Financial Planning is planning for the future. It involves preparing oneself and their family for important events like child education, retirement planning, cash flow planning, taxation, vacation, health corpus creation and just about any event in the future. The above mentioned components form goals or the structure of the planning process.
One needs to understand that Financial Planning is NOT only about investments. And it is definitely not just another fancy word for investing in stock markets. Financial Planning is a holistic approach to your Personal Finances which takes into consideration your Cash flows, Assets and Liabilities, Risk appetite, investment needs to meet your Financial Goals, Insurance needs after considering all existing assets and resources one owns.
Why is Financial Planning necessary
People haven’t still wizened up to the benefits of a professional advice, they are aware of the changing scenario and feel the need to plan for their long-term commitments. Such planning and investments are not made with adequate research and are very often done on an adhoc or push basis and people end up accumulating financial products that do not fit their need or worse have high costs but give low returns.
Unfortunately, majority of savings in Indian households lie in Fixed Deposits and PPF accounts which are low interest earning and sometimes don’t even cover inflation. Hence real returns are negative.
Hence, it is imperative that an individual seeks professional advice to get their finances in order.
What is a Financial Plan
A Financial Plan is a personalised detailed document, which helps the client to identify what their current financial condition is, where they would like to go and help planning and bridging the gaps if any, for helping the client meet their future goals.
Financial Plan Process
The Financial plan process starts from identifying the objective, needs and scope of engagement with clients. Data gathering is the first and most important step towards identifying one’s current financial condition. It is the most important step, because the data provided by the individual, should be accurate and up-to-date, for the planning process to be effective and meaningful.
This process involves gathering data of all aspects of finance of a client such as
Family details and background, including health condition.
Net worth Details.
Cash flow – Detailing All sources of income and expense of the client – Fixed and Discretionary, including any committed savings.
Analysis of Existing Loans and Liabilities and the best option for reducing and optimising the same.
Analysis of existing insurance policies and their need.
Analysis of additional insurance basis the family needs, goals, existing insurance and liabilities.
Analysis of existing financial assets and changes needed, if any.
Analysis of Non-Financial Assets and plan of action.
Asset Allocation based on the risk profile of the client.
Existing resource allocation for meeting goals of clients.
After the data gathering process is accurate and up-to-date, the planner, analysis’s the data provided based on the objectives, needs and goals of the client. Here the planner makes observations on the clients Strengths, Weakness, Opportunities and Threat (SWOT) of the client.
The next step is presenting the analysis and planning that is customised to the needs of the client to the client and discussing options, scenario changes like advancement or postponement of goals and their probability and providing a revised financial document to the client.
Every Financial Plan must have an action plan to direct the client- what next and how to go about meeting the goals. Implementation of a financial plan is the key to moving to the next level. If a financial plan is not implemented, the objective is defeated and the client cannot move to the next step towards financial freedom.
After implementation, an annual goal review must be planned and prepared for the client, considering factors changing data points in income sources, expenses, goal priority, and assumption rates, risk profile of the client and any special requirements or changes in client’s life.
This completes the financial plan process.
All financial plans consider the following
Assumption on rates of interest, rates of inflation, salary growth rates, life expectancy, current market conditions, basis discussion with the client.
Current Status of Financials- Every financial plan is as on date and is likely to change based on changing circumstances.
Understanding and documenting Risk- Risk profiling and tolerance of the client to enable him/her plan for their savings realistically to meet their goals.
A Financial Planner has to undergo rigorous training and examinations to obtain the certification. They are certified in important aspects relating to personal finance like investments, insurance, taxation, Estate Planning. Further, the certification requires candidates to have practical experience of minimum three years to practice independently and keep abreast of latest developments on a continuous basis.
Clients must look for the gold mark certification – CFP or Certified Financial Planner, which is an accreditation given to planners by Financial Planning Standards Board of India after completing 6 modules of learning and writing exams.
Further, to maintain this qualification, an annual criteria is required. This comprises of writing articles, or attending financial plan workshops/conferences, answering quizzes, or contributing to the financial plan journal of the Financial planning Journal published by Financial Planning Standards Board of India.
The initiation of such Qualifications and Certifications have been introduced to help protect investor interest against miss-selling and fraudulent advice.
There is a popular adage often attributed to Benjamin Franklin, the father of time management, “Failing to plan is planning to fail. So ensure every individual has a financial plan prepared by a certified and well qualified planner.
(Originally written for Financial Planners Guild of India)