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I’m repeatedly surprised by the lack of a good plan when I first sit down with medical families, and I think everyone should know what to expect.
In medicine, we use SOAP notes (subjective, objective, assessment and plan) to both document and communicate information to peers and patients. A good financial plan should be very similar. I’m repeatedly surprised by the lack of a good plan in place when I first sit down with medical families, and I think everyone should know what to expect.
As in the medical SOAP note, a good financial plan begins with a subjective assessment. A good planner first wants to know what questions and concerns that the individual or family has.
Discovery of goals is vital to this initial process. Common goals and questions include:
• Determining if the family is saving enough for a comfortable retirement
• Determining how much should be saved for children’s education, and the best vehicles for doing so
• Determining whether assets are protected reasonably well
• Determining whether the retirement plan is good
• Determining how to save on taxes
• Determining what is a good investment strategy for savings
• Determining how investments should be monitored
• Determining whether life and disability insurance is adequate
• Determining if homeowner's insurance costs are adequate
• Determining how to ensure that aging parents are taken care of
• Determining how to leave assets to heirs in the proper fashion
These are just some frequently asked questions in the planning process. If you have not discussed these (and many other general and specific) concerns with a planner, then you do not have a financial plan.
I’d note here that many families don’t use planners, but instead rely on an investment adviser or stockbroker (who may or may not label himself as a financial advisor of some type). Again, if you have not had an impartial discussion of most of these topics, you don’t have a plan, and that is a big mistake that may imperil your financial future.
In the subjective assessment by the planner, you may need to answer the following questions:
• How much do you earn and how much do you spend?
• What are your wishes for your children?
• What are your goals as regards to retirement?
• What has been your experience with investments?
• What mistakes have you made financially?
• What things have worked out well for you financially?
• Who is the “money cop” in the family?
• What do your children think about money and independence?
• How did you react to times when the stock markets were volatile (up and down)?
As these questions are considered and answered, a set of financial and life goals can be plotted out. The rest of the financial planning process should then be performed in a manner that seeks to achieve your goals.
Early on, there you may discover that your goals are unrealistic. For example, a high income family may be saving very little, yet have expectations of an early comfortable retirement. Or, there might be an expectation that the planner is some kind of investment wizard that can produce unusually good or regular returns (just like Bernie Madoff, who had no trouble gathering 50 billion dollars in assets based on such impossible promises).
A good planner spends time early in the process to probe deeper and determine whether moving ahead makes sense for either or both parties. In the next column, we’ll look at the objective process of a financial plan in some detail.