Good Practices in Financial Planning –Part 1

Good Practices in Financial Planning –

Good practice related to Establishing and Defining the Relationship with the Client

Practice 1: Defining the scope of the engagement

The Scope of the engagement shall be mutually defined by the financial planning practitioner and the client prior to providing any financial planning service.

Prior to providing any financial planning service, a financial planning practitioner and the client should mutually define the scope of the engagement. The process of "mutually-defining" is essential in determining what activities may be necessary to proceed with the client engagement. This can be accomplished by

• Identifying the service(s) to be provided;
  
• Disclosing financial planning practitioner's compensation arrangement(s);
  
• Determining the client's and the financial planning practitioner's responsibilities;
  
• Establishing the duration of the engagement; and
  
• Providing any additional information necessary to define or limit the scope.
  

The scope of the engagement may include one or more financial planning subject areas. It is acceptable to mutually define engagements in which the scope is limited to specific activities. This serves to establish realistic expectations both for the client and the practitioner.

While you may not put scope of the engagement in writing, however it will be advisable to do so to avoid confusion at a later stage.

Good Practice Related to Gathering Client Data

Good Practice 2: Determining a client's personal and financial goals, needs and priorities

The financial planning practitioner and the client prior to making and /or implementing any recommendations shall mutually define a client's personal and financial goals, needs and priorities that are relevant to the scope of the engagement and the service(s) being provided.

Prior to making recommendations to a client, a financial planning practitioner and the client shall mutually define the client's personal and financial goals, needs and priorities. In order to arrive at such a definition, the practitioner will need to explore the client's values, attitudes, expectations, and time horizons as they affect the client's goals, needs, and priorities. The process of "mutually-defining" is essential in determining what activities may be necessary to proceed with the client engagement. Personal values and attitudes shape a client's goals and objectives must be consistent with the client's values and attitudes in order for the client to make the commitment necessary to accomplish them.

Goals and objectives provide focus, purpose, vision, and direction for the financial planning process. It is essential those objectives relative to the scope of the engagement are determined and that they are clear, precise, consistent, and measurable. The role of the practitioner is to facilitate the goal-setting process in order to clarify, with the client, goals and objectives, and, when appropriate, the practitioner must try to assist clients in recognizing the implications of unrealistic goals and objectives.

These practice standard addresses only the tasks of determining a client's personal and financial goals, and priorities; assessing a client's values, attitudes and expectations; and determining a client's time horizons. These areas are subjective and the practitioner's interpretation is limited by what the client reveals. A practitioner performing the activity of "gathering client data" should consider together the various good practices applicable to such activity.

The financial planning process : The General Model

Step 1. Establishing Client- Planner Relationships

The CFP Board asserts that the first step in financial planning involves establishing the working relationship with the client. Planners should explain issues and concepts related to the overall financial planning process as appropriate to the client's situation and needs. They should also explain services provided, the process of planning, and the documentation required. Also invluded in the step is a clarification of the client and planner's responsibilies.

Step 2. Gathering Client Data and Determining Goals and Expectations

As with the generic model, the data gathering aspect of the step includes obtaining information about the client's financial resources and obligations via interview and questionnaire and collecting applicable client records and documents. The planner must also determine the client's time horizons and risk tolerance level. Planner must also determine the client's personal and financial goals, needs and priorities, and assess the client's values, attitudes, and expectations.

Step 3. Analyzing and Evaluating the Client's Financial Status

Several categories are involved in analyzing the client's financial status. The general category includes the client's current financial status ( such as, assets, liabilities, cash flow, debt management), capital needs, attitudes and expectations, risk tolerance, risk management, and risk exposure. In the special needs category are divorce/remarriage considerations; charitable planning; adult dependent, disabled child, and education needs; terminal illness planning; and closely held business planning. The risk management category includes needs and current coverage for life; disability, health, long-term care; home owners, auto and other liability (for example umbrella, professional, errors and omissions, directors, and officers); and commercial insurance. The investments category covers analysis and evaluation of current investments and current investment strategies and policies. Evaluation of the tax category involves investment strategies and policies. Evaluation of the tax category involves tax returns, current tax strategies, tax compliance status (such as estimated tax), and current tax liabilities.

In the retirement category, planners should evaluate and analyze current retirement plan tax exposures (for example, assets marked for retirement benefit such as Provident Fund, Gratuity, PPF, Special Insurance Policies) and current retirement strategies.

Planners should evaluate the client's employee benefits, including the benefits available and the client's current participation in those benefits. Finally, the planner should analyze the client's current estate plan, which includes and evaluation of estate planning documents and strategies as well as estate tax exposure.

Step 4. Developing and Presenting the Financial Plan

The planner should develop and prepare a client-specific financial plan tailored to meet the client's goals and objectives, commensurate with client's values, temperament, and risk tolerance. In addition to the client's current financial position, the plan should include the client's projected financial statements under the status quo as well as projected statements if the planners's recommendations are followed. Similarly, the planner should include the current status, projections under the status quo, and projections if recommendations are followed for the following categories: cash flow, estate tax, capital needs at retirement, capital needs at death, capital needs at disability, special capital needs, income taxes, and employee benefits. The planner should also provide a current asset allocation statement along with strategy recommendations and a statement that assumes that recommendations will be followed. Investments should be summarized and the planner should propose an investment policy statement and additional policy recommendations.

The plan should also include an assessment of risk exposures along with recommendations for insurance and other risk management techniques. Finally, the plan should include a list of prioritized actions items.

After developing and preparing the plan, the planners should present the plan to the client and review it with him or her. The planner should collaborate with the client to ensure that the plan meets the goals and objectives of the client and should revise it as appropriate.

Step 5. Implementing the Financial Plan

The planners should assist the client in implementing the recommendations. Often this requires coordinating with other professionals, such as accountants, lawyers, real estate agents, investment advisers, stock brokers, and insurance agents.

Step 6. Monitoring the Financial Plan

After the plan is implemented, the planner should periodically monitor and evaluate the soundness of recommendations, and review the progress of the plan with the client. The planner should discuss and evaluate changes in the client's personal circumstances such as family births or deaths, illness, divorce, job status, or retirement. Any relevant changes in tax laws and the economic environment should be reviewed and evaluated before the planner makes recommendations to accommodate new or changing circumstances.