Building a Financial Plan

If you’ve paid for financial advice before, you know it can be expensive. Building a proper financial plan can take between 10 and 40 hours. There is a lot of work and it takes years of education and expertise to complete the process. If you’re trying to decide if there is value in investing in a financial plan, this article will help you understand the effort that goes into preparing one. 

Knowing what goes into a financial plan helps in two ways. First, it sets an expectation of what you’re paying for. Second, it helps with the decision in choosing which financial professional to work with. Here are some of the topics I typically research, examples of the work needed in each step, and how long it can take to accomplish.

Building a Financial Plan

Meetings and Correspondence

1 to 5 hours

Every client interaction starts with an hour long, complementary meeting. During this initial meeting, I help clients set goals and then show if they’re on track to meet them. There are times we come to realize that a few small changes can get them to their goals, thus saving the expense of hiring an advisor. Of course, most people reaching out have more complicated issues to overcome.

While the heavy lifting falls on the advisor, financial planning is a long-term conversation. There’s information I’ll need to clarify during the planning. After I complete a plan, I need to spend the time needed for my clients to understand and implement the recommendations. I also regularly check in with clients after we’ve finished. The effort of creating a financial plan is all for naught if you don’t follow through.

Document Management

1 to 2 hours

Prior to providing any advice and guidance, a financial advisor needs to have an in-depth understanding of their client’s needs. Spending several hours on document management may not seem worth it to some, but it’s a requirement that the Securities and Exchange Commission set for all Registered Investment Advisors. The requirements, while cumbersome, allow an advisor to carefully collect, study, and categorize all a client’s financial documents for review and future use.

Many of my clients are in better shape than they realize. The initial meeting and follow up conversations help me gather the information that can show this. In my experience, I’ve come to see that most haven’t spent the time needed to completely understand their financial picture. The only way for me to paint this picture is to collect the evidence.

The government compels advisors to complete this vital step. To give an idea of how thorough the requirements are, my most recent annual SEC and Arizona Corporation Commission audit lasted over seven hours. The reason they are so thorough is because advisors are safeguarding and managing client assets. The audit went smoothly because of the time and effort I spent designing a safe, secure system for my clients. Of course, I didn’t put all that work into building a document management process for the regulators; this step helps me provide accurate information to my clients.

Asset Analysis and Back Testing

2 to 8 hours

Knowing where you’ve been key is to figuring out the direction you’re headed. By understanding your current investment strategy and past investment decisions, I can better prepare you for the future. Reviewing a client’s current portfolio helps find strengths and weaknesses in the way they manage investment assets. The process of back testing, which is a review of your current investment’s performance against historical returns, helps you understand if past choices helped or hindered your goals. 

The information learned helps me position the changes needed. Sure, I can tell someone that they should do something… but it’s far easier if I show them. Education and experience has given me the tools to know which recommendations are best for a client. This step helps me illustrate the impact of proposed changes.

This process can be time consuming depending on how you’ve managed your investments in the past. It can also be complicated by multiple investment account or 401k plans use proprietary funds. The hours spent examining your portfolio vary depending on these factors. Without the effort, neither myself nor the client would know where to begin

Risk Analysis

2 to 6 hours

We know that there will be future recessions. Unfortunately, no one can predict when. On the other hand, we know that the markets tend to rise in the long run. A large part of analyzing a client’s risk focuses on making sure their investment strategy matches with their goals, time horizon, and comfort level. I often describe this as the “sleeping at night” test.

Bond Duration Risk

During my initial client meeting, we spend time discussing how risk can impact savings. Rather than focusing on the potential gains an investment could make, I spend my time discussing the possibility of loss. Over the years, I’ve learned that most are willing to be more aggressive with their investing… right up to the day the market dips. 

In the years I’ve worked with investors, there has never once been a phone call complaining about how good the market is doing. During the Great Recession, most clients were panicking at the thought of losing money. While the Great Recession is considered a black swan event, it’s still a useful yardstick to measure against.

determine investment risk 

The risk of a loss investment is the primary concern for most investors. The time spent analyzing risk would be far less involved if the focus was just on the stock market. People spend a considerable amount of time worrying about their investment losses, but another Great Recession is unlikely.  What’s far more common are car accidents, an illness, or any other act of God. A diversified investment portfolio can be expected to recover in time. Without proper insurance, it could be impossible to rebound from an unexpected loss. 

Insurance is a key component to managing risk. Many people are covered under employer offered benefits for medical, dental and disability. These plans are often the first line of defense against the unexpected, yet they can be difficult to decode. As an example, my clients that are Arizona government employees have a handbook for non-Medicare enrolled participants which is 35 pages long that offers multiple insurance plans (there’s a separate handbook for Medicare enrollees). Choosing the wrong plan could leave a client with thousands of dollars worth of uncovered expenses. Risk analysis involves breaking down these policies so that you can understand what is offered in plain English. 

Employer offered plans only cover you while you are working. Extra layers of protection may be needed. Medical, homeowners, business, life, disability and long-term care insurance are central to your financial planning strategy. A proper plan ensures that the unexpected doesn’t derail your goals. There is no point is saving if an emergency forces you to liquidate investments. Reviewing and recommending the right insurance products is part of this important step. 

Tax Analysis

2 to 8 hours

While investing grabs headlines, tax planning is just as important. The U.S. tax code is currently over 2600 pages long (the estimates putting it over 70,000 pages in length come from one source, which cites a handbook for lawyers and accounts rather than the actual tax code). With complexity comes headaches… but also plenty of tax deductions. 

Sifting through your past tax statements and planning for future tax reductions can require hours of work depending on the situation. That 70,000-page handbook of taxes is full of legal and IRS interpretation. And that information is just on the U.S. tax code. I’ve had to spend hours translating and interpreting tax code for my clients planning on retiring abroad. 

The result of spending this much time understanding a client’s tax situation is worth it. Every dollar saved on paying taxes is one that can be put towards saving. Much of the Internal Revenue Code (IRC) was wrote in a way that encourages retirement saving. At retirement, the IRC also helps minimize your overall tax burden as long as retirement account distributions are properly planned.

Estate Planning

1 to 15 hours

Estate planning focuses on properly transferring your assets to the beneficiaries and causes of your choosing. The alternative, probate, is time consuming and expensive. Probate also takes control away from the owner of an asset and puts it in the government’s hands.

Estate planning can be as simple as ensuring that the proper beneficiary forms are competed. Retirement accounts and insurance plans often require that a beneficiary be named when opening an account. Problems arise when that information becomes dated. Checking, savings, brokerage accounts and deeds can be set up jointly or have Transfer On Death (TOD) paperwork filed, but there are state specific rules that can hinder the transfer of property even if the account owner properly filed paperwork.

Reviewing estate planning documents can be a quick job, though unique needs and situations can add hours of work. As a financial advisor, I cannot provide legal advice or draft trust, power of attorney, or will documents. I can, however, identify deficiencies in estate planning and recommend the creation of trusts (such as marital, bypass, QTIP and the like) that minimize taxable consequences when assets are transferred. Knowing your overall financial situation allows me to coordinate your estate planning needs with your legal counsel.

Building Your Plan

1 to 5 hours

At this point, most of the information I need to properly build a financial plan is in place. Account information is kept up to date through the data aggregation software provided on your client login page. With the accounts linked in real time, I can focus on weaving the all of your information together.

What I start with is a probability of success based on the information discussed during our initial client meeting. In the example below, the client started with a much lower chance to succeed (around 18%). After collecting and updating the information she provided, the baseline chance of success rose to 63%. While I built the plan, I crafted built multiple scenarios she could follow. Each has a different probability of success.

Investment Plan Success

During our final planning meeting, we’ll go over the various paths to take. My job is to get you into the Confidence Zone and show you how to stay there. Afterwards, clients can login, play with different options, and then see the results.

The financial reporting can be dense. The plan booklet I provide goes in-depth with year to year projections. While this information is useful, I feel that providing a client checklist of to-do items helps simplify the steps needed to succeed. Additionally, I include budget and investment analysis along with an appendix of sources for future reference.

Building an Investment Strategy

1 to 15 hours

Once the plan is built, the next step is to build an investment portfolio that fits with the strategy. When it comes to this, there are two types of clients I work with. There are those that want me to manage, monitor, and rebalance investments and there are those that want to handle this on their own. For those entrusting me to manage their money, the time spent building an investment portfolio is often done outside of the hours I spend crafting their plan.

This is because I spend a considerable time researching and constructing investment portfolios throughout the year.  I vet the mutual fund, exchange traded funds, REITs and other products used based on several criteria. The products chosen are often used for various risk tolerances, though the percent invested in each differs. Some investment strategies fit within general risk allocation guidelines, though portfolios are built to follow the different needs and goals of each client.

Asset Allocation

Clients opting for continuous asset management services pay a percentage of assets held at the firm throughout the year. Those costs cover, among many other things, the time spent researching, reviewing, and rebalancing the portfolio. While this adds an additional layer of expense, the additional cost has benefits.

One example of this is ensuring that client’s remain at the within the proper asset allocations. Rebalancing sells the winners when prices are high and purchases losers when they are selling cheaply. As an example, the last portfolio I reviewed had around $200,000 invested. If they had rebalanced their investments annually, there would have been an extra $20,000 in growth over the last decade. This small step, in conjunction with maintaining satellite positions based on market trends, helps improve the overall performance. 

Not all clients need or want to pay an additional fee for investment management. That’s fine. I’ve turned away around half of the people requesting asset management services. The reason is that I thought they would be better suited managing investments on their own for a lower cost. On the other hand, if I recommend that the investments should be professionally managed, there’s a reason I think it’s in the client’s best interest. 

Sector Analysis

For plans where clients who are taking charge of the investments, there can be considerably more hours needed to structure a proper portfolio. Recently, I had a client that wanted to manage their own portfolio. They were invested with several brokerage firms and wanted to keep each segregated. The two firms held various 401(k) accounts, Roth and Traditional IRAs, a brokerage account as well as an Inherited IRA. Each account had its own requirements, tax strategy, investment goal, and time horizon.

The overall investment strategy needed to be simple enough to be client managed, yet still fulfill the needs of each account goal. This meant that there were five accounts with varying timelines that each grew more conservative as time went on. Eventually, after they started taking Social Security, all five of the accounts adopted the same allocation. The portfolio build took 13.5 hours to complete. This included the time spent on creating a reallocation and distribution timeline that could be easily understood and implemented.

Plan review

1 to 4 hours

My work is done at this point… but everyone makes mistakes. Before going to print, I need to spend several hours reviewing everything. This means that I go back and reread the initial paperwork submitted. I double check that everything was entered in correctly. I also check to see if the software changed anything I didn’t intend it to (it happens… the software I use is robust, but complicated).

monte carlo simulationThis is also the step where I start throwing wrenches at the plan. I want to make sure that the worst-case scenario still puts you comfortably achieving your goal. Barring any major, unforeseen events, a sound financial plan is the best way to get you on track to meet your goals. Even if the unforeseen arises, we can still minimize the impact as long as we’ve anticipated everything ahead of time.

Conclusion

Even if you’re just skimming all of this, you’ll have a pretty good idea of what goes into a financial plan. It typically takes between 10 and 40 hours to complete one. That doesn’t mean the work is done. Financial planning is a continuous process. Both an advisor and the client have parts to play going forward. At a minimum, it’s usually best to follow up annually on your progress. If there’s a major life event, it’s best to go further in-depth to see if updates are needed.

Not everything outlined here is needed in a financial plan, nor is this an exhaustive list of what goes into a plan. Needs change from person to person. The majority of firms I’ve worked with focused solely on investment sales and did little outside of that aspect of planning. As an independent advisor, I’m more open to unique situations that clients request.

Most financial planners typically charge between $100 and $300 an hour, though many offer discounted rates based on the project. You’ll typically spend between $1,000 and $5,000 if you choose a project based rate over hourly. Keep in mind, not all financial professionals are financial planners. There are many that sell commission based investments without planning services, even though the costs are similar. Make sure you’re getting the most out of your money.

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