How to Build a Custom Recommendations Template

How to Use This Document?

The Guide to Building Quality Custom Recommendationsprovided a starting point to the process of creating quality custom financial planning recommendations. It introduced the sample format of using a 4-step approach that can be used to create custom recommendations. It also included a library of paragraph selections that can be used and modified as needed based upon the client’s specific situation.

This guide, How to Build a Custom Recommendations Template, takes the learning one-step further. It reviews the levels of quality that can be achieved when creating a custom recommendation. What is good, better, best? It discusses content that the financial planner may want to include in a custom recommendations template. It also provides the financial planner with a sample recommendations template that can be changed as needed based upon the planner’s writing style, personality and the client’s situation.

HOW TO BUILD QUALITY CUSTOM RECOMMENDATIONS

At plan delivery, the financial planner will present plan recommendations. Recommendations that are written by the financial planner are referred to as custom recommendations. A quality custom recommendation generally has the following components:

Is objective,
Not product specific,
Provides options and choices,
Includes a fair and balanced discussion, and
Makes a recommendation of which option to choose.

There are different levels of quality: Good, Better, Best. The components as stated above will be included in all levels of quality. However, the highest levelof quality (Best) can be compared to the winner of a Gold medal where points scored for criteria such as style, execution and degree of difficulty outweigh that of a Bronze medal performer.

Let’s look at the chart below to see what characteristics may further define the difference in the levels of quality when creating custom recommendations. Following the chart are examples of what a retirement recommendation would look like using the different levels of quality.

Characteristics of Recommendation / GOOD / BETTER / BEST
Is objective / X / X / X
Not product specific / X / X / X
General discussion of options and choices / X / X / X
Fair and balanced discussion / X / X / X
Makes a recommendation of which option to choose / X / X / X
Includes educational content / X / X
Expanded discussion of options and choices / X / X
Expanded discussion of options and choices using numeric examples / X
Discusses other client specific issues / X
Includes discussion of alternative scenarios(s) / X

Retirement Recommendation Example

Below is a retirement recommendation based upon the different levels of quality. The Sample Format of using a 4-step approach is used in the examples. Step 4-List Options/Choices andMake Your Recommendation is used as the starting point. The sample clients, Mark and Lynda, have a retirement shortfall and excess cash flow. Mark is making pre-tax contributions to his 401(k) and Lynda is making pre-tax contributions her IRA. Notice how quality increases when personalization, enhanced discussionand reference to an alternative scenario are added to the recommendation.

GOOD Level of Quality

Options/Choices:

When we find a shortfall in reaching your goal, there are typically four alternatives: 1) save more, 2) increase investment returns, 3) delay the goal or 4) reducedesired retirement lifestyle. Any combination of those options can and should be used to reach your goal. Since you have excess cash flow, consider saving the additional dollars towards your retirement goal.

It important to be committed to your overall investment strategy, which should include asset allocation, diversification, and rebalancing, proper use of tax advantaged investments. Your tolerance for risk is an important factor in deciding which asset classes you will be comfortable purchasing and owning. Sometimes this decision involves a compromise. In order to obtain the rate of return that will keep pace (or even outpace) inflation, you may need to invest in more aggressive investments. However, more aggressive investments may give you additional risk with the potential of loss as well as gain. It is important that you understand and feel comfortable with the financial products you choose.

While planning for retirement, it is critical to review your financial situation on a regular basis. As your income changes or situation changes, you need to reevaluate this analysis, so you are consistently on track toward your goals.

BETTER Level of Quality

Options/Choices:

When we find a shortfall in reaching your goal, there are typically four alternatives: 1) save more, 2) increase investment returns, 3) delay the goal or 4) reduce desired retirement lifestyle. Any combination of those options can and should be used to reach your goal. Since you have excess cash flow, consider saving the additional dollars towards your retirement goal.

It is recommended that you increase contributions to Mark’s 401(k) and Lynda’s IRA. Mark, you mentioned that you received a salary increase this year. Since you are able to cover your lifestyle expenses, in years that you receive a raise continue to increase your pre-tax contributions. Review with your employer whether you can set your retirement contributions to automatically increase by a selected percentage each year. You should always take full advantage of employer matching contributions in Mark’s 401(k) plan. Lynda, you are currently contributing $3,000 per year to your IRA. Consider increasing contributions to your IRA.

BESTLevel of Quality

Options/Choices:

When we find a shortfall in reaching your goal, there are typically four alternatives: 1) save more, 2) increase investment returns, 3) delay the goal or 4) reduce desired retirement lifestyle. Any combination of those options can and should be used to reach your goal. Since you have excess cash flow, consider saving the additional dollars towards your retirement goal.

It is recommended that you increase contributions to Mark’s 401(k) and Lynda’s IRA. Mark, you mentioned that you received a salary increase this year. Since you are able to cover your lifestyle expenses, in years that you receive a raise, continue to increase your pre-tax contributions. Review with your employer whether you can set your retirement contributions to automatically increase by a selected percentage each year. You should always take full advantage of employer matching contributions in Mark’s 401(k) plan. Lynda, you are currently contributing $3,000 per year to your IRA. Consider increasing your contributions to your IRA.

Mark and Lynda, since you are over age 50, you are allowed to make catch-up contributions to your qualified accounts. Lynda, consider increasing your contributions to the maximum allowed. In 2015, a maximum of $5,500 can be contributed to an IRA. For individuals age 50, an additional contribution or catch-up contribution of $1,000 is allowed. Mark, a catch-up contribution is also available for your 401(k).

In addition to the current and proposed scenarios, an alternate scenario, Save More Now, was included.

The current scenario assumes existing contributions. Mark makes a 6% employee contribution with a 4% employer match to his 401(k) and Lynda contributes $3,000 per year to her IRA. This scenario shows a goal coverage of about 93%.

The proposed scenario includes existing qualified contributions but assumes that retirement investments are reallocated in accordance with the proposed asset mix. Your proposed allocation shows that you are invested too aggressively. Based upon your moderate investor profile, goal coverage is about 70%.

The alternate scenario, Save More Now, assumes existing contributions, reallocating to your proposed mix and saving more to qualified accounts. Mark will increase his contributions to 12% until your son graduates from college. Then Mark will change his contributions to the maximum allowed. Lynda will increase her IRA contributions to $6,000 per year. Based upon this scenario, goal coverage is 86%.

We recommend that you consider making your investments within the framework of a “tax control triangle strategy.” A portion of your investments should be made into tax-deferred investments such as 401(k), IRA or annuity contract. A portion should be potentially tax-free investments such as Roth IRAs, ROTH 401(k) ortax-exempt bonds. Another portion should be in taxable investments such as mutual funds, real estate, money market funds or certificates of deposit. This strategy helps lessen the future impact of changing tax regulations and changing financial conditions by providing investment options that function differently. Over time, taxes will become by far the largest single component of your expenses. Prudential Financial, its affiliates and its financial professionals are not tax or legal advisors. You should consult with your attorney or tax advisor.

HOW TO BUILD A CUSTOM RECOMMENDATIONS TEMPLATE

Now that you know how to create the highest level of quality in a recommendation, let’s build a custom recommendations template.

Why build a template?

A template allows the financial planner to keep content that may be common to most clients in one document. For example, every client should have an emergency fund. The tax control triangle may be common content among clients. Information about the different types of life insurance policies may be beneficial to include. Some financial planners like to have an introduction at the beginning of the custom recommendations which givesgeneral information about financial planning and building a financial foundation. All this common content can be kept in one document. You do not need to start from square one when you are writing custom recommendations for each client. A template is also efficient and saves you precious time.

How to build and use your template?

There are many resources available to build a template. A sample recommendations template has been included at the end of this document. The sample template uses the 4 step format. Keep in mind that the sample template is just a start. It includes content that is commonly used by financial planners. The sections included in the template are not all inclusive so you will need to review what other information you may want to include in your template.

Another resource is to use the library of paragraph selections that are included in the Guide to Building Quality Custom Recommendations. This library is more extensive than the content included in the Sample Recommendations Template. The library of paragraph selections also has content for all modules including the Next Steps-Creating an Action Plan Roadmap. Many planners like to use a Next Steps section at the end of the custom recommendations document.

Start now by opening a blank Word document. Review the sample template below to determine what content you would like to copy to your own template. Go to the Planner’s Toolkit on the financial planner’s website to access the more extensive library of recommendations in the Building Custom Recommendations section. Remember to add some personal touches to your template by editing the content to reflect your writing style and personality. Save your template so that you always have it available. Add new content to your template as needed. Then plan on how you are going to spend the extra time that you saved by creating your own custom recommendations template.

SAMPLE RECOMMENDATIONS TEMPLATE

Financial planning is a lifelong process that starts with identifying your goals. Implementation is how the plan comes to life. Regular plan updates measure your progress and identify changes needed to keep the plan focused on your goals. It is almost certain that changes will be needed as a result of planned and unplanned events that happen both in our personal lives as well as in the economy.

Your primary goals are listed below:

Goal 1
Goal 2
Goal 3

NET WORTH AND CASH FLOW

Goals:

To maintain an emergency fund equal to 3-6 months of expenses.
To keep an awareness of income vs. expenses in order to maintain current lifestyle.

Assumptions:

Base Pay is indexed to 3% annual increase.
Most expenses are indexed to 3% inflation; medical expenses are indexed to 5% inflation.
$X,000 is set aside as part of your emergency fund.

Findings:

Your financial position, consisting of your current net worth and cash flow, appears positive. Currently, the analysis shows your net worth as approximately $XXX,000 consisting of your assets and liabilities.

In general, your financial position, consisting of your current net worth and cash flow, appears to be an area of concern. You need to focus your attention on managing your personal debt and reducing discretionary expenses.

Your current emergency fund is adequately funded and includes your checking and savings accounts.

Your current emergency fund is not adequately funded. Additional resources need to be accumulated to cover the goal.

Options and Choices to achieve your goals:

Consider beginning a systematic budget process with the objective of gaining a better sense of where dollars are being spent and to enable regular contributions into long-term accumulation vehicles.

Consider a three-tiered approach to liquidity in your emergency reserve: 1) tier one should be one to two months of immediately available funds such as from a checking or savings account; 2) tier two should be one to two months in funds that you can access within 2-3 days such as fixed income funds; 3) tier three should be one to two months of funds in investments such as mutual funds in a non-qualified investment account where you are not significantly penalized should you need to liquidate some of them to make cash available. This tiered method gives you availability of your funds when necessary, yet overall gives you a potentially higher investment return.

ASSET ALLOCATION

Goals:

To create an investment portfolio that reflects your goals and attitudes about risk and diversification.
Obtain the appropriate return on investments given your risk profile.

Assumptions:

According to the asset allocation model, you defined yourself as (choose one) Conservative, Moderately Conservative, Moderate, Moderate, Moderately Aggressive, Aggressive
At this time, you do not require current income from your investments.

Findings:

You are currently taking on more market risk than indicated by the assessment of your risk tolerance and your time horizon. Consider reallocating your assets to take advantage of the benefits of diversification. Strategies such as asset allocation or diversification do not assure a profit or protect against loss in declining markets.

Based on your assessed risk tolerance and your time horizon, you are currently invested too conservatively. Consider reallocating your assets to take advantage of the benefits of diversification. This may give you the potential of increasing your rate of return while managing your risk.

Options and Choices to achieve your goals:

Using the asset allocation model generated from the risk tolerance questionnaire you completed and the time horizon for your financial goals, the analysis indicates that you should consider repositioning assets to more closely match your investment risk tolerance.

The Retirement analysis shows you should consider the following re-allocation:

xx%Large Cap Growth

xx%Large Cap Value

xx%Mid Cap Growth

xx%Mid Cap Value

xx%Small Cap Growth

xx%Small Cap Value

xx%International Equities

xx%Core Fixed Income

xx%Limited Maturity Fixed Income

xx%International Fixed Income

xx%Cash

Outside of the emergency fund goal and tiered strategy referred to in the cash flow section, I suggest you maintain the recommended asset allocation in this plan in order to manage the expectations you have for your capital at work. Keep in mind that tax consequences must be considered when reallocating non-qualified investments. Consult with your tax advisor regarding your particular situation.

It is also important to note that your asset allocation may vary with the timing of your goals. For goals you need to accomplish in the near term, your asset allocation may consist of a more conservative allocation in order to minimize risk since the resources will be required sooner.

As you approach retirement, consider re-allocating some or all of your investments for that goal to more conservative investments to help avoid the risk of market volatility on capital that will soon be needed to fund that goal. We will revisit this issue in our periodic updates to your plan.