FINANCIAL PLANNING

A relatively new and unregulated specialty within the financial services sector, financial planning is a process of goal setting and resource management to help consumers achieve financial objectives such as a comfortable retirement, college education for their children, or tax reduction.

The need for financial planning in the consumer market stemmed from several factors:

• complex and changing tax laws
• shifts in employee benefit programs toward 401(k) plans and greater self-management
• dissatisfaction with commission-oriented investment services
• the proliferation of new investment options, particularly in mutual funds and insurance

Further, financial planners offered consumers a holistic approach to managing their financial lives, rather than the fragmented information they might receive through dealing with specialists on each aspect of personal finance, e.g., insurance agents, stockbrokers, and accountants.

THE PRACTITIONERS

CREDENTIALS.

No legal definition of financial planning exists in the United States, and thus a financial planner isn't necessarily required to be licensed by any government or professional body. The only legal requirement is that anyone offering investment advice must register with a state or the Securities and Exchange Commission, depending on how much money is involved in the portfolios he or she manages. This registration is just a disclosure, however, and involves no professional certification or examination. As a result, people who offer financial planning services have diverse educational and professional backgrounds and, sometimes, few relevant credentials. According to the Certified Financial Planner Board of Standards (CFP Board), among the professionals who may offer financial advice are accountants, attorneys, estate planners, insurance brokers, investment advisers, and stockbrokers—in addition to those who go by the title of financial planner.

Since the mid-1990s, the professional certification offered by the CFP Board, known simply as the CFP license, has emerged as the de facto industry-standard credential that many consumers and other professionals expect a financial planner to possess. There are numerous other kinds of certification planners may obtain, but these have apparently waned in significance as the CFP Board successfully assembled a coalition of practitioners and waged a public relations campaign to assert its authority in the practice.

FEES.

Financial planners are generally compensated in one of five ways:

• fees alone
• commissions alone
• fee-offset
• combination fee/commission
• salary

A fee-based financial planner is compensated entirely with fees for consultation and/or financial plan development. Many in the business and the general public believe this is the best method because it eliminates conflicts of interest surrounding commissions. Indeed, the National Association of Financial Advisers, another professional organization for financial planners, found this distinction to be so important that in 1997 it registered a trademark on the term "fee-only" so that only its members could use that label.

Commission-only or combination fee and commission financial planners are compensated in whole or part through the products they sell when implementing a financial plan, such as trust services, tax-advantaged investments, securities, real estate, or insurance. Until the mid-1980s this was the dominant form of compensation for people who provided financial advice. But some practitioners and customers were uncomfortable with the "selling" nature of a commission system, which they felt compromised the adviser's objectivity. Another twist on commissions is the fee-offset approach, through which planners receive their compensation in the form of commissions from the sale of financial products. These, in turn, offset the fees associated with the planning process. Finally, a few financial planners work on a salary basis for financial service institutions, including banks and credit unions.

THE PROCESS

Most financial planners view their service as engaging their customers in an ongoing process of planning and decision making, rather than a one-time transaction in which someone's entire future is mapped out. Financial planning involves reviewing the client's total financial picture: budgeting; cash reserves; college funding; personal goals, such as travel and leisure activities; debt; estate plans (including wills and trusts); insurance (including automobile, homeowner, life, and disability); income, assets, and investments; retirement plans; and taxes.

Financial planning practitioners begin the process by gathering quantitative and qualitative data to establish the individual's current financial situation. Items to be addressed include health status and family data, personal and invested assets, liabilities, annual income and living expenses, insurance and investment products currently owned, and retirement benefits. Step two in the financial planning process is to establish tentative financial goals in terms of realistic objectives. These goals should be specifically geared to an individual's financial attitude and capabilities. Personal goals might include increasing one's standard of living; achieving financial security in retirement; increasing net worth; reducing tax burden; paying for children's college education; providing for one's family in the event of death or the death of one's spouse; purchasing a house; minimizing the cost of probate and estate taxes; controlling the distribution of assets to one's heirs; or planning for long-term or nursing home care.

The financial planner examines the information to determine what strengths and weaknesses currently exist. This process includes preparation of financial statements, such as a statement of financial position (net worth) or of cash flow (one's annual income and expenses) and a projection of cash flow. Additionally, the financial planning practitioner will review existing insurance policies, tax returns, wills and other information. At this point, the financial planner and client can determine if the tentative goals are realistic or need to be revised.

Assuming the goals are realistic, the financial planner will recommend appropriate techniques for achieving objectives. This process can include alternate investment vehicles, insurance products, and/or income and estate tax planning strategies. A review of the recommendations will be made to determine their overall effectiveness and then they will be implemented with the assistance of other allied professionals. Financial planners do not replace the need for specialists, but rather, they can act as coordinators.

In addition, the plan will be reviewed periodically, to reflect changes in economic conditions, regulatory laws, objectives and product performance.

There are two categories of financial plans: the single-purpose plan and the comprehensive plan. A single-purpose plan is problem-oriented and centers on a particular concern, such as tax planning or estate planning. This process accomplishes its goal by isolating that problem or question and focusing on how it affects a particular individual.

The comprehensive financial planning process involves six distinct steps:

1. clarify one's present situation by collecting and assessing all relevant personal and financial data, including assets and liabilities, tax returns, records of securities transactions, insurance policies, wills, trusts, and pensions;
2. decide where one wants to be by identifying both financial and personal goals and objectives;
3. identify financial problems that may create barriers to achieving financial goals;
4. provide a written plan;
5. implement the agreed-upon recommendations; and
6. review and revise the plan periodically.

ELECTRONIC TOOLS

Public interest in financial planning hasn't escaped the makers of financial software. Consumer-oriented programs, such as the Quicken Financial Planner from Intuit Inc., and the Microsoft Financial Suite, provide facilities for users to enter and store basic financial information, project asset growth and savings plans, and experiment with hypothetical scenarios. To a limited degree these applications also attempt to educate consumers on financial topics by providing widely accepted recommendations regarding retirement savings and other financial decisions. Although most financial planners would argue that buying financial software is no substitute for their services, such programs have attracted a large following.