The financial planning profession was born in the early 1970s as the consumer became more aware of his financial needs and the marketplace became more complex. Often, a financial professional was needed to help the client sort through the facts surrounding his financial situation, determining his reaction to the reality of his present and future finances, and recommend specific steps to take in accomplishing his goals. The process of financial planning has three distinct levels of decision making that must be followed in order to be effective.

The first level of decision making involves strategic decisions. Strategic decisions are those that help develop the plan or strategy to take to attain personal financial goals. One must identify his basic goals and objectives such as retirement age, amount of capital needed in the event of his death, educational funds needed to prepare his children’s education, and the amount of capital needed to give him the ability to retire.

This step involves developing a plan for spending and identifying the money available for investment. Projection of income taxes must be made and methods for tax reduction considered. The value of the client’s estate is calculated and the method for estate distribution evaluated from a beneficiary standpoint. Liquidity of the estate is analyzed along with the tax impact at death or retirement. Adequacy of life insurance is determined and strategies for estate transfer are compared. As part of this strategy, a financial statement is generally prepared identifying all assets and liabilities but also classifying investments as to their liquidity, risk level, and asset type. Whether proper diversification of investments is present and whether those investments made coordinate well with each other is also determined. The strategic decisions tell the client where he or she is but more importantly where he wants to be financially in the future.

The second level of decision making involves portfolio decisions. Here the Certified Financial Planner and client identify the categories or areas that most influence those earlier strategic decisions. For example, if one needs a new estate plan, does he use a Trust or just a Will? How would an IRA, Pension Plan, or 401(k) Plan impact income taxes and also increase the ability to retire? If estate liquidity is low, should insurance be considered and if so how much and what type? If financial independence goals are not being met, should assets be repositioned to higher yielding investments and should the investment program be reorganized? Are the investments presently in the client’s portfolio performing as well as they should from a risk and return standpoint? If income is the client’s strategy, certificates of deposit, corporate and municipal bonds, and income oriented real estate is compared and analyzed. The portfolio decisions enable the investor to conceptually and generically identify those areas in which his money should be committed.

The final level of decision making involves product decisions. The client must now chose the vendor or product sponsor with whom to place his funds in order to accomplish his portfolio decisions. Many times these product decisions involve multiple insurance companies, investment with varied and diverse investment managers, and in multiple banking arrangements.

The wise investor will avoid the temptation to take a short cut in financial planning by skipping the strategic or planning decisions and going straight to the product decisions. Also the client recognizes that if an advisor avoids these steps that he is possibly more interested in recommending his particular product than in doing an objective and long range planning job for his clients.

Once the product decisions are make, the job is not over. All insurance decisions and investment decisions need to be analyzed in light of current economic trends. Living in a changing world requires us to evaluate continually our previously made product decisions. DBJ

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