What is Financial Planning and how does it work?


December 12th 1969: in a hotel room near Chicago O’Hare airport, Loren Dunton and James Johnston gather 11 colleagues in a room to share their dream of creating a financial planning profession.

Until then, all financial products, from investments to life assurance, were sold to people without any consideration for the bigger picture. Consumers simply did their best to put some form of financial plan together to protect their family and secure their retirement.

Soon after the meeting in Chicago, the formalities of the financial planning movement were founded and what is now known as the Financial Planning Association was formed. Its goal was to create worldwide standards on how a financial planner should act and work with their clients. Academic excellence was required to ensure a minimum standard was maintained by all members, the standards that consumers could expect from the new profession.

Fast forward to today and the Financial Planning Association, based in America, still flies the flag for standards globally. Overseen by the Financial Planning Standards Board, those standards ensure the 181,360 Certified Financial Planners globally (2019) maintain the professional criteria required to use the internationally-recognised CFP designation: Certified Financial Planner.

What CFP standards mean: so much more than a rubber stamp

I obtained my Certified Financial Planner licence in 2005, some 10 years after joining the industry, and of all the exams I have done – there have been many! – it remains one of the most challenging.

It was challenging because is based on Level 7 academic standards, which means it was up there with my master’s degree. It includes both academic learning, such as the requirement to know tax calculations and advanced pensions and trust knowledge, as well as a requirement to evidence this knowledge in a case study, by way of producing a written financial plan to a team of experienced assessors – the type of plan that would be presented to a client.

Like most things in life, what doesn’t break us makes us stronger, and gaining CFP accreditation over 15 years ago has enabled me to build a multi-award-winning financial planning practice, Lexington Wealth Management. My focus from the start has been on helping my clients achieve their ambitions; to provide a comprehensive service which encourages them to ‘live life by design, not default’.

What does a financial planner do, that a typical (and I appreciate not all) financial adviser doesn’t?

To this day it amazes me how, over half a century since those men met in Chicago to lay the foundations of the financial planning profession, so many financial advisers still act the same way: selling individual products without consideration to the overall plan.

It’s important to note that plenty of financial advisers are not just about selling products; there are many who ethically want to provide you the right product so you can put your own plan together yourself, or maybe they are a specialist who only work in one specific area of finance such as workplace pensions.

But a Certified Financial Planner will work with you, rather than the products. In fact it’s been said that financial planning could actually be an unregulated activity, because it’s more about you (the client) and ‘how do you want to live the rest of your life?’ rather than which pension is best or which fund you should switch into.

Because if all you focus on in life is money, you’re going to miss life itself. Time is precious and it never stops ticking, so it’s important to think about how you’ll live your remaining years.

And that’s what financial planning is about: not the money itself, but what the money can do for you.

Life might be going well for you right now, and you may be reading this and thinking ‘I know this, and I’m comfortable where I am’. But having a ‘financial coach’ work with you and your partner/family to help you live your life by design, not default, can be a life-changing experience.

Over the 25 years I have been a regulated planner, I have got better because my clients have challenged me. What I’ve learned from one client often applies to many others, and after doing over 10,000 hours of client meetings, you get pretty good at helping people make great decisions.

How do you find a good financial planner?

When you do an internet search many financial advisers will ‘hold themselves out’ to be a financial planner, because they know that’s what the consumer wants; they want a life plan, not a new fund. It can become very confusing very quickly, especially when you look at the alphabet of letters after their names.

But if you want to work with someone who follows the process originally formed over 50 years ago, which is proven to work, and has been held to a postgraduate degree standard, then you should search for and work with a Certified Financial Planner. It’s only a CFP that will meet these criteria.

The CFP should follow the six-step financial planning process, which I will cover in more detail in future articles:

Step 1: Establish and define the relationship. This includes what the client wants to achieve, how the planner-client relationship will work, and what it will cost.

Step 2: Collection of client information. This will include specific data such as monies coming in and out, both now and over the years ahead, as well as more emotional information such as ‘What’s important to you in life?’ and ‘What have you always wanted to do that you’ve not yet accomplished?’ (often referred to as your bucket list question). Life is for living, I’m not sure we’re getting a second chance at it, so let’s enjoy it!

Step 3: Analysis of the data. Behind the scenes, the CFP will review your income, expenditure, assets and liabilities, and your cashflow of money now and over the years ahead. They’ll often also carry out tax calculations and estate planning to ensure a comprehensive service is being provided. Then they will cost your desired lifestyle.

The result will be one of two consultations: either you will run out of money (won’t it be nice to know that now, rather than halfway through your retirement?!); or you’ll die with a significant surplus of money, and knowing that now may enable you to retire sooner, fly business rather than economy class, or make more family and charitable contributions without worry.

Step 4: Development. This is where the Financial Plan is presented and refined. I like to do this in a dynamic format, sharing my computer screen (either in my office or over Zoom) to show the plan in its draft stage and then we do the actual planning (not boring data entry) together; it brings the financial plan and experience to life. The feedback I get is that it’s far more enjoyable and engaging than being presented with a simple report to read.

After this meeting you’ll receive a written financial plan and notes which will reflect the discussions you’ve had and highlight the decisions needed, by when and by whom, to take you closer towards your outcomes.

Step 5: Implementation. After you’ve had time to allow your thoughts to settle, the plan can be put into action. Sometimes this is an ‘all at once’ scenario, where someone prefers to get on track straight away, or sometimes the actions are scheduled over time instead. This depends on the client’s personality type and the actions: some people like to just get stuff done, others prefer to work through things methodically. The planner works to the client’s pace.

Step 6: Review. We all have good intentions when we set a new year’s resolution, or any goal, but often they are quickly forgotten and they’re never achieved, so reviewing is important. Some clients like to have a regular ongoing planning meeting, which is typically annually, while others with more straightforward affairs will be happy to come back to the planner only when a life event occurs, such as retirement, a job change, or a windfall.

Above all, a Certified Financial Planner is a highly experienced, qualified financial professional who, I make no apologies for repeating, will help you live your life by design, rather than by default.

When a catastrophe occurs, I have been on speed dial, like when a spouse was rushed into hospital and my client didn’t know what to do. I’m also the sounding board for a client to run that crazy idea past, and idea you know you should ignore, but you just want to try your luck.

In summary, a CFP is much more than just a planner; they are a life coach and a long-term family steward.

Warren Shute MSc. CFP is a multi-award-winning Certified Financial Planner and Investment Adviser at Lexington Wealth Management. He is the author of the Amazon bestseller The Money Plan and host of The Money Planner podcast. Among many regular media contributions, he writes the weekly Sunday Mirror column Money Talk and has appeared on BBC and ITV.