements
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Step 6: Monitor the Plan, Implementation, & Goal Progress Review for short-, intermediate- and long-term
goal progress Review for threats, opportunities, progress Review for responses, made or needed, to
changes – both in client situation and the marketplace
Review for advisor support for the client to help the client feel in control
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Professional Judgment Expertise
Advanced level of competence
Compliance with regulations and guidelines
Integrity, objectivity and independence
Advanced level of expertise
Expertise that goes beyond competence
Fairness
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Professional Judgment in Financial Planning
“the subjective nature of exercising professional
judgment”
CFP Board of Standards, Inc. Practice Standards
“exercise reasonable and prudent professional
judgment”
CFP Board of Standards, Inc., Code of Ethics and
Professional Responsibility
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Professional Judgment
“[A] goal-oriented decision-making or problem-solving process carried out in the interest of
one’s client wherein one gives reasoned consideration to relevant information, criteria,
methods, context, principles, policies and resources.” (Facione, 1990)
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A Framework for Understanding Professional Judgment Stakeholders Setting Problem framing & problem resolution Abiding by standards of practice
“subjective nature of exercising professional judgment”
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Stakeholders: Acting in the Best Interests of the Client Both client and planner must be actively
involved and fully informed Client, as primary stakeholder, should be
offered alternatives, when possible Planner’s responsibility to
• Disclose, explain and educate the client in support of recommendations
• Safeguard confidentiality of client information
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Stakeholders: Acting in the Best Interests of the Client (cont’d)
Secondary stakeholders are other individuals, groups who may be affected by the outcome of the professional relationship to serve the client• Planner• Planner’s employees or partners• Client’s family• Others?
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Stakeholders: Some Examples Lower fee structure for a “big” client Churning or inconsistent fee structure Interests of primary vs. secondary
stakeholders
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Ethics, Professional Judgment: What’s Important? Commitment to professional ethics and
professional behavior An awareness of “normative principles” or
accepted practice standards “Willingness to think,” question and
critically evaluate the issue/decision and ramifications for all stakeholders
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Setting Characteristics or dimensions of the
problem/issue/decision that the planning professional must address on behalf of the client
Advisors must be aware of the client’s and their own “definition” of the setting
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Low Stakes
HighStakes
TimeConstrained
TimeUnconstrained
Novel Very Familiar
Unexpected
Planned
SpecializedKnowledge
KnowledgeCommonlyShared
Solely by theProfessional
Collaborationwith otherProfessionalsRoutine Unusual
Decisions, Problems Or Issues
Setting=72 or Infinite PossibilitiesMany options….
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To Exercise Professional Judgment Regarding Setting Recognize that the setting may be viewed the
same or differently by advisor and client. Be alert to these nuances.
Business practice model may define the setting.
Education for advisors needs to be case-based – technical competency + client-centered planning.
Consider how the setting for the client and the planner impact the financial planning process.
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Problem Framing & Problem Resolution Problem resolution: Baseline competence
Problem framing: Experience-based attention to situational data elements and key data patterns that lead to problem identification AND resolution.
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Problem Framing & Problem Resolution
“Problem identification, interpretation, differentiation,
and diagnosis”
(Facione, Facione, & Giancarlo, 1997)
The medical analogy: Do the symptoms suggest a zebra or a horse?
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Problem Framing in Financial Planning Discern an ill-defined or complex situation Gain the necessary information – from the
client or other sources• Attend to client verbal/non-verbal clues
Generate potential planning solutions
See the “big” picture and the details
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“Other” Issues of Problem Framing Defining the scope of the engagement
• Limit the scope to the advisor’s expertise• Seek other professionals when needed
Carefully matching products and services to the client’s situation, including alternatives
Recommendations consistent with other advisors
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Standards of Practice
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Standards of Practice: Consequences & Effectiveness Is the recommended product or service a cost-
effective alternative with a relatively high probability of success for the client?
Is the plan built on valid assumptions representative of the legal, tax, and broader economic environment?
Does the plan allow for readjustment in response to changing situations?
Are the client alternatives and proposed solutions socially and culturally acceptable?
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What Standards of Practice Apply to Financial Planning?
“Subjective nature of exercising
professional judgment”
CFP Board of Standards
Documentation• Transparency
Business practice model
Fiduciary responsibility
Full disclosure
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What is Professional Judgment? Stakeholders
Setting
Problem framing & problem resolution
Abiding by standards of practice
Professional skepticism: self-reflectionself-correction
Avoidance of complacency— “the way
we always did it”“paralyzing
perfectionism”
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Professional Judgment in Plan Development
Analysis of Strategies for Each
Core Planning Content Area
PlanningGoals
Recommendation 1
Recommendation 2
Recommendation 3
Recommendation X
PlanningRestrictions
PlanningChoices
Developthe
Plan
Professional Judgment
Planner
Client
Goals
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Spiraling Professional Judgment & the Planner-Client Relationship
Strategies Recommendations Plan
Client
Planner Goals
Relationship PlanPresentation
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Two Issues that Ground Financial Planning Goal Orientation to Planning
• Client-centered focus for planning• Basis for sustained client commitment
Cash Flow Orientation to Planning• Discretionary income, available assets• Maximize and stabilize cash flow
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Summary Six-step financial planning process is
• Founded on the planner-client relationship• Controlled by the advisor’s professional
judgment• Based on a goals orientation + a cash flow
orientation• Recursive