Steps in Financial Planning

7/31/2019 Steps in Financial Planning

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Steps in Financial Planning

Steps in financial planning are:Asset Allocation

Selection of Instrument Studying the features of a instrument Financial planning is concerned only with broad asset allocation,

leaving the actual selection of securities and their management to

fund managers.

A financial planner has to closely follow the objectives stated in the offer document,because financial plans of investors are chosen using these objectives.

Investor & Financial Planner

The financial planner can only work with defined goals and cannot take up largerobjectives that are not well defined.

The client is responsible ultimately for realizing the goals of the financial plan. The basis of genuine investment advice should be financial planning to suit the investor's

situation

Risk tolerance of an investor is not dependent on the market, but his own situations.


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Benefits of Financial Planning

Provides direction and meaning to financial decisions To understand how each financial decision effects other areas ofones finances By viewing each financial decision as part of a whole one can consider its short and long

term effects on ones life goals

Attributes of a Good Financial Planner

Understands:

The universe of investment products Risk-return attributes Tax and estate Planning Has the ability to convert life cycles of investors into need and preference based financial

products

Organised approach to work Excellent communication and interpersonal skills


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Process of FP in Practice

Step I: Establish and define the relationship with the client Step II: Define the clients goals Step III: Analyze and evaluate clients financial status Step IV: Determine and shape the clients risk tolerance level Step I: Establish and define the relationship with the client Step II: Define the clients goals Step III: Analyze and evaluate clients financial status Step IV: Determine and shape the clients risk tolerance level


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Life Cycle and Wealth Cycle

Life Cycle classification of investors Childhood stage Young adult Young married with children Middle age Retirement Post retirement The ability of an investor to save, his income and dependence on investment income, his

investment horizon and risk taking ability depend on the phase of the life cycle he is in.

Wealth Cycle Classification

Accumulation StageInvestor is earning and has ability to invest and requires no supplementary

income from investments

Transition StageInvestor is able to save, but has also started drawing on his investments to meet

his financial goals.

Distribution StageInvestor is not earning and has ability to invest has reduced and requires

supplementary income from investments


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Other Wealth Stages

Inter-generational Fund Transfer The investment of funds depends on the the beneficiary Sudden Wealth Surge Investments on funds from winnings and lotteries to be done carefully. It is safe to

invest in a short tern fund and allocate assets later.

Affluent Investors Wealth creating investors prefer to invest in equity Wealth preserving investors prefer to invest in debt

Developing a Model Portfolio

Develop long term goals Investment avenues, time horizon, return and risk Determine asset allocation Allocation to broad asset classes Determine sector distribution Allocation of sectors of the mutual fund industry Select specific fund schemes for investment Compare products and choose actual funds to invest in


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Health Insurance ______________ ______________

Pension Plan ______________ ______________

oWhat would your annual net cash flows be?

Net Annual Cash flows INR ______________

INVESTMENT OBJECTIVE

o What is the ultimate purpose of your investable assets?

_____ Preservation of capital (No appetite for risk)

_____ Regular cash inflows (Funds needed periodically for expenses)

_____ Liquidity (Money possibly required for other purposes, to be invested in very liquid or

short term assets)

_____ Growth (May need money in 2-3 years)

_____ Retirement (Long term investments)

o What are the specific needs that you envisage at this time? (Needs could be education,marriage of children/family member(s), an asset purchase etc.)

Need Details of Need Amount Needed When

1

2

3


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A qualitative view on other needs

oWhat is the average time frame that you normally envisage for your investments?

Less than six months

Six months to one year

One year to three years

More than three years

EQUITY RETURN EXPECTATIONS

o Specifically with regard to equities, what is the return you are expecting from yourinvestments in equities, over the long-term?

0-8% growth - Safe, relatively low risk equities or debt as a alternative

8 - 18% growth - Medium risk, medium returns

>18% growth - High risk of returns, and principal erosion

o Alternatively, what is the level of risk you are willing to take on your wealth?

I do not want to risk interest or principal

I will only be comfortable with small degree of risk (i.e. to income, but not to capital.)

I am comfortable accepting the risk that the value of my investment could decline from

time to time

I am willing to tolerate putting my principal at risk by investing in volatile investments


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o How would you rate your ability to stick with a given investment as its value fluctuates duringa market cycle?

Low Medium High

EQUITY PREFERENCES

(If the client opts out for pure debt advice, skip this section)

o While designing your portfolio, it is important to understand any specific preferences for oraversions towards any particular scrip that you may have. Is there anything that we need to

keep in mind while designing your portfolio? (E.g. do you specifically want low priced shares,

or all investment in A group only, shares which offer good dividend yields etc.)

PERSONAL LEVEL OF INVOLVEMENT

How involved do you want to be in managing your investments with us?

I will accept most of the advisors recommendations

I want to make all decisions concerning my investments, but receive active counseling

from the bank

I want to make all decisions concerning my investment and require only research support


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PORTFOLIO ASSET ALLOCATION

o Desired level of Risk (High/Medium/Low) ____________o The agreed strategy on asset allocation for you, if a asset allocation portfolio is being tracked

Plan Variations from plan

(Strategic) (Tactical)

Equity or equivalent _______% +/-_______%

Debt or equivalent _______% +/-_______%

Cash or equivalent _______% +/-_______%

o Desired level of insurance would be INR _______________oro Percentage of wealth _______________

o Specific Equity Products that you would be advised on (please tick)o Market Information _________o Super Aggressive portfolio _________o Trading Strategies (derivatives) _________o Trade Ideas _________o Stock Ideas _________o Aggressive recommendations _________o Conservative recommendations _________o Other specific requirements that define the relationship on communication period, specific

reports needed, and specific needs in terms of information type, etc Any levels of equity

profits/losses that you want to work with. Any specific points defined by the advisor.


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Please Note:

1. No returns are guaranteed in any asset category2. The equity class (including derivatives) is a high risk high return asset category. Investments in

this category are subject to market volatility and investors could make sharp losses if one does

not have a long-term approach to equity investing. In some cases debt exposures also carry

volatility risk. Proper asset allocation is therefore recommended to all investors

3. In the equity category itself, which is a high risk category the risk is the highest in productsbased on market information / technical and lowest in products based on fundamental

recommendations.

Client Sign _________________________

Advisor Sign _________________________


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Strategy Formulation

Strategy on What Product mix for the Investor, When to buy the Products selected and the steps

involved in completing the entire process is critical. The Product Mix has to be on the basis of

What Investor really wants?Rather than What theAdvisor wants to sell?

At this stage the Investors Profile would serve as an important tool to decide What Investor

really wants? This includes factors like his/her current assets and liabilities, liquid cash that

he/she is holding, futures inflows and outflows, number of dependents, annual income from all

sources, age, risk appetite and investment horizon (both short term and long term).

Implementation of the Strategy so decided

Based on the findings from Customer Profiling, the Advisor has to make a detailed plan on

what products to choose from the above mentioned available products in the market.

After zeroing in the Products, it is very critical to decide on the timing (though one can not time

the market however appropriate timing should be thoghtful and careful and in favour of the

Investor), as in When to buy the Products. Also what would be the cost to the customer in the

products. This goes true for the products like Real Estate, Any product which is Market linked

(E.g., Equity, Unit Linked Products).


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Asset Allocation and Model Portfolios

What Does Asset Allocation Mean?

An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets

according to an individual's goals, risk tolerance and investment horizon.

The three main asset classes - equities, fixed-income, and cash and equivalents - have different

levels of risk and return, so each will behave differently over time.

There is no simple formula that can find the right asset allocation for every individual. However,

the consensus among most financial professionals is that asset allocation is one of the most

important decisions that investors make. In other words, your selection of individual securities is

secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents,which will be the principal determinants of your investment results.

Asset-allocation mutual funds, also known as life-cycle, or target-date, funds, are an attempt to

provide investors with portfolio structures that address an investor's age, risk appetite and

investment objectives with an appropriate apportionment of asset classes. However, critics of this

approach point out that arriving at a standardized solution for allocating portfolio assets is

problematic because individual investors require individual solutions.

Steps Involved:

Deciding the allocation of funds amongst equity, debt and money market. Incorporating product, investor profile and preferences in the portfolio. Equity, debt and money market products are called asset classes. Allocating resources to each of these is called asset allocation


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Model Portfolios for different investor attitude

Series1, Cash,

40, 40%Series1, Debt

Insturments,40, 40%

Series1,

Equity, 20,

20%

Cautious Investor

Series1, Cash,

10, 10%

Series1, Debt

Insturments,

50, 50%

Series1,

Equity, 40,

40%

Balanced Approach


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Series1,

Cash, 5, 5%

Series1, Debt

Insturments,25, 25%

Series1,

Equity, 70,70%

Aggressive Approach


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Other important aspects of wealth management

Customer Service

What is customer service?

Customer service is research, marketing and public relations at the most basic level. It is your

bridge to building a strong one-to-one relationship with your client. Through listening,

responding and acting on input from your customer, it is the avenue to developing current and

future profits through customer satisfaction.

Quality customer service begins when managements philosophy and attitude are conveyed to

the customer through the front line staff (say Investment Advisor). Training and empowering

your employees provides the core to developing a fully integrated customer service program.

Can customer service be taught?

While specific techniques can be taught, customer service is more of a spirit where

responsibility and care for the customer is reflected in the attitude of the employee. It is best

encouraged through coaching, led example and cultivated through practice. Leadership is

required to foster an atmosphere where the employee is made comfortable with taking the risks

associated with this responsibility. Therefore selection ofright kind of people is most critical

job for any Wealth Management Company.

One of the most controllable features that differentiates your product from the competition is

the level of service you provide. Any business can sell the product you offer many can offer a

lower price. The single feature that can shift the weight on the price/value scale is the valueadded level of service you provide. Quality is apparent when value exceeds the price. This is

your competitive edge. This "edge" generates references and not to forget references in this

industry is the Key to Success.


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What kind of Services do Investors expect?

Availability of information Update on the Investment Portfolio Convenience New Product offering Reviewing the Portfolio on mutually decided time To check on timely basis if the Portfolio so decided is moving toward the ultimate

Investment Objectives set initially.

Modifying the allocation as and when required

Risk Management

What Is Risk?

Risk provides the basis for opportunity. The terms riskand exposure have subtle differences in

their meaning. Risk refers to the probability of loss, while exposure is the possibility of loss,

although they are often used interchangeably. Risk arises as a result of exposure. Exposure to

financial markets affects most investors, either directly or indirectly. When an Investor has

financial market exposure, there is a possibility of loss but also an opportunity for gain or

profit. Financial market exposure may provide strategic or competitive benefits. Risk is the

likelihood of losses resulting from events such as changes in market prices. Events with a low

probability of occurring, but that may result in a high loss, are particularly troublesome because

they are often not anticipated. Put another way, risk is the probable variability of returns. Since

it is not always possible or desirable to eliminate risk, understanding it is an important step in

determining how to manage it. Identifying exposures and risks forms the basis for anappropriate financialrisk management strategy.


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Different types of Risks:

Interest rates risk Credit risk Exchange rates risk Commodities prices risk

Factors that Affect Interest Rates:

Interest rates are a key component in many market prices and an important economic

barometer. They are comprised of the real rate plus a component for expected inflation, since

inflation reduces the purchasing power of a lenders assets. The greater the te rm to maturity,

the greater the uncertainty. Interest rates are also reflective of supply and demand for funds and

credit risk.

Factors that influence the level of market interest rates include:

Expected levels of inflation

General economic conditions

Monetary policy and the stance of the central bank

Foreign exchange market activity

Levels of sovereign debt outstanding

Financial and political stability


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Factors that Affect Foreign Exchange Rates

Foreign exchange rates are determined by supply and demand for currencies. Supply and

demand, in turn, are influenced by factors in the economy, foreign trade, and the activities of

international investors. Capital flows, given their size and mobility, are of great importance in

determining exchange rates.

Factors that influence the level of interest rates also influence exchange rates among floating or

market-determined currencies. Currencies are very sensitive to changes or anticipated changes

in interest rates and to sovereign

risk factors. Some of the key drivers that affect exchange rates include:

Interest rate differentials net of expected inflation

Trading activity in other currencies

International capital and trade flows

International institutional investor sentiment

Financial and political stability

Monetary policy and the central bank

Economic fundamentals

Factors that Affect Commodity Price

Physical commodity prices are influenced by supply and demand. Unlike financial assets, the

value of commodities is also affected by attributes such as physical quality and location.


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Commodity prices may be affected by a number of factors, including:

Expected levels of inflation,

Interest rates

Exchange rates, depending on how prices are determined

General economic conditions

Costs of production and ability to deliver to buyers

Availability of substitutes and shifts in taste and consumption patterns

Political stability, etc


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Steps in Financial Planning

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