Topic-1
Introduction to Financial Planning
Objectives:
This Chapter will help the students to understand
The concept of Financial Planning and Financial
Planners
Chapter-1 Outline
What is Financial Planning
The Need for Financial Planning
Who is a financial Planner
Remuneration of Financial Planners
Who needs Financial Planning Advice
Qualities of a Successful Financial Planners
Comprehensive Financial Planner-A 6 step
Process
Format of a written Financial Plan
What is Financial Planning
Financial planning is the process of
assessing the financial goals of a client
that arise at
different intervals in his life,
taking into account an inventory of the
investments and other assets he already
has
to help him achieve those goals and
estimating what he needs in future
Financial Planning-Goals
Savings to buy a car costing around Rs.
3,50,000 after 3 years
Purchasing a flat after 6 years with
accumulated funds worth Rs. 10,00,000 and the
balance with loan
Investing for higher education of children where
the money is required after 10 and 12 years.
Financial Planning also includes:
Using a monthly spending plan or budget to
keep the finances on track
Controlling expenses and staying out of debt.
Putting target dates
on financial goals:
Short-term goals—to be accomplished
within the next year.
Intermediate-term goals—to be
accomplished in the next 2-5 years.
Long-term goals—to be accomplished in
time periods greater than 5 years.
Why Clients do not Plan
Thinking they have insufficient assets or income
to warrant planning
Assuming their financial situation is in good
order
Putting off what is complex and worrisome
Not wanting to consider unpleasant events such
as death, disability, unemployment, or property
loss
Thinking financial planning expensive
Faulty Assumptions of Client relating
to Financial Planning leads to
following consequences:
Inadequate protection against personal
catastrophes such as death, disability, serious
illness, an automobile accident, prolonged
unemployment, or other major negative events
Too little money set aside for retirement or for
the family’s educational needs
Higher than necessary income taxation
Unplanned estates, with higher taxes and
settlement costs
Not reaching financial goals in life
The Need for Financial Planning:
The need for financial planning is to ensure that right amount of
money is available to the investor at the right time to enable him
to meet the different goals in his life.
The need for financial planning has been driven by changes in
the Indian Financial Markets.
Equity and Debt markets have become more dynamic and more
volatile due to global and local factors. The investments options
are also increasing and now include bank deposits, bonds,
mutual funds, equities, gold, derivatives etc.
Reform have put more money in the hands of the investors but
only a few people have the time and expertise to make a
complete financial plan for themselves. Hence there is a need to
take the help of a professional Financial planner who can guide
individuals to achieve their financial goals.
Who is a Financial Planner
A Financial Planner is a person who
uses the financial planning process to
enable the client to achieve his financial
objectives.
A Professional Financial Planner is one
who is well informed and understands
the universe of the various investment
options available as well as the risks and
return attributes of these options.
Remuneration of Financial
Planners
Commission-based financial planners: They act
as Brokers/Mutual Funds advisors/Insurance
advisors and are compensated by the financial
institutions with whom they place the clients
funds
Fee based Financial Planners: Who charge a
fee for making a comprehensive financial plan
and do not get commission from institutions
Combination of both: They charge a fee from
the client as well as get commission from the
institutions where they place the clients funds
Who Needs Financial Planning
Advice?
Any person who earns money either in
form of salary income or in any other
form and has financial goals to achieve.
Financial Planning recommendations will
be different for different group of
investors.
Qualities of a successful
Financial Planner
Technical Skills: Technical Skills are achieved by
pursuing a professional education programmed for
“Certified Financial Planner”. All certified Financial
Planners are required to earn CE (Continuous education)
points every year in order to fulfill the requirement of
continuing education and professional development.
Interpersonal Skills: The Financial Planner profession is
based on dealing with people. These people may choose
to remain clients as well as refer new clients to the
financial planner if he is successful in maintaining good
relations and is able to communicate well with clients.
Professionalism: It implies that the interests of the client
are of paramount importance and a financial planner
carries out his duties in a correct manner.
Professional Financial
Planning Designations
DESIGNATION ISSUED BY
1. CFP Licensee (Certified 1. CFP Board of Standards
Financial Planner)
2. American Institute of
2. PFS (Personal Financial Certified Public
Specialist) Accountants
3. CFA (Chartered 3. CFA Institute
Financial Analyst)
4. ChFC (Chartered 4. The American College
Financial Consultant)
Issues Client Considers when
selecting Financial Planners
Do I need a Specialist?
Does the planner earn significant commissions?
Will the planner provide professional
references?
Can the Planner answer technical questions?
What does the planner charge?
What is the planner’s education and
experience?
Core Disciplines of Personal
Financial Planning
Cash Flow Management
Insurance Planning
Investment Planning
Education Planning
Income Tax Planning
Retirement Planning
Estate Planning
Comprehensive Financial
Planning-A six step Process
Comprehensive Financial Planning-A six
step Process
1. Establishing and defining a professional relationship
The financial planner should clearly explain or document
the services to be provided to the client and define both their
and the client’s responsibilities.
The planner should explain fully how he/she will be paid and by
whom.
The client and the planner should agree on how long the professional
relationship should last and on how decisions will be made.
2. Gathering data, including goals
The financial planner should ask for information about the client’s
financial situation.
The client and the planner should mutually define the client’s
personal and financial goals, understand the client’s time frame for
results and discuss, if relevant, how the client feels about risk.
Comprehensive Financial Planning-A six
step Process
3.Analyzing and Evaluating the client’s financial status
The financial planner should analyze the
client’s information to assess the client’s current situation and
determine what the client must do to meet their goals.
this could include analyzing the client’s assets, liabilities and cash
flow, current insurance coverage, investments and tax strategies.
4. Developing and presenting financial planning
recommendations and/or alternatives
The financial planner should offer financial planning
recommendations that address the client’s goals, based on the
information the client provides.
The planner should go over the recommendations with the client to
help the client understand them so that the client can make
informed decisions.
The planner should also listen to the client’s concerns and revise
the recommendations as appropriate.
Comprehensive Financial Planning-A six
step Process
5.Implementing the financial planning recommendations
The client and the planner should agree on how the
recommendations will be carried out. The planner may carry
out the recommendations or serve as the client’s 'coach,'
coordinating the whole process with the client and other
professionals such as attorneys, accountants and or
stockbrokers.
6.Monitoring the financial planning recommendations
The client and the planner should agree on who will monitor
the client’s progress towards their goals. If the planner is in
charge of the process, he/she should report to the client
periodically to review their situation and adjust the
recommendations, if needed, as the client’s life changes.
Format of a Written Financial Plan
1. Cover Page
2. Covering Letter
3. Executive Summary
4. Statement of Current Situation
5. Objectives
6. Assumptions
7. Financial Planning Strategy
8. Summary of Recommendations
9. Action to proceed
10. Disclosures
11. Disclaimers
Format of a Written Financial
Plan
Cover Page:
CONFIDENTIAL
Personal Financial Plan
For…………………………..
Mr. and Mrs.
Prepared By
Authorized Representative
XYZ Ltd.
Date……………
Format of a Written Financial
Plan
1.Covering Letter:
The Financial Plan starts with
Conveying thanks for seeking financial planning
recommendations.
Should State that the financial plan has been prepared as per the
information provided by the client based on his current situations
Covering letter should explain to the client the time within which
plan has to be implemented and to emphasize on the need for
review and revision of the plan.
Format of a Written Financial
Plan
2. Executive Summary:
Executive summary will provide concise
information about the key aspects of the
client’s financial situation followed by the
recommendations and the potential outcomes
of these recommendations.
3. Statement of the Current Situation:
The next step is to state the current financial
situation, financial concerns and risk profile
Format of a Written Financial Plan
Example:
Mr. X (client) XX years of age, employed in the private sector and getting salary
package of Rs. XXXX p.a. He contributes XX% of his salary towards Provident
Fund and his present retirement fund corpus is Rs. XXXX, He has residential
house worth Rs. XXXX and Other outstanding loan is Rs. XX.
His present investment is as follows:
Cash at Bank XXXX
Direct Equity XXXX
Diversified Equity
(Mutual Fund) XXXX
Bank Fixed Deposits XXXX
Life Insurance XXXX
Household Policy XXXX
Health Insurance Policy XXXX
PPF XXXX
NSC XXX
Format of a Written Financial Plan
4. Objectives:
The financial objectives of the client will be listed in
the following manner:
Savings to buy a car costing around Rs. 3,50,000
after 3 years
Purchasing a flat after 6 years with accumulated
funds worth Rs. 10,00,000 and the balance with
loan
Investing for higher education of children where
the money is required after 10 and 12 years.
Format of a Written Financial Plan
5. Assumptions:
5. Assumptions:
A Financial Plan has to address both the client’s present situation
and the expected future financial situation. In order to make long
term plans and to analyze potential future financial position a
financial planner has to make the following assumptions in the
following areas:
Inflation
Salary/business income increase
Return on growth investments
Return on debt investments
Return on balance investments
Taxation rates
Life Expectancy
Increase\Decrease in expenses
Format of a Written Financial
Plan
6. Financial Planning Strategy:
A. Risk Management:
This area will cover the financial risks which may arise in the life
time of the client. These may include the need of Life Insurance,
Health Insurance, etc.
B. Asset Allocation:
It is a tool designed to maximize the return on your portfolio while
minimizing risk. It involves structuring a diversified portfolio from
four broad asset classes - Stocks, Bonds, Balanced and Cash –
based on your income and growth needs and your risk tolerance.
As a rule of thumb, investment in debt funds should be equal to
one’s age and the remaining should be in equity.
Format of a Written Financial
Plan
C. Tax Efficiency:
Tax is a major expense which requires careful
assessment and proper use of tax planning
devices which will enable to save tax as well as
accumulation of wealth.
D. Estate Planning:
It means preparation of wills and power of
attorney so the assets are distributed to the next
generation without any problem.
Format of a Written Financial
Plan
7. Summary of Recommendations:
All the recommendations made in the plan
will be summarized in this section. The
recommendations should be in bullet points .E.g.
We recommend that you increase your PF
contribution by Rs. 3000 every month.
We recommend you to increase your Life
insurance cover to Rs. 4,00,000
Format of a Written Financial Plan
8. Actions to Proceed:
In this section the financial planner will write down the steps to be
taken to proceed with the implementation of the plan. The planner
firm will require the client firm to sign a “Letter of Engagement”, the
format of which will be enclosed with the plan.
The applications for the recommended investments will be filled up
and deposited along with the cheques for the requisite amounts.
The completed forms will be submitted to the different institutions.
After around 3-4 weeks a further meeting with the client to be
scheduled to check with the client about receipt of the certificates or
account statements.
Format of a Written Financial
Plan
9. Disclosures:
In this section disclosure about services and fee will be
made. The fee for preparing the financial plan will be
mentioned and any other form of commissions to be
received by the financial planning firm will be stated.
10. Disclaimers:
Disclaimers means not to claim responsibility for the result
of the financial plan because a financial planner may not
be held liable for the events which are beyond his control
and which has adverse effect on the performance of the
recommended schemes.
END OF Topic 1
