financial problems by tomsgreathits


									                    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
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
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
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
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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