Financial Planning Gap Analysis: Do you Know Where you are Headed?
Jun 10, 2016
CEOs do it - athletes do it – corporations do it and professional sports teams do it – Maybe it’s time for you to perform a Gap analysis, too.
What is Gap analysis? It’s comparing what you are doing now and what you should be doing. It’s identifying the “Gap” between what you are doing now and what you really want for yourself and your family. Gap analysis is used to achieve a specific goal by assessing what you are doing now with the resources available to you versus what you could be doing to allow these resources to be better utilized at all times. If resources are being utilized in the wrong way – too inefficiently, too costly, too risky (or not the right kind of risks) – it will likely undermine the long term prospects of achieving your goals. A gap analysis is sort of a snap shot of your current situation and an understanding of the different “best practices” you could use to make adjustments and get your plan on track.
There are four steps in Gap analysis:
- Identify your strategic objectives and goals. Opportunities for success must be based on an assessment of your family’s needs, priorities, investment preferences, and tolerance for risk. Goals must be quantified with measurable benchmarks, and, as in the case of planning for lifetime income sufficiency, they must account for actual needs, economic factors, and life’s uncertainties. In essence, where are you headed? Are your actions in line with your goals? Prioritizing your family’s needs is critical in this process. This is the time to clarify the difference between wants and needs. Prioritizing needs is so important to a family’s overall goals.
- Identify current standings and deficiencies. This is a self-assessment. In addition to identifying areas of “waste,” gap analysis helps you determine whether the resources you are applying to meet your goals are optimally utilized in all aspects of your strategy. In the financial planning arena this includes: Asset Allocation: What is your current ratio of equities-to-fixed income? Is this mix the best allocation based on your investment objectives and risk tolerance? Portfolio Diversification: Do you have a multiple level mix of investments across the right number of distinct equity asset classes. Investment Costs: Is your portfolio structured in a way to minimize management expenses and transaction costs? Do you know what your costs are? Can you justify the return you are earning? If you are not working with a qualified financial advisor, can you justify the lack of return and the missed opportunities for earnings by going it alone? If attempting to manage your investments on your own, are you consistently conducting a thorough portfolio analysis?
Gap analysis is not just about assessing our own skills and identifying our own deficiencies. It’s about recognizing when you don’t have the time, skills, or interest in acquiring that skill and partnering with others who can provide the skill in the most economical and timely manner.
- Create a Plan of Action. After you have identified the areas that need additional attention, you will need to create a plan and the selection process to bring that skill to the mix.
- Back up your Plan of Action with data and analysis. Annual reviews that include a comparison to past years and industry averages is the only way to know if the changes to your plan have a positive effect on the bottom line.
Financial Planning Gap Analysis evaluates the difference between your current situation and where you want to be. Call and talk with a Western Fraternal Life Wealth Management, Inc. advisor today and assess if your current plan will get you where you want to be.
By Julie Cole, CFP®, FLMI
Annuity Product Manager
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