Steps to a successful financial plan

When it comes to financial planning, having a plan and a process in place to achieve your goals is key.

Allan Gray explains that people often make the mistake of asking which financial or investment product they need without realising that this is the incorrect place to start. The critical starting point is your long-term plan – it forms the foundation of all your decisions. Once your plan is in place you can establish a process to follow that deals with how you will achieve your goals. The final step is choosing your product.

Deloitte provides a 5-step financial planning process that simplifies the development of a successful financial plan.

Step 1 – Defining and agreeing your financial objectives and goals

The goals and objectives will be the guide to the financial plan and should provide a roadmap for your financial future. They should contain the following features:

Quantifiable and achievable.
Clear and have a defined timeframe.
Separate your needs from your wants.

They should be agreed and documented with your financial adviser to assist you in measuring your progress. They should also be reviewed periodically to capture your changing circumstances and to ensure they remain relevant.

Step 2 – Gathering your financial and personal information

The financial planning process and its success will depend on the quality and clarity of the information communicated to your adviser. Your adviser will complete a detailed financial fact-find to capture all relevant information in relation to your finances. This will include:

Income and expenditure.
Assets and liabilities.
Risk attitude, tolerance and capacity.

Your attitude, tolerance and capacity for risk are assessed using a psychometrically designed risk tolerance questionnaire in relation to investment assets. This is also analysed to assess your asset allocation for investment or pension goals.

Step 3 – Analysing your financial and personal information

Your financial adviser reviews the information provided in step 2 and uses it to produce a report that reflects your current financial profile. The following ratios are produced to improve your understanding of your financial circumstances and to pinpoint areas of strength or weakness:

Solvency Ratio
Savings Ratio
Liquidity Ratio
Debt Service Ratio

Step 4 – Development and presentation of the financial plan

The financial plan is developed based on the information received in step 2 and analysis completed in step 3. Each of the goals and objectives in step 1 should be addressed and a recommendation for each identified. It will include:

Net worth statement (a balance sheet)
Annual consolidated tax calculation
Annual cash flow report (displaying surplus or deficit)

The report is presented, explained, and discussed with the client by the adviser.

Step 5 – Implementation and review of the financial plan

Once the analysis and development of the plan is complete, the adviser will outline the recommended courses of action. This can involve implementing:

A new pension or investment strategy.
Changing debt provider.
Additional life or serious illness insurance.
Income and expenditure adjustments.

Your adviser may carry out the recommendations or serve as your coach, coordinating the process with you and other professionals such as accountants or investment managers. They may also handle the interaction with financial product providers.

Financial planning is a dynamic on-going process that requires continuous monitoring. Review of the actions recommended in the plan should take place regularly, and the goals should be reviewed annually to take account of a change in income, asset values, business or family circumstances.

Financial Planning that follows a properly defined and documented process will give the greatest chance of a successful outcome. It will not guarantee financial security or wealth but will provide an opportunity to pursue both and requires proper analysis, discipline and expertise.

Allan Gray concludes that personal finance is personal and there are no one-size-fits-all solutions. A good, independent financial adviser can help you create a financial plan that takes your unique circumstances into account. This includes managing your risks, suggesting appropriate financial products, updating your plan as your circumstances change and keeping you on track and accountable.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.