1. Establishing and Defining the Client–Planner Relationship: This first step in the financial planning process is important because it sets the stage for client–planner interactions by clarifying issues and concepts related to responsibilities of both parties in the relationship. CFP Board rules require financial planners to specify and document their services. CFP Board Practice Standard 100-1 further requires financial planners to specifically provide clients with the following information:42
■ Disclosures related to the practitioner’s material conflict(s) of interest.
■ Disclosures of a practitioner’s compensation arrangement(s).
■ Explicit disclosure of the client’s and the practitioner’s responsibilities.
■ Establishment of the duration of the engagement.
■ Any additional information necessary to define or limit the scope of the engagement.
2. Gathering Client Data, Including Goals: Gathering client data begins following the establishment of the client–planner relationship. According to CFP Board, data gathering includes interviewing or questioning clients about various aspects of their financial resources, obligations, and expectations. Data gathering also includes collecting all necessary documents necessary to perform analyses. This step in the process is most often used by financial planners to help their clients define and better understand financial goals and objectives, needs, desires, and priorities.
3. Analyzing and Evaluating the Client’s Financial Status: According to CFP Board, within the context of the financial planning process, examining and evaluating client data begins with a review of current cash flow needs. The analysis procedure continues with a review of risk management, investment, tax, retirement, employee benefits, estate planning, and special situation topics. Understanding a client’s values and attitudes, and determining the client’s time horizon, risk capacity, and risk tolerance, are important elements associated with this step in the planning process.
4. Developing and Presenting Financial Planning Recommendations and/or Alternatives: Financial planning recommendations should meet the unique goals and objectives of each client, reflecting his or her values, traditions, risk profile, and unique situation. Financial planners are expected to present, review, and discuss recommended strategies with clients to ensure that expectations and desired outcomes are maximized, and that recommendations are thoroughly understood by the client. It may be necessary to revise recommendations or alternatives based on client–planner discussions.
5. Implementing the Financial Planning Recommendations: Without client action to put recommendations into place, the likelihood that clients will reach their financial goals becomes uncertain. Clients and planners should agree on the steps necessary to move recommendations from theory into practice. During the implementation state of the planning process, financial planners will either carry out services for the client or counsel the client in coordinating efforts with other professionals. It is important for financial planners to use counseling and communication skills in this process.
6. Monitoring the Financial Planning Recommendations: Monitoring the soundness of implemented recommendations and progress toward goal achievement is a crucial aspect linked with the planning process. The client and planner must agree on who will monitor the financial progress. If it is the planner, then he or she should openly communicate with the client and make any necessary, ongoing adjustments to the plan relative to changes in the client’s life.
Financial planner and client situational factors play an important role in shaping applications of the financial planning process.43 Important financial planner situational factors include temperament, personality, attitudes, beliefs, behaviors, knowledge, and expertise. Client situational factors include risk tolerance, risk capacity, financial knowledge, personal/household characteristics, socioeconomic status, lifestyle, attitudes, beliefs, temperament, and personality. Planner and client situational factors combine to influence how goals are framed and how recommendations are formed in the areas of cash flow management, income tax planning, risk management, investment planning, retirement planning, education and special needs planning, and estate planning.
LEARNING OBJECTIVES
The student will be able to:
a. Describe the personal financial planning process as defined by the Financial Planning Practice Standards.
b. Recognize unethical practices in the financial planning profession based on the CFP Board Standards of Professional Conduct.
Financial planners should be proficient in explaining, documenting, and diagramming the financial planning process. The financial planning process, as defined by CFP Board, can be diagramed in a number of ways. Consider the example presented in Figure 6.1. The illustration shows how the process begins by establishing and defining the client–planner relationship and ends with monitoring tasks. It is important to note that this process is cyclical, and feedback from each step informs the ongoing planning process and client–planner relationship.
Figure 6.1 The Systematic Financial Planning Process
The diagram shown in Figure 6.1 illustrates the sequence of logical, organized steps that a personal financial planner follows when working with clients to develop a comprehensive financial plan. Each step in the process flows seamlessly to the ensuing step; this process ensures that nothing is inadvertently overlooked that might result in a less than optimal client experience. Personal financial planning is extremely detail-oriented, and it entails gathering and interpreting information of a sensitive and confidential nature. Clients seek assurance that this information will be handled with discretion and with proper regard for recommendations that will ultimately be made.
Financial planning shares practice requirements that are unique among established professional endeavors in that practitioners must abide by various professional, local, state, and federal rules, regulations, and ethical guidelines. The wide variety of regulatory oversight, and sometimes conflicting ethical standards, has often been justified as a way to protect the consumer interest. Increasingly, however, many financial planners have adopted Certified Financial Planner Board of Standards, Inc. Standards of Professional Conduct to guide their interactions with clients.44 The Standards provide guidance on: (1) the material elements of the financial planning process, (2) obligations owed to prospective clients, (3) disclosure obligations, (4) the use of written agreements, (5) compensation disclosure, (6) obligations to the profession and other professionals, and (7) standards of care. CFP Board’s Code of Ethics and Professional Responsibility outlines principles that are aspirational and a source of guidance for CFP® practitioners.45 These include integrity, objectivity, competence, fairness, confidentiality, professionalism, and diligence. CFP® professionals are expected to both know these principles and be able to apply them in their practice.
In summary, ethical guidelines represent the basis on which the personal financial planning profession exists. Clients expect not only that financial planners are technically proficient in all facets of personal financial planning, but that they will always place the client’s interests above everything and everyone else. Merely the appearance of impropriety or lack of objectivity can trigger a loss of confidence in the client’s immediate situation as well as the overall profession. Clients seek professionals who will be advocates for meeting their goals and objectives without distraction or other consideration. A personal financial planner should always be mindful of situations and circumstances that could potentially result in a loss of objectivity and impartiality.