Tools in the Financial Planning Process Chapter 4 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company1 Three Stages.

Tools in the Financial Planning Process

Chapter 4Tools & Techniques of

Financial Planning

Copyright 2009, The National Underwriter Company 1

Three Stages in the Financial Planning Process

In addition to the financial planner’s role as a business owner or executive managing his or her practice, there are three stages of the financial planning process that require different tools and skills:

– Planning

– Implementation & Product

– Management



Financial Planning


Tools for the Planning Stage

• Basic counseling skills– Ability to listen– Communicate your understanding of

the client's concerns

• Data Gathering– Help disorganized clients accumulate

necessary information– Still need to communicate well



Financial Planning


Tools for the Implementation Stage

Coordination of the team efforts– Tax accountant – quantitative analysis and possibly

projections– Estate attorney – Draft documents– Insurance and investment advisors – product knowledge

including tax and financial benefits and drawbacks of each product



Financial Planning


Tools for the Management Stage

• Continual monitoring of the client’s attention to the plan and intervention when necessary:– Need to let client know he or she is not handling the plan well.– Client sensitivity – will the client let you question his or her

performance?– Communication skills – How do I tell the client that he or she is

not doing as well as he or she thinks?– Professional dilemma – Is the planner willing to risk the client

relationship to give the client the knowledge to put the client back on track?



Financial Planning


28 Golden Principles of Financial Planning

Some of these principles are old maxims, but that is because they work.

Financial conditions change and new financial products are designed to meet new circumstances, and old products fade away, but these principles endure.



Financial Planning


Principle 1.

“Cover your assets before taking greater risk.”

– Protect current assets before speculating.

– Insurance is often one of the first items in a new financial plan.



Financial Planning


Principle 2.

“Seek a return of principal before you seek a return on principle.”

– Get too greedy and you may lose it all.

– Remind client of relationship between risk and reward, but make sure of “safety first.”



Financial Planning


Principle 3.

“No risk, no reward.”

“Strong profits are not made by faint hearts.”

– Three big financial risks: financial risk, purchasing power risk, and lost opportunity risk.

– Doing nothing is the biggest risk of all: At 3% inflation, $100,000 will only buy $75,000 worth of goods after only ten years.



Financial Planning


Erosion of Purchasing Power

Effect of 3% inflation



Financial Planning


Inflation-Adjusted Income and Asset Analysis



Financial Planning


Principle 4.

“Without liquidity and marketability, there is no flexibility.”

– Liquidity is the ability to quickly turn assets into cash with little or no loss.

– Marketability is the probability that of the speed and ease at which the seller can dispose of an investment.

If the client cannot turn assets into cash quickly and easily without loss, emergencies can be devastating and opportunities may be lost.



Financial Planning


Principle 5.

“A successful investor has to be right three times.”

Selection, timing, and titling are all keys to success.



Financial Planning


Principle 6.

“An investor should never put all his eggs inone basket.”

• But if they are put in one basket, the basket must be watched carefully.

– R – Return: Diversify to achieve the highest after-tax return consistent with asset growth and income needs.

– B – Balance: Diversify to acquire the proper balance of liquidity and marketability.

– R – Risk: Diversify to match a client’s risk-taking propensity and temperament.



Financial Planning


Principle 7.

“Put yourself on your own payroll – at the top of the payroll.”

– Budget for yourself (by putting money into savings and investment FIRST, then pay your bills.)



Financial Planning


Principle 8.

“Capitalize on the miracle of the ‘forgotten’ automatic investment.”

– 401(k) plans, thrift plans, automatic investment in mutual funds and insurance policies, all are pathways to having money when you need it.



Financial Planning


Principle 9.

“It is as important to increase the rate of investing as it is to increase the rate of return.”

– Give ‘til it hurts! Increase investments until the “ouch” point – when it starts to interfere with your standard of living. The easiest way to do this is with automatic investment (Principle 8.)



Financial Planning


Principle 10.

“Let purpose help define the level of risk taken.”

– If the outcome is vitally important, don’t take much risk. If the money is disposable, you can take more risk.



Financial Planning


Principle 11.

“Assets and income maintain their utility only to the extent they maintain or increase their purchasing power.”



Financial Planning


Principle 12.

“Increase expenditures (especially nondeductible ones) at a lower rate than you increase your income.”



Financial Planning


Principle 13.

“Think of financial security only in terms of the bottom line.”



Financial Planning


Principle 14.

“He is wise who can turn top tax dollars into assets or spendable income without undue risk.”



Financial Planning


Principle 15.

“The essence of risk management is protecting the ground that’s already been gained without losing more in the process.”



Financial Planning


Principle 16.

“It’s not enough just to make money; an investor has to create automatic mechanisms to make money with the money he’s made.”



Financial Planning


Principle 17.

“Always use the lowest risk solution that satisfies the need.”



Financial Planning


Principle 18.

“At a certain point, action must replace cogitation and articulation.”



Financial Planning


Principle 19.

“No tool or technique is without cost.”



Financial Planning


Principle 20.

“Patience and discipline are the parents of financial success.”



Financial Planning


Principle 21.

“Whether it is better to “own” or “loan” depends on one’s own situation.”



Financial Planning


Principle 22.

“Debt, like spending, should be at the discretion of and fully controlled by the investor.”



Financial Planning


Principle 23.

“Tax leverage is a concept similar to financial leverage and can provide similar advantages.”



Financial Planning


Principle 24.

“The after-tax return on the repayment of debt is essentially risk free.”



Financial Planning


Principle 25.

“When planning for retirement, the wise planner and client will assume a lower than hoped for rate of return on investments, a higher than anticipated level of inflation and cost of living, and put less reliance on what Social Security or a pension will provide.”



Financial Planning


Principle 26.

“When doing estate planning, the wise planner will assume the highest reasonable liquidity demands and the lowest reasonable cash to meet those needs.”



Financial Planning


Principle 27.

“The best investment, regardless of what you may choose to compare it to, is education.”



Financial Planning


Principle 28.

“Before making any suggestion to a client regarding any investment or any tool or technique, the planner should ask and answer these questions –

a) What are the advantages – and disadvantages – of the viable alternatives?

b) Which of the viable alternatives provides the highest return at the least cost with the greatest certainty?

c) What happens if the client takes no action?”

Tools in the Financial Planning Process Chapter 4 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company1 Three Stages.

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