Introduction to Financial Planning Why Financial Planning is needed? Financial Planning Process
Financial Planning facts Expectations from Financial Advisors and Clients  

Introduction to Financial Planning

Financial Planning is an ongoing process to help you make sensible decisions about money that can help you achieve your goals in life. In other works, financial planning is a systematic approach whereby the financial planner /adviser helps the customer to maximize his existing financial resources by utilizing financial tools to achieve his financial goals.

In mathematics terms, financial planning can be described with three major components:

  • Financial Resources – FR
  • Financial Tools – FT
  • Financial Goals – FG.

When you want to maximize your existing financial resources by using various financial tools to achieve your financial goals, that is financial planning.

Financial Planning: FR + FT = FG

Financial planning is about the process of meeting once life goals through proper management of one's finances. Life goals can include buying a home, saving for child's education or planning for retirement. It is a process that consists of specific steps that help one to take a big-picture look at where you are financially. Using these steps one can work out where he are now, what he may need in the future and what he must do to reach his goals.

Why Financial Planning is needed?

Financial Planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. By viewing each financial decision as part of the whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.

The need for financial planning thus arises from the need to meet the financial goals that enable the achievement of one's life goals. Generally everyone invests in the various available avenues but very few investments are linked to individual goals. All of us have goals to be fulfilled at every stage of life. Life and financial goals are very diverse and are as under :

  • Protecting Oneself & Family against Financial Risks : The loss of a job, a serious illness, a legal problem, a sudden death, an accident or a natural disaster will prompt seeking a financial advice. Financial planning will help in analyzing ones insurance needs (disability and long-term care) in relation to ones overall financial circumstances and goals. Moreover, in addition to all these uncertain risks, all investments have certain risks as well, such as market risk, inflation risk, interest rate risk & reinvestment risk. Financial Planning helps in reducing and managing all these risks. Prevention is better than cure so its better to start planning.
  • Organize and Manage Finances : Many people have complex financial life, yet lack the time, expertise, discipline and objectivity to put their finances in order. Financial Planning will help in examining the overall net worth, financial situation, goals and objectives, and recommend strategies to get the most from their investments, so that life's goals are achieved.
  • Achieving Personal Goals Such as Child Education, Marriage, Car, Home : Everyone has his own set of individual financial goals. Yours may include funding a child's college education, enjoying a comfortable retirement, purchasing a home, starting your own business, minimizing your tax costs, or any combination thereof. But no matter which financial goals you choose, developing a comprehensive financial plan will help you in achieving them in a systematic manner.
  • To be Able to Retire Peacefully : Retirement is like going on a long vacation where the expenses are increasing and there is no regular income, hence it is very important to have enough retirement kitty before retirement. Moreover as the life expectancy has increased nowadays, there should be enough kitty to avail the medical expenses, which will also increase at the time of retirement due to the rising cost of living and inflation. With the help of Financial Planning one can get a clear picture of the kind of lifestyle one wishes at the time of retirement and hence can plan accordingly.
  • Passing Wealth to Next Generation : Estate planning will ensure that your assets will be used to benefit the people that you choose, and in the amounts chosen by you. A Financial planners is needed to discuss wills, living wills, powers of attorney, life insurance, trusts and other estate planning issues. A well-drafted estate plan provides assurance that the taxes and costs associated with your death will be minimized.

Benefits of Financial Planning:

  • Knowing & understanding your financial needs / goals.
  • Achieving your goals with optimum use of resources
  • Understanding impact of investment choices
  • Adapting to changes in personal & financial situations
  • Peace of mind – ensuring that your goals are not compromised

Financial Planning Process

Financial planning, especially at an early age can help to give your life focus and help you to achieve your goals in life. Financial planning gives you a set of tools to create wealth and build up a nest egg that you can use in case of emergency. Financial planning also gives you direction, direction you need to make informed decisions about investments so that you won't make any mistakes and you can reap the benefits for the rest of your life.

The Financial Planning Standards Boards (FPSB) defines the financial planning process as consisting of the following six steps. We have just reproduced the exact process prescribed

  • Establish and define the client-planner relationship:

    The financial planner should clearly explain and document the services that he or she will provide to clients and define both his/her and clients responsibilities during the financial planning engagement. The financial planner should explain fully how financial planner 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.
  • Gather client data, including goals:

    The financial planner should ask for information about client's financial situation. The client and the planner should mutually define the client's personal and financial goals, understand your time frame for results and discuss, if relevant, how the client's feel about risk. The financial planner should gather all the necessary documents before giving the clients the advice they need.
  • Analyze and evaluate your financial status:

    The financial planner should analyze the client's information to assess the current situation and determine what must be done to meet the client's goals. Depending on what services the client's have asked for, this could include analyzing the client's assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.
  • Develop and present financial planning recommendations and/or alternatives:

    The financial planner should offer financial planning recommendations that address the client's goals, based on the information provided by clients. The planner should go over the recommendations with clients to help you understand them so that the clients can make informed decisions. The planner should also listen to the client's concerns and revise the recommendations as appropriate.
  • Implement the financial planning recommendations:

    The client and the financial 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 process with the client and other professionals such as attorneys, accountants or stockbrokers.
  • Monitor the financial planning recommendations:

    The client and the financial planner should agree on who will monitor the client's progress towards your goals. If the planner is in charge of the process, he or she should report to the client periodically to review the situation and adjust the recommendations, if needed, as the client's life changes.

Financial Planning Facts:

  • Financial Planning is a Process and discipline: Any Financial Plan provides a brief on your financial goals and a way to achieve them. It can help you focus on your financial resources and goals, and create a plan of action for attaining your dreams. However, your situation will change constantly over time, due to changes in your personal circumstances or in external circumstances. As a prudent person, you should review and update your Plan periodically; to be sure it still meets your needs.
  • Financial Planning is Not Precise and provides 'No Guarantees': The projections or results of any Financial Plan are not precise and are often based on the information provided plus many assumptions & workings. The future is uncertain and planning for large number of years in advance is difficult. One should use Financial Planning for guidance in order to plan for the foreseeable future and do regular review of the same. Prudent financial planning may increase your chances for success, but cannot guarantee your goals will be achieved.
  • Financial Plan – Understanding assumptions/ disclosures is important A Financial Plan is often based upon many assumptions and has certain inherent limitations attached to it. Further,there are also many other features, issues which you would like to know beforehand. Such assumptions, limitations, features, issues, etc. should be detailed in financial plan and you should through the same at leisure. The information includes assumptions about future returns on products, your income growth, inflation assumptions, etc., disclosure on calculation methodology and limitations, etc.

Expectations from Financial Advisors and Clients:

The financial planning is a joint exercise that will be successful only with it is undertaken with full understanding, commitment and trust between both, the financial advisor and the client. The following are the broad expectations from both of the parties for ensuring success of any financial planning exercise.

Expectations from Financial Advisors

  • Preparing a suitable personal financial plan for clients
  • Making comprehensive recommendations for investment, protection needs & strategies
  • Implementation support for your investment, protection needs & strategies
  • Periodical assessment of personal, financial situation and review of the finalized financial plans
  • Keeping track of your investments and updating you on same

A financial Advisor must:

  • Put their clients’ best interests first;
  • Act with due care and in utmost good faith;
  • Not mislead clients;
  • Provide full and fair disclosure of all material facts; and
  • Disclose and fairly manage all material conflicts of interest.

Expectations from clients

  • Provide all material and relevant data, information for financial planning. The financial plans shall be limited by the information shared by clients
  • Intimate financial advisors of the ongoing changes and updates in personal, financial situation
  • Actively participate in the entire financial planning process and provide time for same
  • Respect the financial recommendations made/suggested as per requirements. Please note that, there is no commitment from client's side and one is free to make own decision

Making the Financial Plan Work

The clients are the focus of the financial planning process. To achieve the best results from your engagement, I is better to avoid some of the common mistakes in financial planning process...

  1. Set SMART - 'Specific, Measurable, Achievable, Relevant, Time-bound' Goals for the clients
  2. Understand the explicit and implicit costs and effects of each financial decision and non-decision
  3. Periodic review of financial situation and the life goals /objectives is necessary
  4. Cover all essential areas /aspects of life and explore emerging situations
  5. Do not procrastinate implementing financial plans or taking any financial decisions
  6. Be realistic in expectations and make proper assumptions
  7. Disclose all important matters to client
  8. Focus only on areas that are strong and ignore weak areas
  9. Ignoring taxation

Financial Advisors must realise that:

  1. Financial planning is for everyone – rich or poor.
  2. It never too late to do financial planning. The sooner the better.
  3. Financial planning is different from investing or portfolio management
  4. It is important to collect all relevant information and save all financial planning related documents
  5. SEBI (Investment Adviser) Regulations, 2013 may be applicable to them

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