In my previous post 5 Reasons for financial planning in your 50s, I discussed why it is important to have a financial plan. I have found that most people that I speak to are not entirely aware of what a financial plan is and why they need one. What a financial plan is is not exactly fully agreed upon between financial professionals so it is not surprising that most consumers are not entirely clear on it either. Wendell Fuller of Fuller Wealth Advisors in Richmond, Va. explains, “I see that more than anything — not having a true sense of what will be the true costs of retirement goals and dreams, or thinking of them in today’s dollars, and in 10 or 15 years, with inflation, could cost more than you think.” I have worked with three financial advisory companies and with each company, we have taken a little different approach based on the company’s policy and how I have grown to look at financial planning. I have found through my years in the financial industry that what makes a good financial plan is that it is realistic, understandable, and actionable.
Through the Years
At my first firm, we were encouraged to create a detailed plan for every client regardless of their situation. What we would end up with is an extremely comprehensive spiral bound notebook projecting future returns, contributions, withdrawal rates, major purchases, etc… What I found with my first firm, however, was that I would put hours of data input and tweaking into these plans and when I presented them people would kinda nod in agreement and go on with their life as they normally had.
As I moved to my second firm, we followed a similar approach of creating large comprehensive financial plans for the majority of our clients. A large difference though was that a lot of the clients I was working with at my second firm had been clients for a long time with some in excess of 20 years. We reviewed and updated the plans annually with new projected expenses, assets, and goals. Although many of these clients had been through the financial planning process more times than they could count, I noticed that many of them did not fully comprehend the concepts and ideas we tried to portray through the plan.
About a year into working with my second firm we transitioned to a new approach that moved away from the 40 page bound notebook with detailed projections to an approach where we completed the process interactively in the meeting through a simple program. By the end, the client left with an 8-page printout listing goals, action steps, and current projections for them to achieve their goals. This approach made the financial plans easier to comprehend and gave clients greater ownership of the plan.
My Process Today
A lot of the time now, especially with clients new to the financial planning process, I start with pen and paper. It is odd being a millennial discussing on my blog about using pen and paper instead of some fancy app or algorithm, but it is true. At this point, I have enough experience discussing finances with people and preparing financial plans that I can get a rough idea of whether someone’s current goals are feasible or whether changes need to be made. What pen and paper do is makes it interactive with the client so that they can see exactly how each number is arrived at. I will use outside tools to explain why some numbers are used and help make projections, but for the most part, I am using high school algebra. Pen and paper also allow us complete flexibility. As we go through the process it is easy to make changes to assumptions throughout the process without trying to manipulate an advanced program on the fly and possibly messing up other assumptions in the process.
No one process is correct and different processes are better for different people in different situations. Many people just need a couple of simple helpful tips to get their finances on track. For other people, they would prefer to see a chart detailing every projected financial transaction for the next 30 years. The important thing is that however someone creates a financial plan whether it is with a professional or on their own is that it is realistic, understandable, and actionable.