Comprehensive Financial Planning
Vs Step by Step Financial Planning
Comprehensive Financial Planning essentially means you pay a fee, provide someone lots of information and that planner gives you back a binder with suggestions for you to implement, which are intended to improve your financial condition. Many of these suggestions contain very valuable advice. For many people the fee is well spent, if the suggestions made are implemented.
Step by Step Planning means you decide where you are and take action steps to get to where you want to go. Along the way you have the opportunity to learn about all the suggestions that might enable you to improve your financial condition. Typically, this learning process enhances the suggestions offered by most financial planners and guides you to implement what you need to do. In addition, you will learn about many other things, not typically offered by a financial planner. You learn these things, in part on your own from information we provide and additional suggested reading / research. You learn the things you need to know based on where you are and where you want to go.
Although not every planner will adhere to the following steps precisely, a typical Comprehensive Financial Plan has these steps:
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The Initial Interview for most financial planners is essentially an opportunity to get acquainted combined with a sales pitch. This interview is frequently “free.” Just remember that a competent financial planner’s minimum expectation is probably $150/hr and can exceed $500/hr. If this session is free, other sessions will be at a higher price. The initial session might last from 15 minutes to an hour, but if things are going well could easily extend to two hours or more, so you may end up spending $300+ for this “free” session without realizing it. What you want to do is be well organized, seek as much information as possible and keep the sales pitch to a minimum in order to get as much real value as possible for the time spent. The following is a typical agenda:
- Provide a brief history of the firm and planner background.
- Discuss the role of a financial counselor.
- Provide the firm’s disclosure manual.
- Briefly review your current tax returns.
- Review and discuss potential action plans.
- Consider the benefits you could expect to receive from a comprehensive financial plan.
- Outline any training and support services.
- Review a projected cost / benefit ratio and a sample financial plan.
- Discuss the next steps.
A word about the disclosure document. A financial planner is probably going to be providing you investment advice for a fee, especially if they are a fee only planner. This requires them to be associated with a Registered Investment Advisor. An RIA is required to provide you with a disclosure brochure. If you are not provided with a disclosure, this should be a red flag to you. If a planner is a stock broker or insurance agent paid on the basis of a commission, no disclosure brochure may be required. Sometimes the planner may be paid on a fee and a commission basis. In all of these cases (commission broker / agent and both fee & commission) the red flag will be the quality of the advice. It is important to know how your planner is paid as you evaluate the quality of the advice you receive.
Sometimes the initial interview may take the form of a “free” dinner with a group of other people or an investment / retirement / tax / etc. seminar. It costs the planner money to put on this seminar / dinner, so expect the cost to be built into the planning fee in some way. Sometimes the cost of the event is partially paid by a “sponsor”; therefore, the planner will have a motivation to push you toward the product or service provided by the sponsor. If this is the case, a planner with integrity should disclose this information to you.
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This is the heart of the planning process. It is where you begin to make decisions that affect what you will be doing to improve your financial life. You are confirming that the data is correct and you are confirming your values, goals and dreams. By now you and the planner should be forming a relationship that could potentially last the rest of your life. Be aware that you are also beginning to confirm this relationship.
Don’t take these decisions lightly. You want to know that the advice you receive will genuinely be in your best interest, not based on a planner’s commission structure or some other motivation. The following is a typical agenda:
- Review your planning assumptions, rate assumptions and objectives.
- Resolve any issues and concerns.
- Discuss who will participate at the Plan Delivery and Implementations Sessions.
- Review prior interview notes.
- Confirm the factual and assumed values for the plan.
- Discuss any changes in short or long term objectives.
- Set a time frame for the Plan Delivery Session.
At this point you should have entered into a formal or informal agreement to retain the planner. You should understand how the planner is being compensated. If his/her compensation is as a fee only planner, you will most likely have entered into a formal agreement. If the compensation is essentially on a commission basis the agreement may be much less formal. “Does this sound like a good plan?” “What do you think?” When you answer “Yes” or “I like what you say” or whatever else you might say and the planning continues, the informal agreement has taken place.
It is to your advantage to work with a planner who will let you pay on the basis of a fee, offset by commissions so you only pay once. If the commissions exceed the fee, you should be able to get future advice without additional cost. The worst of both worlds is to pay for a financial plan which is executed for additional commissions by the same planner. The advice you receive is likely to be tainted and you are paying twice.
Before you actually enter into an agreement with your planner, be sure you know how your planner is compensated.
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This is the heart of the planning process. It is where you begin to make decisions that affect what you will be doing to improve your financial life. You are confirming that the data is correct and you are confirming your values, goals and dreams. By now you and the planner should be forming a relationship that could potentially last the rest of your life. Be aware that you are also beginning to confirm this relationship.
Don’t take these decisions lightly. You want to know that the advice you receive will genuinely be in your best interest, not based on a planner’s commission structure or some other motivation. The following is a typical agenda:
- Review your planning assumptions, rate assumptions and objectives.
- Resolve any issues and concerns.
- Discuss who will participate at the Plan Delivery and Implementations Sessions.
- Review prior interview notes.
- Confirm the factual and assumed values for the plan.
- Discuss any changes in short or long term objectives.
- Set a time frame for the Plan Delivery Session.
At this point you should have entered into a formal or informal agreement to retain the planner. You should understand how the planner is being compensated. If his/her compensation is as a fee only planner, you will most likely have entered into a formal agreement. If the compensation is essentially on a commission basis the agreement may be much less formal. “Does this sound like a good plan?” “What do you think?” When you answer “Yes” or “I like what you say” or whatever else you might say and the planning continues, the informal agreement has taken place.
It is to your advantage to work with a planner who will let you pay on the basis of a fee, offset by commissions so you only pay once. If the commissions exceed the fee, you should be able to get future advice without additional cost. The worst of both worlds is to pay for a financial plan which is executed for additional commissions by the same planner. The advice you receive is likely to be tainted and you are paying twice.
Before you actually enter into an agreement with your planner, be sure you know how your planner is compensated.
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You potentially won’t know whether a genuine Internal Review has taken place, because you are unlikely to be there when it happens. You can reflect on whether it has taken place based on your evaluation of the advice you receive. Below are many of the questions your planner and his/her staff should be asking at the Internal Review. These are the same questions you should be asking as the plan is presented to you.
- Is asset distribution between spouses appropriate? Liquidity increase / decrease appropriate? Current investments receiving an adequate return?
- Are education funding assumptions valid? Shortage of assigned capital?
- Is there an income shortage for Disability? Survivor income? Medical coverage inadequacy? Long term care?
- Are there shortcomings in coverage for Property Liability? Auto liability? General liability?
- Is projected income adequate? Is there effective use of existing qualified plans? Is deferred compensation possible or desirable?
- Are there excessive estate settlement costs? Estate liquidity problems? Dependent minor or parent problems?
- Has a review of the Master Implementation Checklist been conducted?
- Are all present circumstances sections completed? Have all problems been identified and qualified?
- Has each problem been first addressed by exhausting all non-product solutions?
- Have your objective priorities been adequately considered? Are recommendations consistent with your philosophy?
There are a lot of other questions you should be asking. In Step by Step Planning we ask these other questions, step by step, so that you will be taking the steps you need to take as you are ready to take them.
For example, if your income is not adequate to pay your current bills, it is premature to be considering lavish vacation plans and building a million dollar home. You may still have enough assets, so that some estate planning is appropriate, but your focus needs to be on first priorities, like income and reducing expenses. Then as you achieve certain goals, you can take additional steps.
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This is the final sales pitch, especially for a commission based planner. As you review various portion of the plan and understand the projections being presented, you can begin to feel very good about your future.
This is good. At the same time pay close attention to potential judgment failures. Understand the risks involved. When someone says “guaranteed” realize it takes a very large bank account to genuinely assure your projected multi-million dollar portfolio. Investment and insurance decisions involve real risk and specified costs. Understand what they are really saying, especially if they don’t spell it our clearly. This is a typical agenda for the Plan Delivery Session:
- Review recent changes in your situation or objectives and pay attention to special input from other advisors.
- Review your employee benefits, your current financial position, your tax analysis and projection, and your cash flow analysis.
- Analyze projections for the future including disability, retirement, estate cost and liquidity, as well as your survivor income.
- Analyze investment income and risk.
- Discuss the anticipated cost / benefit ratio of your planning and determine additional information you desire.
- Review the implementation checklist and make decisions as to what to do when.
- Answer questions about the recommendations and provide additional information that you desire.
- Suggest additional background reading material as appropriate.
- Determine the next actions for you and the planner.
- Schedule the First Implementation Session.
Warren and his former wife had a significant portfolio in one stock obtained from her previous employer. Many planners told us that we should immediately diversify this portfolio, which would have incurred substantial taxes. Those in her company that did diversify lost 20 to 30% of their portfolio value, more than 100% of the potential growth and paid substantial taxes. We didn’t diversify at that time. After my former wife died I received a step up in basis as of the time of her death. The stock had grown from $5/share to over $100/share in the meantime. We understood the value of the investment far better than the advisors did. After her death, I did diversify and grew the portfolio 150% in about two years.
This doesn’t mean that diversification isn’t a good thing. It means do the diversification gradually and be sure that what you move to is as good or better than what you have. Also, when possible, do your diversification in a tax sheltered vehicle like an IRA or a charitable remainder trust, or better yet within a “tax free” vehicle like a Roth IRA or what one planner calls a Jumbo Roth.
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This is when you spend your money. If you are working with a fee only planner, the implementation happens with brokers / agents different from the planner. If you are working with a commission based planner you have a right to know what commissions come out of the investments you make or insurance you buy. If a planner is unwilling to discuss his/her commission structure, this is a serious red flag. “it is your business” because the money that goes for commissions is not going towards your investment or insurance benefits. A competent planner with high integrity will charge a fair price for the advice you get. A planner without integrity will take advantage of your ignorance and not provide you with the best available product or service at a reasonable price. A typical agenda for Implementation Sessions might be:
- Review any changes in your situation or objectives and any alternate suggestions by other advisors.
- Review what has been accomplished since the last meeting.
- Determine specific actions to take.
- Determine additional information needed to make decisions on any recommendations not yet implemented.
- Discuss other friend’s or associates who may be interested in the planner’s services.
- Execute appropriate transactions.
- Determine additional action steps to be taken by you and the planner.
- Schedule the next meeting.
If your planner is providing you good advice, you should tell your friends, family and associates about him/her. Sometimes this will save the planer substantial marketing costs and you might receive some reduction in ongoing services as a result. Reducing your cost for ongoing service when you make referrals is part of how Chimorel’s 735 plan works
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If you look closely, the list below is almost the same as that for the Plan Implementation sessions. The periodic review process, although very important, is essentially a maintenance program. If your planner does not have a follow up program, you probably should be working with another planner.
- Review any changes in your situation or objectives and any alternate suggestions by other advisors.
- Review what has been accomplished since the last meeting.
- Determine specific actions to take, including executing additional transactions.
- Determine additional information needed to make decisions on any new recommendations or actions not yet implemented.
- Discuss other friend’s or associates who may be interested in the planner’s services.
- Determine new action steps to be taken by you and the planner.
- Implement appropriate transactions.
- Schedule the next meeting.
In Review
A competent Financial Planner should expect to make good money, averaging between $150 and $500/hr. Many make a lot less and some are just sales people calling themselves financial planners. If someone really knows how to save you money, use the money you save to make good investments, plan to protect you and your assets, and can circumnavigate the government foxholes, he or she is worth every bit of what they charge you. But that is not always the way things turn out. Working with a Certified Financial Planner, a CLU, a CPA or a good attorney helps to raise the standards. A stockbroker or insurance sales person who calls him or herself a financial planner may not be terribly reassuring.
In the end, however, it is not so much who you work with that makes the difference, but the judgements and actions you make that count. That is the real difference between a Comprehensive Financial Plan and Step by Step Planning with Chimorel. Our intention is to teach you what you need to know so you can make the best judgments possible and to encourage you to develop an action plan to make it happen. If you rely completely on someone else’s advice without making your own independent judgments, the risk of loss is much greater.
In the final analysis, the difference at Chimorel between a Comprehensive Financial Plan and Step by Step Planning is not overly significant. The key is to provide you with the information you need to make good judgments. Along the way you want to save money where possible; to develop the resources to live a comfortable, satisfying life; and perhaps to support some other people along the way.
