Introduction to Financial Planning

Topic-1Topic-1Introduction to Financial PlanningIntroduction to Financial Planning

Objectives:Objectives: This Chapter will help the students to understandThis Chapter will help the students to understand The concept of Financial Planning and Financial The concept of Financial Planning and Financial

PlannersPlanners

Chapter-1 OutlineChapter-1 Outline What is Financial PlanningWhat is Financial Planning The Need for Financial PlanningThe Need for Financial Planning Who is a financial PlannerWho is a financial Planner Remuneration of Financial PlannersRemuneration of Financial Planners Who needs Financial Planning AdviceWho needs Financial Planning Advice Qualities of a Successful Financial PlannersQualities of a Successful Financial Planners Comprehensive Financial Planner-A 6 step Comprehensive Financial Planner-A 6 step

ProcessProcess Format of a written Financial PlanFormat of a written Financial Plan

What is Financial PlanningWhat is Financial Planning

Financial planning is the process of Financial planning is the process of assessing the financial goals of a client assessing the financial goals of a client that arise at that arise at

different intervals in his life,different intervals in his life, taking into account an inventory of the taking into account an inventory of the

investments and other assets he already investments and other assets he already hashas

to help him achieve those goals and to help him achieve those goals and estimating what he needs in futureestimating what he needs in future

Financial Planning-GoalsFinancial Planning-Goals

Savings to buy a car costing around Rs. Savings to buy a car costing around Rs. 3,50,000 after 3 years3,50,000 after 3 years

Purchasing a flat after 6 years with Purchasing a flat after 6 years with accumulated funds worth Rs. 10,00,000 and the accumulated funds worth Rs. 10,00,000 and the balance with loanbalance with loan

Investing for higher education of children where Investing for higher education of children where the money is required after 10 and 12 years.the money is required after 10 and 12 years.

Financial Planning also includes:Financial Planning also includes: Using a monthly spending plan or budget to Using a monthly spending plan or budget to

keep the finances on trackkeep the finances on track Controlling expenses and staying out of debt.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:

The need for financial planning is to ensure that The need for financial planning is to ensure that right amount of right amount of money money is available to the investor at the is available to the investor at the right time right time to enable him to enable him to meet the different goals in his life.to meet the different goals in his life.

The need for financial planning has been driven by The need for financial planning has been driven by changes in changes in the Indian Financial Marketsthe Indian Financial Markets. .

Equity and Debt markets have become more Equity and Debt markets have become more dynamic and more dynamic and more volatile due volatile due to global and local factors. The investments options to global and local factors. The investments options are also increasing and now include bank deposits, bonds, are also increasing and now include bank deposits, bonds, mutual funds, equities, gold, derivatives etc.mutual funds, equities, gold, derivatives etc.

Reform have put Reform have put more money in the handsmore money in the hands of the investors but of the investors but only a only a few people have the time and expertisefew people have the time and expertise to make a to make a complete financial plan for themselves. Hence there is a need complete financial plan for themselves. Hence there is a need to take the help of a professional Financial planner who can to take the help of a professional Financial planner who can guide individuals to achieve their financial goals.guide individuals to achieve their financial goals.

Who is a Financial PlannerWho is a Financial Planner

A Financial Planner is a person who A Financial Planner is a person who uses the financial planning process to uses the financial planning process to enable the client to achieve his financial enable the client to achieve his financial objectives.objectives.

A Professional Financial Planner is one A Professional Financial Planner is one who is well informed and understands who is well informed and understands the universe of the various investment the universe of the various investment options available as well as the risks and options available as well as the risks and return attributes of these options.return attributes of these options.

Remuneration of Financial Remuneration of Financial PlannersPlanners Commission-based financial plannersCommission-based financial planners: They act : They act

as Brokers/Mutual Funds advisors/Insurance as Brokers/Mutual Funds advisors/Insurance advisors and are compensated by the financial advisors and are compensated by the financial institutions with whom they place the clients institutions with whom they place the clients fundsfunds

Fee based Financial Planners: Fee based Financial Planners: Who charge a Who charge a fee for making a comprehensive financial plan fee for making a comprehensive financial plan and do not get commission from institutionsand do not get commission from institutions

Combination of bothCombination of both: They charge a fee from : They charge a fee from the client as well as get commission from the the client as well as get commission from the institutions where they place the clients fundsinstitutions where they place the clients funds

Who Needs Financial Planning Who Needs Financial Planning Advice?Advice?

Any person who earns money either in Any person who earns money either in form of salary income or in any other form of salary income or in any other form and has financial goals to achieve.form and has financial goals to achieve.

Financial Planning recommendations will Financial Planning recommendations will be different for different group of be different for different group of investors.investors.

Qualities of a successful Qualities of a successful Financial PlannerFinancial Planner Technical Skills: Technical Skills: Technical Skills are achieved by Technical Skills are achieved by

pursuing a professional education programmed for pursuing a professional education programmed for “Certified Financial Planner”. All certified Financial “Certified Financial Planner”. All certified Financial Planners are required to earn CE (Continuous education) Planners are required to earn CE (Continuous education) points every year in order to fulfill the requirement of points every year in order to fulfill the requirement of continuing education and professional development.continuing education and professional development.

Interpersonal Skills: Interpersonal Skills: The Financial Planner profession is The Financial Planner profession is based on dealing with people. These people may choose based on dealing with people. These people may choose to remain clients as well as refer new clients to the to remain clients as well as refer new clients to the financial planner if he is successful in maintaining good financial planner if he is successful in maintaining good relations and is able to communicate well with clients.relations and is able to communicate well with clients.

ProfessionalismProfessionalism: It implies that the interests of the client : It implies that the interests of the client are of paramount importance and a financial planner are of paramount importance and a financial planner carries out his duties in a correct manner.carries out his duties in a correct manner.

Professional Financial Planning Designations DESIGNATION

1. CFP Licensee (Certified Financial Planner)

2. PFS (Personal Financial Specialist)

3. CFA (Chartered Financial Analyst)

4. ChFC (Chartered Financial Consultant)

ISSUED BY

1. CFP Board of Standards

2. American Institute of Certified Public Accountants

3. CFA Institute

4. The American College

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 Comprehensive Financial Planning-A six step ProcessPlanning-A six step Process

Comprehensive Financial Planning-A six Comprehensive Financial Planning-A six step Processstep Process

1.1. Establishing and defining a professional relationshipEstablishing and defining a professional relationshipThe financial planner should clearly explain or documentThe financial planner should clearly explain or document

the services to be provided to the client and define both their the services to be provided to the client and define both their and the client’s responsibilities. and the client’s responsibilities.

The planner should explain fully how he/she will be paid and by The planner should explain fully how he/she will be paid and by whom. whom.

The client and the planner should agree on how long the professional The client and the planner should agree on how long the professional relationship should last and on how decisions will be made. relationship should last and on how decisions will be made.

2.2. Gathering data, including goalsGathering data, including goals The financial planner should ask for information about the client’s The financial planner should ask for information about the client’s

financial situation. financial situation. The client and the planner should mutually define the client’s The client and the planner should mutually define the client’s

personal and financial goals, understand the client’s time frame for personal and financial goals, understand the client’s time frame for results and discuss, if relevant, how the client feels about risk. results and discuss, if relevant, how the client feels about risk.


3. 3. Analyzing and Evaluating the client’s financial statusAnalyzing and Evaluating the client’s financial statusThe financial planner should analyze the The financial planner should analyze the

client’s information to assess the client’s current situation and client’s information to assess the client’s current situation and determine what the client must do to meet their goals. determine what the client must do to meet their goals.

this could include analyzing the client’s assets, liabilities and cash this could include analyzing the client’s assets, liabilities and cash flow, current insurance coverage, investments and tax strategies.flow, current insurance coverage, investments and tax strategies.

4. Developing and presenting financial planning 4. Developing and presenting financial planning

recommendations and/or alternativesrecommendations and/or alternatives The financial planner should offer financial planning The financial planner should offer financial planning

recommendations that address the client’s goals, based on the recommendations that address the client’s goals, based on the information the client provides. information the client provides.

The planner should go over the recommendations with the client to The planner should go over the recommendations with the client to help the client understand them so that the client can make help the client understand them so that the client can make informed decisions. informed decisions.

The planner should also listen to the client’s concerns and revise The planner should also listen to the client’s concerns and revise the recommendations as appropriate.the recommendations as appropriate.


5.Implementing the financial planning recommendations5.Implementing the financial planning recommendationsThe client and the planner should agree on how the The client and the planner should agree on how the recommendations will be carried out. The planner may carry recommendations will be carried out. The planner may carry out the recommendations or serve as the client’s 'coach,' out the recommendations or serve as the client’s 'coach,' coordinating the whole process with the client and other coordinating the whole process with the client and other professionals such as attorneys, accountants and or professionals such as attorneys, accountants and or stockbrokers. stockbrokers.

6.Monitoring the financial planning recommendations6.Monitoring the financial planning recommendationsThe client and the planner should agree on who will monitor The client and the planner should agree on who will monitor the client’s progress towards their goals. If the planner is in the client’s progress towards their goals. If the planner is in charge of the process, he/she should report to the client charge of the process, he/she should report to the client periodically to review their situation and adjust the periodically to review their situation and adjust the recommendations, if needed, as the client’s life changes.recommendations, if needed, as the client’s life changes.

Format of a Written Financial PlanFormat of a Written Financial Plan

1.1. Cover PageCover Page

2.2. Covering LetterCovering Letter

3.3. Executive SummaryExecutive Summary

4.4. Statement of Current SituationStatement of Current Situation

5.5. ObjectivesObjectives

6.6. AssumptionsAssumptions

7.7. Financial Planning StrategyFinancial Planning Strategy

8.8. Summary of RecommendationsSummary of Recommendations

9.9. Action to proceedAction to proceed

10.10. DisclosuresDisclosures

11.11. DisclaimersDisclaimers

Format of a Written Financial Format of a Written Financial PlanPlan

Cover Page:Cover Page:

CONFIDENTIAL Personal Financial Plan For………………………….. Mr. and Mrs. Prepared By Authorized Representative XYZ Ltd. Date……………


1.Covering Letter:1.Covering Letter:

The Financial Plan starts withThe Financial Plan starts with Conveying thanks for seeking financial planning Conveying thanks for seeking financial planning

recommendations.recommendations. Should State that the financial plan has been prepared as per the Should State that the financial plan has been prepared as per the

information provided by the client based on his current situationsinformation provided by the client based on his current situations Covering letter should explain to the client the time within which Covering letter should explain to the client the time within which

plan has to be implemented and to emphasize on the need for plan has to be implemented and to emphasize on the need for review and revision of the plan.review and revision of the plan.


2. Executive Summary:2. Executive Summary:

Executive summary will provide concise Executive summary will provide concise information about the key aspects of the information about the key aspects of the client’s financial situation followed by the client’s financial situation followed by the recommendations and the potential outcomes recommendations and the potential outcomes of these recommendations.of these recommendations.

3. Statement of the Current Situation3. Statement of the Current Situation::

The next step is to state the current financial The next step is to state the current financial situation, financial concerns and risk profilesituation, financial concerns and risk profile

Format of a Written Financial PlanFormat of a Written Financial Plan Example:Example:

Mr. X (client) XX years of age, employed in the private sector and getting salary 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 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 Fund and his present retirement fund corpus is Rs. XXXX, He has residential house worth Rs. XXXX and Other outstanding loan is Rs. XX. house worth Rs. XXXX and Other outstanding loan is Rs. XX.

His present investment is as follows:His present investment is as follows:

Cash at Bank XXXXDirect Equity XXXXDiversified Equity(Mutual Fund) XXXXBank Fixed Deposits XXXXLife Insurance XXXXHousehold Policy XXXXHealth Insurance Policy XXXXPPF XXXXNSC XXX

Format of a Written Financial PlanFormat of a Written Financial Plan4. Objectives: 4. Objectives:

The financial objectives of the client will be listed in The financial objectives of the client will be listed in the following manner:the following manner:

Savings to buy a car costing around Rs. 3,50,000 Savings to buy a car costing around Rs. 3,50,000 after 3 yearsafter 3 years

Purchasing a flat after 6 years with accumulated Purchasing a flat after 6 years with accumulated funds worth Rs. 10,00,000 and the balance with funds worth Rs. 10,00,000 and the balance with loanloan

Investing for higher education of children where Investing for higher education of children where the money is required after 10 and 12 years.the money is required after 10 and 12 years.

Format of a Written Financial PlanFormat of a Written Financial Plan5. Assumptions:5. Assumptions:

A Financial Plan has to address both the client’s present situation A Financial Plan has to address both the client’s present situation and the expected future financial situation. In order to make long and the expected future financial situation. In order to make long term plans and to analyze potential future financial position a term plans and to analyze potential future financial position a financial planner has to make the following assumptions in the financial planner has to make the following assumptions in the following areas:following areas:

InflationInflation Salary/business income increaseSalary/business income increase Return on growth investmentsReturn on growth investments Return on debt investmentsReturn on debt investments Return on balance investmentsReturn on balance investments Taxation ratesTaxation rates Life ExpectancyLife Expectancy Increase\Decrease in expensesIncrease\Decrease in expenses


6. Financial Planning Strategy:6. Financial Planning Strategy:

A. Risk ManagementA. Risk Management::

This area will cover the financial risks which may arise in the life 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, time of the client. These may include the need of Life Insurance, Health Insurance, etc.Health Insurance, etc.

B.B. Asset Allocation: Asset Allocation:

It is a tool designed to maximize the return on your portfolio while It is a tool designed to maximize the return on your portfolio while minimizing risk. It involves structuring a diversified portfolio from minimizing risk. It involves structuring a diversified portfolio from four broad asset classes - Stocks, Bonds, Balanced and Cash – four broad asset classes - Stocks, Bonds, Balanced and Cash – based on your income and growth needs and your risk tolerance.based on your income and growth needs and your risk tolerance.

As a rule of thumb, investment in debt funds should be equal to As a rule of thumb, investment in debt funds should be equal to one’s age and the remaining should be in equity.one’s age and the remaining should be in equity.


C. Tax EfficiencyC. Tax Efficiency: :

Tax is a major expense which requires careful Tax is a major expense which requires careful assessment and proper use of tax planning assessment and proper use of tax planning devices which will enable to save tax as well as devices which will enable to save tax as well as accumulation of wealth.accumulation of wealth.

D. Estate PlanningD. Estate Planning::

It means preparation of wills and power of It means preparation of wills and power of attorney so the assets are distributed to the next attorney so the assets are distributed to the next generation without any problem.generation without any problem.


7. Summary of Recommendations7. Summary of Recommendations::

All the recommendations made in the planAll the recommendations made in the plan

will be summarized in this section. The will be summarized in this section. The recommendations should be in bullet points .E.g.recommendations should be in bullet points .E.g.

We recommend that you increase your PF We recommend that you increase your PF contribution by Rs. 3000 every month.contribution by Rs. 3000 every month.

We recommend you to increase your Life We recommend you to increase your Life insurance cover to Rs. 4,00,000 insurance cover to Rs. 4,00,000

Format of a Written Financial PlanFormat of a Written Financial Plan

8. Actions to Proceed:8. Actions to Proceed: In this section the financial planner will write down the steps to be In this section the financial planner will write down the steps to be

taken to proceed with the implementation of the plan. The planner taken to proceed with the implementation of the plan. The planner firm will require the client firm to sign a “Letter of Engagement”, the firm will require the client firm to sign a “Letter of Engagement”, the format of which will be enclosed with the plan. format of which will be enclosed with the plan.

The applications for the recommended investments will be filled up The applications for the recommended investments will be filled up and deposited along with the cheques for the requisite amounts. and deposited along with the cheques for the requisite amounts. The completed forms will be submitted to the different institutions. The completed forms will be submitted to the different institutions. After around 3-4 weeks a further meeting with the client to be 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 scheduled to check with the client about receipt of the certificates or account statements.account statements.


9. Disclosures:9. Disclosures:

In this section disclosure about services and fee will be In this section disclosure about services and fee will be made. The fee for preparing the financial plan will be made. The fee for preparing the financial plan will be mentioned and any other form of commissions to be mentioned and any other form of commissions to be received by the financial planning firm will be stated.received by the financial planning firm will be stated.

10. Disclaimers:10. Disclaimers:

Disclaimers means not to claim responsibility for the result Disclaimers means not to claim responsibility for the result of the financial plan because a financial planner may not of the financial plan because a financial planner may not be held liable for the events which are beyond his control be held liable for the events which are beyond his control and which has adverse effect on the performance of the and which has adverse effect on the performance of the recommended schemes.recommended schemes.

END OF Topic 1END OF Topic 1

Introduction to Financial Planning

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