Understanding the Financial Planning Process

Understanding the financial planning process can empower individuals to make informed decisions about their financial future. This process involves evaluating one’s current financial situation, setting achievable goals, and developing a strategy to reach those objectives. By analyzing income, expenses and investments, individuals can create a comprehensive plan that aligns with their long-term aspirations. Whether it’s saving for retirement, purchasing a home, or managing debt, a well-structured financial plan provides a roadmap for achieving financial stability and growth.

If you’re thinking about getting a financial plan, consider matching with a financial advisor who serves your area.

1. Survey Your Financial Situation

The first step in any financial plan is to assess your financial situation. Your advisor will ask you to take stock of all of your assets, including cash, investments, retirement accounts, cars, homes and anything else of financial value. Just as importantly, you’ll take stock of all your debts and liabilities. This includes credit card debt, student loans, mortgages, car payments and any other money you owe to a lender.

This step may seem rote, but in many ways it is the most important part of the financial planning process. If you don’t take accurate stock of your existing financial situation, there is no way you can make a plan that will help you achieve both short- and long-term financial goals.

This is also the part of the process where you and your advisor should discuss fees. Your advisor likely will charge an asset-based management fee which will be expressed as a certain percentage of your total assets under management. If this is the only way your advisor makes money, this professional is a fee-only advisor. If the person also earn commissions for selling securities or insurance products, this professional is a fee-based advisor.

2. Think About Your Goals

Now that you know where you are financially, you have to think about where you want to be. This means figuring out your financial goals both short-term and long-term. Your advisor will work with you to figure out what your goals are, but try to go into your first meeting with a sense of what you are trying to accomplish.

Some examples of a short-term goal could be buying a new home, going on a vacation or purchasing a new car. Some examples of long-term goals could be paying for your children to go to college, purchasing a vacation home or financing your retirement.

You’ll also need to prioritize your goals so that your advisor has somewhere to start as they build your plan. If you really want to be able to buy a house in five years, you may be steered towards some more aggressive investments that will get you the cash you need, whereas if funding education for your children is your most important goal, more of your investment money will go into longer horizon investments that will pay out further down the road.

3. Develop and Present a Plan

Here is where things get real. After the analysis is complete, your financial advisor will put together a plan he or she thinks makes the most sense for you and your family. Chances are that your advisor will bring you a few different options and you’ll be able to choose what you think will work best for you.

This plan will have many layers, but there are a few things to think about so you know how to pick the asset allocation path that will be the best for you. First, your advisor may have possible paths broken down by their level of aggressiveness. A conservative plan will be low-risk but have the lowest possible rewards. An aggressive plan will take more risks, but have a greater chance of big gains long-term. A moderate plan will be balanced somewhere in between.

There will be multiple elements to the plans presented to you. Your advisor should have plans for all of your goals. For instance, if paying for a college education for your children is one of your goals, they should help you set up a 529 plan. If you want to invest, they’ll draw up a diversified portfolio. If you want to save for retirement, they may set up an individual retirement account or help you invest in a workplace retirement plan like a 401(k), if you have access to one. If insurance is part of your plan, the advisor will present a plan for purchasing the right products.

After hearing your options, you’ll give your advisor an O.K. and he or she will be on to the next step.

4. Implement the Plan

Now, your advisor will actually take the steps outlined in your plan. He or she will make investments, create accounts and deposit funds as needed. This step may come with additional charges to you, either from your advisor or from a third party, in the form of brokerage fees or commissions.

That’s pretty much it for the initial financial planning process. There is, however, one more step – and it’s one that doesn’t really have an easy end point.

5. Monitor and Adjust

The world changes all the time, and you’ll want your financial plan to adjust as it does. If you employ your financial planner on an ongoing basis as an asset manager, they’ll monitor your portfolio and make changes as needed. If a stock reaches new highs but seems like it might go down at some point, they’ll sell to make a profit. If you have another child and need more insurance, your advisor can adjust that.

If you have a discretionary relationship with your advisor, he or she can make these adjustments without running them by you first but is always required to act in your best interest. If you have a non-discretionary account, all changes will be run by you first. This may give you some peace of mind, but it also may slow down the process for quick portfolio rebalancing or time-sensitive investments.

Bottom Line

The financial planning process is simple, but has a lot of moving parts. Make sure you take your time at the beginning to find a financial planner you are comfortable with – after all, you’re literally putting your entire financial life in your advisor’s hands. Your advisor should communicate with you throughout the process, and if you are an active and engaged partner, your chances of achieving your goals are much higher.

Financial Planning Tips

Building a comprehensive financial plan can be daunting, which is why you may want to consider hiring financial advisor who offers planning services. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Taxes are an important part of any financial plan. Get a sense of what your income tax bill may look like with SmartAsset’s free income tax calculator.