Perhaps you’ve been told that you need a financial plan or you think you already have one. Either way, here are the essential sections a complete financial plan should cover.
Many clients initially seek financial advice because they want help making smart investment decisions. But investments are just a vehicle to help you pursue your most important goals. An advisor can’t effectively manage a portfolio that’s aligned with those goals unless they have a holistic view of your overall financial life.
For true peace of mind and a path to financial freedom, you need a comprehensive financial plan — and preferably a Living Financial Roadmap that remains up to date and reflects any changes in your goals, situation, and/or needs.
Creating that plan requires an advisor who will take a deep dive into your current finances, your personal and professional goals, and your top concerns.
Download eBook: Are You Getting What You Need From Your Financial Advisor?
Here’s what goes into a complete financial plan:
1. A thorough discovery process
Financial planning is not simply about numbers, it’s about real life: Your family’s successes and challenges today, your hopes for tomorrow, and your lasting legacy. A complete plan starts with an in-depth discussion of what matters most to you.
Through the discovery process, your advisor should ask about:
- Your family make-up
- Your values
- Your fears
- Your interests and hobbies
- Your professional and personal goals
They should also review all your financial information, such as:
- Your income
- Your cash savings
- Your assets (including investments, real estate, business ownership)
- Your debts
- Your insurance coverage
- Your estate plan
- Other details needed to create a personalized wealth management strategy
2. A timeline for your goals
Financial planning is about pursuing your goals—which means identifying not just what you want to achieve, but when you hope to get there. Timing is a key puzzle piece that your financial plan must address. Goals should be clearly articulated and prioritized.
For example, a younger person might map out:
- Near-term objectives, such as building an emergency fund or saving for a home remodel.
- Mid-term objectives, such as saving for their children’s college tuition or purchasing a second home.
- Long-term objectives, such as retirement.
People later in their careers might have different goals and timelines:
- Near-term objectives might include making catch-up contributions to maximize retirement account balances.
- Long-term objectives might include enacting charitable giving strategies and making gifts to family.
3. An investment strategy to get you there
Much like a doctor can’t prescribe treatment without diagnosing the patient, advisors can make investment recommendations without a complete understanding of your current financial situation, objectives, and constraints. The most important investment decision is determining the mix of assets needed to meet your goals and objectives—a process that incorporates both your ability and willingness to tolerate risk.
Ability to tolerate risk is objective and determined through the financial planning process and Monte Carlo simulations (more on that below). But your willingness is more subjective, so your advisor must ask the right questions to measure your emotional comfort with various forms of risk.
Using everything they know about your financial situation, your advisor should create an appropriately diversified investment portfolio to achieve those objectives. There is no such thing as a one-size-fits-all portfolio.
Depending on your specific situation and your personal tastes and preferences, an advisor should be able to offer a variety of strategies that take an active, passive, or mixed approach to meet your goals.
- Some investors are best served with the simplest, lowest-cost portfolio available.
- Others have the capacity and circumstances to tilt their portfolio towards riskier assets in hope of earning higher returns over time.
- Others may want a strategy that emphasizes companies that do well on Environmental, Social, and Governance (ESG) issues, so their portfolio aligns with their values.
4. Stress test your financial plan
Nobody can predict the future, but future economic conditions will have an impact on your ability to meet your goals. Rather than targeting one possible outcome for the goals in your plan, your advisor should stress test each one by running it through a range of different market scenarios.
The process is called a Monte Carlo simulation, which runs a thousand scenarios to generate a probability that your plan will be successful. You can consider a goal to be “On Track” when 85% (850 or more) of the scenarios provide or exceed the value required to meet all your life goals.
Monte Carlo simulations start with the information from the first two steps (discovery process and timeline for your goals) of the planning process, along with an advisor’s expert estimates on the potential returns and volatility of your investments, rebalancing parameters, taxes, and inflation. Then, powerful planning software takes all of this data, runs the randomized simulations, and provides the results in terms of probability of success.
As you change the inputs of your financial plan, you can see how they change your likelihood of success. That’s the power of Monte Carlo Simulations: They give you a framework to translate chances into choices.
5. A review of insurance coverage
Insurance is a critical part of your plan because it can help keep your family’s finances on track should something happen to you or your spouse. Your advisor should analyze your current coverage for life, disability, long-term care, and other types of insurance to ensure you’re adequately protected.
Nearly everyone in their working years will need life and disability insurance, but it’s easy to end up with bad policies that are costly and leave your loved ones inadequately protected.
Unlike fiduciary advisors, people who sell insurance don’t have to uphold the fiduciary standard. That means they’re under no obligation to work in your best interest. When an advisor reviews your existing insurance or makes recommendations to add coverage, they’re on your side of the table. That means they lean on your detailed financial plan to determine the appropriate amounts and types of coverage, and then help you shop around for the lowest prices.
6. Estate planning support
If you’ve already begun the estate planning process, a financial advisor can review your estate planning documents and assess whether anything is missing or out of date. If you haven’t started planning yet, your advisor can help you articulate your intentions and share recommendations with an estate planning attorney who can create those documents.
A good financial plan should include a complete diagram showing how assets would flow to different beneficiaries in different scenarios, so you know your wishes will be carried out the way you intend. Then, your advisor should routinely revisit your wills, trusts, health care directives, and power of attorney documents to make sure the information is current and the documents reflect your wishes.
7. Tax planning
Taxes are inevitable, but you shouldn’t pay any more than necessary. That’s why your financial plan should incorporate tax planning to help you keep more of your money.
A financial advisor can help create detailed tax projections to help you avoid major tax bills you weren’t expecting—alerting you when you need to adjust your estimated tax payments, for example. And they can help you take advantage of opportunities like bunching charitable donations to offset excess income, harvesting tax losses, and strategically using Roth IRA conversions. If you already work with a CPA, your advisor can share the details of your tax plan to keep them in the loop.
8. Ongoing monitoring and adjustment
Plans are living documents that need to be updated as your life changes and your goals shift. But many people find it difficult to create and stick to a schedule to review their plans. Your plan should have regular reminders built in, so you know exactly when your advisor is reviewing your important documents and assessing your progress toward important goals.
By carefully monitoring all the details in your financial plan, your advisor can help you assess which goals you’re on track to meet, which goals need attention, and what tasks you can take now to improve your financial circumstances.
This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.