Financial Plan Construction Financial planning is the process of helping the clients achieve their financial goals and fulfill their needs in a disciplined, systematic and scientific manner taking a holistic view of their life. Certified Financial Planners are encouraged to follow the six step process while providing financial planning services. Establishing Relationship Data Gathering and Goal Setting Analysis of Information and Identification of Financial Problems Preparation of Written Alternatives/Recommendations Implementations of the Plan Periodic Review and Revision of the Plan Step 1: Establishing Relationship The first step in Financial Planning process is towards building a professional relationship with the prospective client and establishing the credibility and integrity of the planner. Every professional relationship is built upon the foundation of ‘trust’. If the foundation is strong, the relationship will also be long lasting, may be through generations. The trust a client places in a financial planner carries with it a preparedness to expose himself to certain risks in reliance upon the advice of the financial planner. Naturally, the client will want to know whether he can repose that confidence upon you. In this respect, the first meeting is of vital importance to the client. Initial Client Meeting The initial meeting is an opportunity to get to know the client, build the relationship and inspire confidence. Confidence carries with it a sense of safety and security. Individuals who believe or understand there to be a relationship of confidence are able to be open, honest and frank with the financial planner and provide accurate information which is crucial raw material for preparing a plan. It gives you the opportunity to get to know the client more generally, explore with the client other issues of concern and explain fully your role. Explain Your Role First, the planner should briefly explain to the client about himself, his firm and services being offered. Remember, clients are interested in your business as you are in theirs. You might explain the process of comprehensive financial planning and how it may differ from the work of an investment advisor. Many Indian investors are not aware of the financial planning profession and that there are many advisors who claim to be offering financial planning services yet are simply sellers of financial products. Distinguish the importance and value of you services over those offered by the competitors. Discuss how products are selected and strategies are developed. If you have independent research, briefly explain how it works. Also explain the implementation process; importance of ongoing review and services. This is the one area that can differentiate your from those engaged in product selling. You may also need to temper unreasonable expectations that your prospective client may have. Also, discuss after sale services and delivery systems. Defending the Scope of Engagement The services provided by a financial planner or required by a client many range from a recommendation about one particular investment to preparing a comprehensive financial plan. An engagement statement makes it clear what is required and being provided and helps avoid misunderstanding at a later stage. Before the first meeting is concluded, financial planner and the client should mutually define the scope of engagement which may include the following: Identifying the services to be provided. Disclosing financial planner’s compensation arrangement(s). Determining the client’s and financial planner’s responsibilities. Establishing the duration of the engagement. Providing any additional information necessary to define or limit the scope. Clarity of the scope of engagement enhances the likelihood of achieving client expectations. It provides a framework for the financial planning process by focusing both the client and the financial planner on the agreed upon tasks. This enhances the potential for positive results. Step 2: Data Gathering and Goal Setting Data Gathering Prior to making any recommendations the planners should ensure that sufficient, relevant and accurate information has been obtained from the client. This is generally known as ‘Know Your Client Rule, wherein the financial planner has a duty to have a thorough knowledge of client’s situation before providing any recommendations. Code of Ethic of Diligence-Rule 703 refers. The planner should obtain sufficient and relevant quantitative information and documents pertaining to client’s financial resources, obligations and personal situation. This information may be obtained directly from the client or other sources through interview, questionnaire, client records and documents. Few financial planners believe that first meeting is more appropriate opportunity to complete a data collection form. Actually, it depends on the kind of data or information required. General information like client’s profession, family, health etc could be discussed during the initial meeting but for more specific data related to investments, insurance, retirement fund balance etc., either second meeting is required or data collection sheet should be left with the client which can be collected later on. The financial planner should also communicate to the client a reliance on the completeness and accuracy of the information provided and that incomplete or inaccurate information will have an impact on the conclusions and recommendations. If you are unable to obtain sufficient and relevant information and documents to form a basis for the recommendations, you can either: a. restrict the scope of the engagement to those matters for which sufficient and relevant information is available; or b. terminate the engagement. You should always communicate to the client any limitations on the scope of the engagement, as well as the fact that these limitations could after the conclusions and recommendations. Types of Information Required Information to be collected from the client can either be as quantitative or qualitative: Quantitative information may be described as statements of fact. A client’s name, age, income, household expenses and so on. Qualitative information is more difficult to obtain. It may be defined as relevant information that is not factual in nature. Examples of qualitative information include attitude to risk, future employment prospects etc. qualitative information relates more to the personal and social attitudes of the client. These aspects are very important in the development of a plan containing recommendations in keeping with what a client will find acceptable. In some cases, you may need to obtain qualitative information inferentially. This means that through the client’s statements or comments, you may be able to infer information that will be used in framing your advice. Use of Data Collection Forms Easiest way to ensure that you have the required quantitative and qualitative information is to use a data collection form. As verification of the information provided, you must get the data collection form signed by the client. The data collection form should contain at least the following information: a. Personal details-age, health status, profession, family details etc. b. Financial details-income and expenses, assets and liabilities, investments etc. c. Attitude to risk and other qualitative information e.g. level of sophistication as an investor, past investment experience etc. Special attention should be given to client’s risk profile. It sets the boundaries of play in the market and the point of risk-return trade-off. Goal Setting One of the important tasks of the financial planner is to help clients define their financial and lifestyle goals. These may include Buying a house/car Upgrading the house or car Funding children education and marriage expenses. Funding retirement target corpus Accumulating assets or wealth to a defined level Funding word tour expenses and many more Sometimes when clients are not aware about the future capital needs or goals, the financial planner should motivate and help clients define their goals. Time Frame Based on the client’s time horizon for goals, the financial planner should categorize them in short, medium or long-term. Prioritizing The Goals The financial planner should also help the clients prioritize their goals in the order of necessity and importance so that available resources can be utilized for the important goals first. Optimizing the goals The financial planner should match the client’s available resources with the goals to check whether these goals are achievable comfortably. If all the goals are not achievable with the available resources or goals are unrealistic, the financial planner should inform the client and may give the following options to the client: Increase the income or cut down the expenditure, or Postpone some of the goals, or Sacrifice less important goals to achieve more important goals, or Reduce some or all of the goals in proportion. When excess resources are available, you should help the client to add some more financial or lifestyle goals or upgrades this standard of living. Step 3: Analysis of Information and Identification of Financial Problems The third step after getting all the required information is to analyze this information and identify financial problems, if any. Identifying Critical Needs Where an issue, gap or deficiency is immediate, such as lack of adequate protection covers, lack of a current will or paying a very high rate of interest on credit card dues, it becomes a problem. These problems are critical and should be addressed first before proceeding to the goal funding strategies. Identifying Future Needs When the future outcomes of the financial strategy are falling short to achieve the goals, it becomes a future problem. In this case, the financial planner should suggest the client alternative strategies like changing the asset allocation or gearing etc. to achieve his goals. Step 4: Preparation of Written Alternatives/Recommendations After analyzing the information, the financial planner will develop alternative strategies and give final recommendations to help clients achieve their goals and fulfill their needs. The financial planner will formulate and evaluate various alternative strategies keeping in mind the clients needs, goals, personal circumstances, financial position, time horizon and risk taking capacity; and recommend the best suitable strategy. Common Strategy Areas in Comprehensive Financial Planning A financial planner has to work on the following strategic areas while preparing a comprehensive financial plan: Risk management and insurance planning Investment planning Asset purchase and asset up gradation planning Tax planning Retirement planning Children future planning The financial planner must weigh pros and cons of all the possible alternatives before making the final recommendations to the client The plan should be written in a simple and professional language with a logical flow of information. It should be in proper format with explanatory diagrams, charts and illustrations to make the client understand it easily. Step 5: Implementation of the Plan Once the plan has been prepared, it has to be presented to the client. While presenting the plan you should explain to the client recommended financial strategies, their rationale and how these strategies have the potential to enhance the client’s chances of achieving his goals. If the client agrees to the recommendations, seek his consent in writing to implement the plan. If the client wants any modification or variations in the recommendations, this should be noted in writing in the plan or if possible, get a written request from the client. Final agreed upon recommendations after incorporating the changes, if required, are now to be implemented. These may be in the form of new investments, redemption or switch of existing investments, buying insurance or pension plans, updating the will etc. etc. It is also important that all the transactions should be recorded correctly; copy of all the documents should be filed properly and kept at a safe place and in a safe mode for future reference. After implementation is completed, you should contact the client to ensure that all the relevant investment certificates and policy documents have been received and are in order. You should also update your records accordingly. Step 6: Periodic Review and Revision of the Plan Implementation of the plan is only the beginning point for a long-term on-going relationship. As we live in a dynamic world, ever-changing circumstances make it necessary to periodically review the outcomes of the recommendations and revise the plan if needed so that the client achieves his goals in the desired and planned manner. Define the Scope of the On-Going Services The type of on going or review services to be provided in future should be decided beforehand and should be explained to the client clearly. These may include: Periodic portfolio valuations and account statements Strategic reviews Portfolio reviews Information on new investment opportunities Periodic newsletters or research reports Frequency of the review can be decided upon mutually with the client depending up on the size of the portfolio, type of investments or sophistication level of the client. Fees for various on-going services should also be clarified to the client in writing.
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