Key Components of Financial Planning
Key Takeaways:
Comprehensive financial planning requires eight interconnected components to create a complete picture.
Holistic financial planning goes beyond investment guidance and encompasses debt management, emergency funds, tax efficiency, retirement readiness, and personal goals.
Visualization tools, such as Asset-Map, enhance client engagement and clarity by supporting informed decision-making and collaboration.
What does financial planning really include? That’s the question many financial advisors are asking themselves. Today’s clients expect more than piecemeal advice; they want holistic guidance and comprehensive planning services.
Comprehensive financial planning is a necessity in today’s uncertain environment. Inflation, longer retirement timelines, and tax complexity all make working with a financial planner advisable. Financial advisors craft strategic and achievable financial plans for clients.
This article will outline eight interconnected components of financial planning that form its foundation. Read on for tips on how to formulate a successful financial plan for your clients.
The Key Components of Financial Planning
Financial planning is a complex career route that requires specialized knowledge and hands-on experience in eight core areas. We’ll highlight the key components of a solid financial plan.
1. Income and Cash Flow Planning
The first step to creating a comprehensive financial plan is to establish your client’s income sources and spending habits. These pieces of information make up the foundation of any financial strategy. Income determines the “money in,” whereas spending habits dictate the “money out,” providing a visualization of a client’s cash flow.
Financial advisors should assess a client’s current budget, lifestyle costs, and savings rate to get a baseline of where their finances lie. This assessment provides you with a good idea of what goals to set and of issues that need to be addressed.
Debt repayment and emergency fund planning are often some of the first takeaways for new financial planning clients. Approximately one-quarter of Americans have no emergency funds in place. Credit card and student loan debt also plague millions of Americans. Planning for debt consolidation and setting aside money in an emergency fund are common steps when working with new clients.
Asset-Map is a powerful tool financial advisors can use to visualize a client’s cash flow gaps and priorities. It provides clear visualizations to facilitate collaborative planning sessions and enhance client engagement.
2. Risk Management and Insurance Planning
Risk management is another crucial part of a financial plan. Financial advisors should evaluate a client’s existing coverage. Identify if a client has life, disability, health, liability, property, and long-term care coverage. Then, identify gaps in protection that could derail financial goals and provide recommendations.
An assessment should be completed to identify a client’s risk tolerance when planning for unexpected occurrences. Some clients may have high risk tolerances, such as young professionals with minimal debt, while those in retirement may be more risk-averse.
Asset-Map aids advisors in mapping risks across a client’s household and proactively planning for unexpected events. With the Signals feature, advisors can anticipate a client’s potential financial weak spots before they occur. This enables risk mitigation strategies to be deployed, preventing the unexpected from compromising a client’s financial stability.
3. Investment Planning
Investing offers clients the opportunity to grow their wealth over time, helping them achieve their financial goals, whether long-term or short-term. Investment planning involves establishing a suitable risk tolerance for your client based on factors such as age, financial goals, and time horizon for investing.
Diversification, asset allocation, and rebalancing are all critical for protecting a client’s financial stability and ensuring they're well-positioned to capitalize on growth opportunities. When giving investment advice, help clients understand the advantages and disadvantages of their options so they can make informed decisions about where to allocate their resources.
Investments should be integrated into the broader financial plan, rather than being considered in isolation. Asset-Map helps advisors explain investment strategies visually without overwhelming clients. The easy-to-understand visualizations simplify the planning process and encourage client engagement.
4. Tax Planning
It's essential to help your clients understand the laws associated with taxes and how they impact their take-home pay. By doing so, you can help them identify strategies to reduce their taxable income and enhance their overall financial well-being.
Begin by educating your clients on the various components of their taxable income, such as wages, interest, dividends, and capital gains. Also, explain how deductions, credits, and exemptions can influence their tax liability. For instance, itemized deductions can help reduce taxable income by accounting for expenses like mortgage interest, property taxes, or charitable contributions.
Next, explore various tax-saving strategies with your clients, such as contributing to tax-advantaged retirement accounts like 401(k)s or IRAs, which can lower taxable income and promote long-term savings.
Additionally, consider discussing the benefits of tax-efficient investment strategies, such as investing in tax-exempt municipal bonds or using tax-loss harvesting to offset capital gains. Roth conversions and charitable giving are two other strategies for achieving tax efficiency worth discussing.
Finally, stay up-to-date with the latest changes in tax laws and regulations, as they can have a significant impact on your client's financial situation. By being well-informed, you can provide timely and accurate advice, ensuring your clients make the best decisions for their unique circumstances.
Asset-Map can be used to model tax impact scenarios holistically and improve client understanding. Use Asset-Map to help clients understand how income, capital gains, and withdrawals are taxed.
5. Retirement Planning
Everyone has a unique vision for their retirement lifestyle. As a retirement planner, you can help clients assess how much money they will need to put in their retirement savings and achieve that desired lifestyle. Different clients will have varying ideal retirement ages, lifestyle goals, and projected expenses. You can use Asset-Map to visualize retirement income sources and gaps across timelines.
Guide your clients through understanding the impact of tax-advantaged investment accounts such as 401(k)s and individual retirement arrangements (IRAs), as well as Social Security and Medicare, on their long-term planning.
Estimate how much income they will need to maintain their desired lifestyle in retirement, taking into account factors such as inflation, living expenses, and healthcare costs. Then, explore various strategies to help them reach those goals, including maximizing employer-sponsored retirement plans, diversifying investments, and planning for Social Security and Medicare benefits.
6. Education and Goal-Based Planning
Financial advisors should also help clients plan for major financial goals, such as college funding, weddings, real estate, or travel plans. You can help your clients achieve their financial goals while upholding their personal values, which can be accomplished through personalized financial planning. Aligning your advice to their values ensures that your clients will have an easier time following your advice, thus making your collaboration more effective.
Align short- and mid-term goals with long-term wealth accumulation to successfully achieve major goals. A financial plan can incorporate 529 plans for college funding, gifting strategies, and custom timelines tailored to each client.
Asset-Map enables easy illustration of competing goals and tradeoffs. With the Target-Maps feature, clients can visualize their progress toward funding their goals and resolve any capital shortfalls.
7. Estate and Legacy Planning
In addition to retirement planning, your clients might also need to address end-of-life decisions through estate planning. This is often an emotional and complex process that involves creating a will to inform loved ones of one's last wishes and the distribution of assets. This process might also include setting up trusts, designating beneficiaries, and establishing healthcare directives.
Values-based planning and an emphasis on charitable giving ensure that a client’s legacy is protected. Financial advisors should encourage and facilitate multi-generational conversations around end-of-life wealth transfer. Having these conversations early supports more seamless transitions.
Asset-Map visually highlights assets, beneficiaries, and estate considerations in one view, enabling clients to easily understand their estate plans.
8. Business or Practice Planning
Business or practice planning is particularly relevant for business owner clients and advisors in family-run firms. Succession planning ensures that a business’s assets and relationships are transferred seamlessly when the baton is passed to another owner. Financial advisors should help clients plan for succession, liquidity events, and retirement from the business to cover all the bases.
When working with business clients, advisors can coordinate personal and business finances to provide a comprehensive plan view. Planning for family succession, sale, or management buyouts ensures business owners are prepared for major transitions. Financial advisors can use Asset-Map to illustrate how business assets align with a client’s overall financial plan.
Visualize the Full Financial Picture
True financial planning goes beyond any one service. It involves the integration of eight components to create comprehensive financial planning. A financial advisor plays the role of a guide in all areas, not just investments. That’s why it’s important to integrate the key components into your service offerings.
Asset-Map helps you deliver clear, client-centric advice that resonates and drives action. Discover how Asset-Map enables advisors to provide holistic planning conversations with confidence and clarity. Schedule a demo today!