Three Stages in the Financial Planning Process

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

2. 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

3. 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

4. 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?

5. 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.

6. 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.

7. 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.”

8. 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.

9. Erosion of Purchasing Power Effect of 3% inflation

10. Inflation-Adjusted Income and Asset Analysis

11. 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.

12. Principle 5. “A successful investor has to be right three times.” Selection, timing, and titling are all keys to success.

13. Principle 6. “An investor should never put all his eggs in one 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.

14. 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.)

15. 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.

16. 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.)

17. 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.

18. Principle 11. “Assets and income maintain their utility only to the extent they maintain or increase their purchasing power.”

19. Principle 12. “Increase expenditures (especially nondeductible ones) at a lower rate than you increase your income.”

20. Principle 13. “Think of financial security only in terms of the bottom line.”

21. Principle 14. “He is wise who can turn top tax dollars into assets or spendable income without undue risk.”

22. Principle 15. “The essence of risk management is protecting the ground that’s already been gained without losing more in the process.”

23. 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.”

24. Principle 17. “Always use the lowest risk solution that satisfies the need.”

25. Principle 18. “At a certain point, action must replace cogitation and articulation.”

26. Principle 19. “No tool or technique is without cost.”

27. Principle 20. “Patience and discipline are the parents of financial success.”

28. Principle 21. “Whether it is better to “own” or “loan” depends on one’s own situation.”

29. Principle 22. “Debt, like spending, should be at the discretion of and fully controlled by the investor.”

30. Principle 23. “Tax leverage is a concept similar to financial leverage and can provide similar advantages.”

31. Principle 24. “The after-tax return on the repayment of debt is essentially risk free.”

32. 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.”

33. 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.”

34. Principle 27. “The best investment, regardless of what you may choose to compare it to, is education.”

35. 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 – • What are the advantages – and disadvantages – of the viable alternatives? • Which of the viable alternatives provides the highest return at the least cost with the greatest certainty? • What happens if the client takes no action?”