Building a Financial Plan

If you’ve paid for financial advice before, you know if can be expensive. Building a proper financial plan can take between 10 and 40 hours. It’s a lot of work that takes involves years of expertise. If you’re trying to decide if there is value to investing in a financial plan, it’s a good idea to understand what goes into 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 I work with starts with an hour long, complementary meeting. During the initial meeting, I help my clients set goals and then show them if they’re on track to meet them. This is important because there isn’t much point spending money on a plan if you don’t need an advisor’s help.  Of course, most people reaching out to me have more complicated issues to overcome before they can reach their goals.

While the heavy lifting falls on the advisor, financial planning is a long-term conversation. I regularly check in with my clients both during and after the plan is created. There’s information I’ll need to clarify during the planning. Afterwards, we need to spend the time needed for you to understand the plan and my recommendations.  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 and Arizona Corporation Commission have 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 can prove this. The problem is that few have spent the time and effort needed to see their entire financial picture. The only way for me to show a client this is to collect the evidence.

The government agrees that this is a vital step in the process My annual SEC and AZ Corp Commission audit lasted over five hours this summer.  The reason they are so thorough is that my role is to safeguard and manage client assets. The audit went smoothly because of the time and effort I spent designing a safe, secure system for my clients.

Asset Analysis and Back Testing

2 to 8 hours

Knowing where you’ve been key to figuring out where your headed. By understanding your current investment strategy and past investment decisions, I can better prepare my clients for the future. Reviewing their current portfolio helps find strengths and weaknesses in their current strategy, while back testing helps clients understand if their past choices helped or hindered their 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. My experience has given me the evidence which backs up my recommendations, but without that background, it’s hard to see the value in what I propose at times.

This process can be time consuming depending on how you’ve managed your investments in the past.  I’ve had clients insist on maintaining accounts at multiple firms, which can add many layers to uncover. Even simple accounts can be time consuming to understand. For example, many 401k plans use proprietary funds that don’t directly link with publicly available options. This step helps me decode information and translate it in a way you can better understand.

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.

Bond Duration Risk

During my initial client meeting, I spend time discussing how risk can impact savings. Rather than focusing on the gains an investment may make, I spend my time discussing the potential for investment loss. Over the years, I’ve learned that most people are willing to be more aggressive when investing right up to the point where the market has a correction. 

In the years I’ve worked with investors, I’ve never once had a phone call complaining about how good the market was performing. During the Great Recession, I spoke with concerned investors all the time. While he Great Recession was a black swan event, it’s still a useful yardstick to test against.

determine investment risk 

The risk of a loss investment is the primary concern most of my clients have. The time spent analyzing risk would be far less involved if the focus was only on the stock market. While people spend considerable amount of time worrying about investment losses, another Great Recession is less likely than a car accident, an illness, or any other unforeseen loss.

A diversified investment portfolio can be expected to recover in time. Without proper insurance, it may not be possible to rebound from an unexpected loss. This is why most of the planning time involved with risk centers on insurance needs.

Many people are covered under employer offered benefit, yet these plans can be lengthy and difficult to understand. For example, Arizona’s government employee handbook for non-Medicare enrolled participants is 35 pages long and offers multiple options to choose from (there’s a separate handbook for Medicare enrollees). Choosing the wrong plan can leave a client with thousands of dollars’ worth of medical expenses.

A proper financial plan needs ensure that the unexpected doesn’t derail your goals. There is no point is saving is an emergency forces you to liquidate your investments. This is why medical, homeowners, business, life, disability and long-term care insurance are central to your strategy. Reviewing and recommending the right insurance products is an important step.  One that is extremely time intensive, given the fact that lawyers are behind writing insurance contracts.

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 this 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. The Internal Revenue Code (IRC) was wrote in a way to encourage retirement saving. At retirement, the IRC helps minimize your overall tax burden when retirement account distributions are properly planned.

Estate Planning

1 to 15 hours

Estate planning focuses on properly transferring your assets to the beneficiary 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 gives it to the government.

Estate planning can be as simple as ensuring that the proper beneficiary designations are assigned. 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 the 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 in the client login page. There’s some data entry at this point, but the majority of the work focuses on weaving the all of your information together.

What I start with is a probability of success based on the information discussed during the initial meeting with a client. In the example below, the client started with a much lower chance to succeed. After collecting and updating the information she provided, the baseline chance to success rose to 63%. I built multiple plans, each with a different probability of success.

Investment Plan Success

During our final plan meeting, we go over the various scenarios created. Afterwards, you can login and make updates yourself online. My goal is to get you into the Confidence Zone and show you how to stay there.

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 success. Additionally, I include budget and investment analysis along with an appendix of sources for future reference.

Building an Investment Strategy

1 to 15 hours

When it comes to investment portfolios, there are two types of clients I work with.  There are those that want me to manage the investments and those that will handle that aspect of the planning 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 on their plan.

I spend considerable time researching and constructing investment portfolios throughout the year. Many of my investment strategies fit within general risk allocation guidelines. Every individual has different needs and goals, so strategies often differ from client to client.

Asset Allocation

Sector Analysis

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

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 $100,000 invested. If they had rebalanced their investments annually, there would have been an extra $20,000 in growth over the last decade.

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. I thought they would be better suited managing investments on their own for a lower cost.

Plan review

1 to 4 hours

My work is done at this point… but everyone makes mistakes.  Before going to print, I 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 review to see if the software had problems (it happens… the software I use is robust, but complicated).

This is also the step where I start throwing wrenches into 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 any updates are needed.

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.