How important is a written financial plan?

More than half (53%) of investors believe that having a written financial plan is important, up from 41% of retail investors as of year-end 2014, according to new research from Cerulli Associates and Osaic, Inc., Financial Planning: Fueling Client and Business Growth.

Financial advisory practices that incorporate comprehensive wealth management and planning services see longer-lasting client relationships, bolster upmarket growth, and manage wealthier clients, according to the report.

The increased demand for planning is driven by various factors, including greater market volatility, the continued decline of employer pensions as a funding mechanism for retirement, and a growing array of complex investment vehicles.

“Financial planning and advice services are now a vital consideration for investors when choosing an advisor with whom to work, nearly surpassing investment performance as a factor,” said Andrew Blake, associate director with Cerulli Associates. “According to the research, 55% of investors consider an advisor’s understanding of their financial goals, needs, and risk tolerance, as well as their entire financial picture (49%) when choosing a financial advisor, as compared to the performance of their investments relative to the overall market (46%).”

“I think there are a variety of factors that are causing the higher demand, including advancements in technology that make financial plans easier to implement and follow,” added Andrew MacDougall, director of wealth management at Sapers & Wallack, Inc. “Additionally, with economic uncertainty and high inflation, people don’t know if they can live their current lifestyle and want someone to take a second look. Other factors are increased awareness of financial literacy, complex financial strategies, tax planning, and many more,” he said.

For Evan Potash, executive wealth management advisor, TIAA, demand for financial plans has risen over the past decade due to a variety of factors. For example, he said, baby boomers born from 1946-1964 make up over 20% of the population. Many of them are either close to or have entered retirement.

Also, financial institutions have more avenues, besides television and newspapers, to advertise the benefits of having a financial plan, and the rise of social media has made it easier to communicate with consumers, he said.

Benefits of providing comprehensive services

In addition, the report said advisors who specialize in comprehensive wealth management have significantly larger average client sizes and assets under management (AUM) per practice than those providing financial planning on an issue or a per case basis. Private wealth manager advisors, defined as practices that offer comprehensive wealth management, manage $822 million, on average, versus $210 million for case-based planners, service a greater proportion of high-net-worth (HNW) clients (37% versus 7%), and manage an average client portfolio of $1.8 million, versus $562,000.

“With client demand for financial planning increasing and the majority of retail investors considering a financial advisor’s planning-related services as an extremely important factor when selecting an advisor, the service offering provides an opportunity for advisors to differentiate their practice beyond investment performance,” said Blake. “Just less than one-third (31%) of financial advisor practices provide a wide range of core financial advice services as an integral part of their value proposition, creating ample opportunity for advisors to gain a competitive advantage.”

Taking the steps necessary to transition from an investment management-oriented service model toward a financial planning and advice-oriented service model will not come without challenges for many practices, the report said. However, Cerulli’s research indicates that the benefits may be worth the effort as investor demand for this service grows.

“Relationships are at the core of our business, and advisors whose practices incorporate comprehensive wealth solutions into their service model often results in deeper and longer-term connections as they work with clients holistically on their larger financial picture instead of individual needs,” said Joe Gaeckle, head of the National Planning Institute at Osaic. “Osaic is committed to continuous education, and we empower our advisors to build upon their expertise through programs like Wealth Advisor Academy to further grow their practices.”

Cerulli believes that many advisors should evaluate how their wealth management service offering is satisfying the growing demand and consider gradually adding more services to move further along the service emphasis spectrum. “Advisors who don’t currently provide financial planning and advice services don’t need to make the transition all at once. Small steps can be taken toward incorporating financial advice and planning into a practice’s service model and familiarizing clients with the value proposition of services,” Blake said.

Hallmarks of an effective written financial plan

So, what are some of the hallmarks of a written financial plan that helps an advisor’s clients achieve their financial goals? “Comprehensive overview, personalized goals and easy-to-implement actionable steps, I believe, are traits that are pivotal in helping a client achieve their financial goals,” MacDougall said.

A financial plan looks at a person’s goals and separates them into three categories: needs, wants, and wishes, said Potash, as he shared the hallmarks of a comprehensive written financial plan. “Once the needs are satisfied, I ask my clients to start dreaming bigger. Given a client’s resources and day-to-day expenses, there may be an opportunity to start to incorporate less essential goals like travel, charitable gifts, or a large purchase,” he said.

A financial plan addresses these goals and resources, and stress tests them using a financial modeling approach typically called Monte Carlo simulations, which is where we incorporate a client’s tolerance for risk, added Potash. He pointed out that TIAA uses 100 years of data to run 500 of these simulations. “A lot has happened in the last 100 years; so, it is reassuring to have data on major events, such as the Great Depression and the financial crisis of 2008, to stress test the financial plans we put together for our clients,” he added.

However, these are just projections, added Potash, and it is important to understand the assumptions used in the plan. There are many assumptions like inflation, assumed rates of return, and financial forecasts that must be considered. Clients who engage in financial planning typically feel more confident toward the attainment of their goals, including pre- or post-retirement goals, he said.

A trusting and transparent relationship formed between the advisor and the client is essential, and a client’s annual monitoring of the financial plan is necessary in ensuring they are still on track to meet their goals, as there is always a possibility for unforeseen events to happen, which can change their plan and goals. “Having a professional you can turn to is invaluable,” he said.

According to Potash, the hallmarks of a effective written financial plan include:

1. Client expense goals (Needs, wants, and wishes)
2. Time horizon of goals
3. Financial resources
4. Risk tolerance and ability to take risk. This includes asset allocation and asset location.
5. Variable and guaranteed income options–systematic withdrawals vs pension, Social Security, and annuities
6. Tax and income planning
7. Budgeting and savings
8. Debt management
9. Estate planning
10. Insurance strategies: life insurance, health care, and long-term care

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