What Is Financial Planning?

These days, most businesses with a website have made an effort to ensure that potential clients can find their site once it’s up and running. This typically involves hiring a specialist in “search engine optimization”, or SEO, as it’s known. When I recently asked my SEO guru what topics people searched for on the web related to finances, I was surprised when he told me that one of the most popular searches was for “What is financial planning?” I mean, everyone knows what “financial planning” is, right?

But maybe this shouldn’t have surprised me. The fact is, many so-called “financial advisors” are merely salespeople who push investment products under the guise of doing financial planning. Knowing there must be something better, consumers have gotten wise to this and are starting to ask: “What is real financial planning?”

There’s no better place to go to answer this question than to the Certified Financial Planner Board. As described on its website, “CFP Board is a non-profit organization acting in the public interest by fostering professional standards in personal financial planning through its setting and enforcement of the education, examination, experience, ethics and other requirements for CFP® certification.”

Here’s how the CFP Board defines “financial planning”:

The Standards of Professional Conduct (Standards) define financial planning as “the process of determining whether and how an individual can meet life goals through the proper management of financial resources. Financial planning integrates the financial planning process with the financial planning subject areas.”

There are six steps to the financial planning process:

  1. Establishing and defining the client-planner relationship
  2. Gathering client data including goals
  3. Analyzing and evaluating the client’s current financial status
  4. Developing and presenting recommendations and/or alternatives
  5. Implementing the recommendations
  6. Monitoring the recommendations

“Financial planning subject areas” denotes the basic subject fields covered in the financial planning process which typically include, but are not limited to:

  • Financial statement preparation and analysis (including cash flow analysis/planning and budgeting)
  • Insurance planning and risk management
  • Employee benefits planning
  • Investment planning
  • Income tax planning
  • Retirement planning
  • Estate planning

This all seems quite clear: if the client and adviser follow the six steps in the financial planning process, and the planning includes one or more of the subject areas, then it’s probably financial planning.

Let’s look at some situations that would not constitute financial planning, in my opinion:

  • You meet with a mortgage broker, who recommends that you refinance your house to lower your mortgage payments.
  • You go to a stockbroker to make an investment. He/she has you fill out a new account application which has various questions about your finances. Then he/she recommends some mutual funds or stocks for you.
  • You buy some life insurance from an insurance agent, who asks you some questions about your finances and recommends a certain type of policy and face amount.
  • Your CPA does your tax returns for you.

When an engagement with a professional is limited in scope and/or primarily related to the sale of a product, it’s not financial planning.

Of course, there can be some grey areas. What if your stockbroker finds out you don’t have a will, and suggests that you get one? What if your CPA tells you that you need to put more into your IRA if you want to be able to retire? If you get advice, does that mean you’re getting financial planning?

Well, let’s go back to steps 1-4 in the financial planning process. If you go to a professional with a concern like “Can I afford to retire next year?” or “I need a plan that ties all of my finances together” and that person gathers detailed financial information from you, analyzes it using spreadsheets or computer software, and presents you with written recommendations across several of the subject areas, then it’s likely financial planning. If not, it’s just incidental advice.

This brings us to the question: What makes for a good financial plan? First, you should pay for it. You wouldn’t expect to go to a CPA or attorney for free, would you? If a “financial adviser” offers to do a plan for free, how good do you think it’s going to be? Second, it should be detailed. Garbage in, garbage out, right? Third, the recommendations should be written by the adviser and should be clear, preferably in a “to do list” format.

Most of the large, national firms offer financial plans. Be aware that in most cases, you’re asked to fill out a questionnaire and this is then sent back to the corporate office, where the information is input into a computer and results are spit out. The recommendations section is filled with generic advice, or written by someone at the home office. The local adviser then presents it to you, often with little knowledge of the details and with the main intention of selling you investment products.

If you want to do financial planning, your best bet is to find a fee-only Certified Financial Planner Professional™. For more information, see my April article, “How To Choose a Financial Advisor” and my May article, “How To Find A Financial Advisor“.