What to Expect When Developing a Financial Plan

Last Updated (Wednesday, 06 August 2008)
Written by Hank Brock

Once you select a financial planner, what happens then?  What is the process of creating your financial plan? Financial planning addresses everything that has to do with money. With your adviser's help, you'll leave no financial stone unturned. Should you refinance your mortgage? Should you buy or lease a car? What should you do with the inheritance from your grandmother? How can you get more tax-sheltered dollars out of your professional corporation? Where do the answers come from? They come from the "subsets" of financial planning -- things like cash flow management and tax planning. Let's look at a few of the most common.

Income Tax Planning

Tax planning actually spans all parts of your financial plan, such as investment strategies, retirement planning, and estate planning. Specifically, you need to make sure you're maximizing all available deductions, exemptions, and credits to minimize your tax bite.

Retirement Planning

How much should you save for retirement? And how will you do it? Is retirement right for you? Your planner will discuss tax-qualified retirement plans-including IRAs, Keoghs, 401k plans, 403b plans, corporate pension and profit-sharing plans. You'll also want to look at non-tax-qualified retirement plans, non-qualified deferred compensation plans, selective incentive plans, and tax shelters.

How do you know what's best for you? It's called "sensitivity analysis." It looks at your retirement goals. When you want to retire. Your income objectives. Inflation rates. Varying rates of return. The answers help determine how much you need to save -- at what rate of return.

Estate Planning

You'll start with wills. Trusts. Estate distribution issues. But that's not all. A good planner will help you construct a plan so you avoid estate taxes. Too few people worry about estate taxes. They're too far away. Too intangible. But the only way to avoid them is to strategically plan for them today.

Legacy Planning

A good planner will understand legacy planning. A good legacy plan comes from knowing, living, and then planning from your values.  You are building bridges that will take you and those you love to greater levels of abundance, purpose and significance. You'll talk about those things that are truly important to you, and then determine the best ways in which to pass those values on after you pass.

Asset Protection

It is imperative to develop strategies that maximize protection of your assets from frivolous lawsuits or creditors in this litigious society. You don't want to spend years saving and growing your assets only to have them taken away by ambulance chasers.  Your planner should address ways in which to implement asset protection.

Education Funding

There are three basic sources of education funding: cash flow dollars, dollars from tax savings, and compound interest dollars. You won't want to use cash flow dollars. They're the most expensive. Income tax savings and compound interest dollars are far less expensive -- but require advanced strategic planning. That's what your planner is for.

Investment Portfolio Management

Entire college courses are built around portfolio management. Simply stated, your licensed investment advisor makes sure your portfolio is "balanced." In other words, you need both long-term and short-term investments; liquid and illiquid investments; tax-advantaged and non-tax advantaged investments. You should have some fixed-income investments-such as bonds, certificates of deposit, and money market funds-and some equity investments-such as stocks, real estate, and other tangibles. This achieves the balance we've discussed. Since different kinds of investments behave differently during different phases of the economic cycle, current conditions will dictate how your assets are invested: Is the economy growing? Are we experiencing inflation? Recession?

As part of portfolio management, your registered investment advisor will discuss the pros and cons of different kinds of investments -- stocks, bonds, money market funds, annuities, mutual funds, real estate, tangibles, limited partnerships, and certificates of deposit, among others. You will look at the whole thing in light of how much risk you can tolerate.

Risk Management and Insurance

There are three basic things you can do with risk: You can avoid it, absorb it, or transfer it.

First, find out what you can do to avoid risk. Your planner might advise using trusts, family partnerships, or family corporations. He should tell you how to protect your assets from frivolous malpractice claims, frivolous creditors, and similar problems.

You might be willing to absorb some of the risks you can't avoid. For example, you might increase the deductibles on your auto insurance, homeowners insurance, or health insurance. In essence you are self-insuring for the amount of that deductible.

Finally, if you can't avoid or absorb a risk, you should transfer it usually through some means of insurance. Your financial planner should do a complete review and analysis of all insurance you own -- life, auto, homeowner, health, dental, malpractice, disability, and so on.

Hank Brock, CPA, MBA, CLU, ChFC is President of Brock and Associates, LLC and author of "Your Complete Guide to Money Happiness." Hank has been in the business of financial consulting since 1979.

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