1. Chapter 5 The Systematic Process: An Overview The Process of Financial Planning: Developing a Financial Plan Lytton, Grable & Klock 2006

2. 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

3. 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

5. 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

6. 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

7. 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

8. Step 3: 3 Primary Sub-steps X 7 1. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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)

16. A Framework for Understanding Professional Judgment Stakeholders Setting Problem framing & problem resolution Abiding by standards of practice “subjective nature of exercising professional judgment”

17. 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

18. 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?

19. Stakeholders: Some Examples Lower fee structure for a “big” client Churning or inconsistent fee structure Interests of primary vs. secondary stakeholders

20. 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

21. 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

22. Low Stakes High Stakes Time Constrained Time Unconstrained NovelVery Familiar Unexpected Planned Specialized Knowledge Commonly Shared Solely by the Professional Collaboration with other Professionals RoutineUnusual Decisions, Problems Or Issues Setting=7 2 or Infinite Possibilities Many options….

23. 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.

24. 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.

25. 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?

26. 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

27. “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

28. Standards of Practice

29. 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?

30. 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

31. What is Professional Judgment? Stakeholders Setting Problem framing & problem resolution Abiding by standards of practice Professional skepticism: self-reflection self-correction Avoidance of complacency— “the way we always did it” “paralyzing perfectionism”

32. Professional Judgment in Plan Development

33. Spiraling Professional Judgment & the Planner-Client Relationship

34. 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

35. 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