What Is A “Good” Financial Plan?

I have been trying to understand the point of a financial plan for the last month or so. I have come to the conclusion that only a few people know and I am not certain that I am among them.

I have talked to a number of people who prepare financial plans. Adjusted for clarity I have these general answers to the question above:

  1. A good financial plan is one that helps the client to understand why he should own what I am selling.
  2. A good financial plan is one that the client can understand and commit to in order to reach their goals.
  3. A good financial plan is one that helps the client to see how the pieces relate to one another.
  4. A good financial plan addresses risks in a productive way.
  5. A good financial plan is bound, has more than 40 pages and at least one colored pie chart. (God help the clients)

To come to grips with preparing good financial plans, we need to know more.

First of all recognize that no plan works. If the plan is not going to work, then accuracy is not a value. Internally consistent might be good but accuracy or precision or elegant mathematics will likely just hide things.

Most of the original thought on planning comes from the military. Military planning predated personal financial planning by centuries and is well known.  One of the great military philosophers was Field Marshall Helmuth von Moltke the Elder. He was Chief of Staff of the Prussian General Staff from 1857 to 1871. One of his maxims is “No plan of operations extends, with any certainty, beyond the first contact with the main body of the hostile force.”

Why? Because the outcome of the first battle is unknown. The remaining resources are unknown as are those of the opponent. You cannot know what to do unless you know what you have to do it with.

Reworded, “No financial plan survives first contact with unforeseen reality.” You need to be able to adapt and the plan needs to allow that.

Second observation is that all plans reflect more of the planners biases than they reflect the real world. The planner cannot know everything so unless there is a clear outline of assumptions and the meaning of the assumptions, the plan will be purpose driven. You should aim for a range of assumed values within which the plan will work but you need to also communicate that that range of values may represent only a small share of the possibilities.

So, where to go once we know the plan will be biased and soon wrong?

We should adopt the approach that planning is to help us understand our circumstances. How the pieces come together, how they might come together in future, and what are the limits to possible outcomes.

Is the plan specific to the present, like arranging insurance or financing a house, or is it longitudinal – pertaining to a long time period. Specific plans can be measured against real world conditions as they exist now. There are no others that you can relate to. As long as future flexibility is addressed you are finished.

Longitudinal plans are for other purposes.

  • Insight. What is the general direction and how do opportunities and limits impact. For instance, what if there is not a long time? Longitudinal plans are always wrong but they do help us to see ways to better use resources.
  • Identification of opportunities and pitfalls. Once known and known within the range of assumptions, specific action can be taken to address them. Like inter-generational loans, insurance, income splitting and so on.

Longitudinal plans should never be done with an emphasis on accuracy. They are for direction and to provide a reference base for future changes.

On the positive side, again from the military, “Plans are useless, planning is necessary.” Dwight D. Eisenhower

Financial planners should get past the idea of plans that only facilitate sales. Remaining in the product world means the clients will be less well served, and the profession will be demeaned.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

2 Comments on “What Is A “Good” Financial Plan?

  1. Don,

    In my book “Client-Centred Life Planning”, I discuss the Relationship Equation:
    R = (U + D + E) / S.
    U is Understanding, D is Dependability, E is Expertise, and S is the CLIENT’s perception of the ADVISOR’s Self-Orientation. For example on a scale of 1 to 10, with 10 being high:
    If R = (8 + 8 + 8) / 8, then R = 3.
    If R = (8 + 8 + 8) / 2, then R = 12.
    That is, if the client’s perception is that an advisor is doing a plan to sell product, then S is HIGH and the relationship score is low. But if the client’s perception is that the advisor is doing a plan because of a genuine interest in helping the client, then the advisor’s self-orientation score is low, and the Relationship score is much higher. Advisor’s who do plans with a product sales agenda sabotage themselves.

    There are no “final” plans. There are clients’ “wants” at this point in time and their current financial resources. Plans help clients understand how they can act effectively to achieve their current wants. Effective action is a blend of values-based lifestyle trade-offs and the application of sound financial-planning tactics.

    The true value of planning is setting up a decision-making model. As clients travel through life and face new choices, clients can return to the model, create a “What if?” scenario, and enter what they are thinking of doing in order to understand the long-term implications. Clients can make their “mistakes” on the “practice field” of the software model, rather than irreversible mistakes in real life. This is the true value of planning – the creation of a decision-making model that can be used over and over again. We all must manage change. The decision-making model helps clients MASTER change.

    When advisors keep their self-orientation low and use realistic planning software (not artificial financial-planning software) to ongoingly help clients master change, then advisors can achieve their true objective in the planning process – to position themselves in clients’ minds as their Chief Financial Councillor.

    If you’d like to learn more about the premier planning software suite in Canada, please visit http://www.visionsystemscorp.com.

    Michael Curtis

    • Good comment. There is no doubt that capable planning software helps. The risk is that client takes the outcome seriously and stops thinking. The idea of planning/projecting remains insight into risks and opportunities and a communication tool

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