Comprehensive Financial Planning is the process of meeting your life goals through the proper management of your finances.
Life Goals for e.g. are
- Buying a House
- Children’s Education
- Children’s Marriage
- Retirement
- Tax Optimization
The Comprehensive Financial Planning Process consists of six steps viz.
- Establish and define the client-Planner relationship
The Financial Planner clearly explains or documents the services provided to Client. He / She defines responsibilities for both parties. The contract should specify and explicit on compensation to Planner by Client, assumptions, restrictions and limitations to give unbiased advice, disclose any conflicts of interests and validity of the professional relationship.
- Gather client data, including goals
The Financial Planner gathers information about the Client’s financial situation, personal & financial goals and all the necessary documents before giving the advice.
- Analyse and evaluate Client’s financial status
The Financial Planner analyzes the Client’s information to assess his/her current situation and determines the actions required to meet goals. Planner analyses Client’s assets, liabilities, cash flow, current insurance coverage, investments and tax strategies.
- Develop and present Financial Planning recommendations and/or alternatives
The Financial Planner offers Financial Planning recommendations that address the Client’s goals, based on the information provided. The Planner walks through the recommendations
- Implementing the Financial Planning recommendations
Client and the Planner should agree on the action plan of the recommendations. The Planner may serve as ‘coach’, coordinating the whole process with Client and other professionals such as solicitors or stockbrokers.
- Monitoring the Financial Planning recommendations.
Client and the Planner agree on how to monitor Client’s progress towards your goals. Plan, recommendations, actions should be monitored periodically, at least, quarterly. During this period, it is likely Client’s situation/life may undergo change requiring a change in Plan & Recommendations
Using these six steps, Planner can assess As Is, To Be situations and actions required to reach goals. The process involves gathering relevant financial information, setting life goals, examining Client’s current financial status and coming up with a strategy or plan for how you can meet your goals given your current situation and future plans.
The Benefits of Comprehensive Financial Planning
- provides direction and meaning to financial decisions
- It allows understanding how each financial decision impacts other areas of finances. For example, investing in Mutual Funds may help to pay off the mortgage faster than Post Office instruments. Or it may delay building retirement corpus significantly.
- The client can also adapt more easily to life changes and feel more secure that goals are on track.
Who is a Financial Planner?
A Financial Planner is one who uses the Financial Planning process to help the Client figure out how to meet life goals. The Planner can take a ‘big picture’ view of Client’s financial situation and make Financial Planning recommendations that are suitable for you. The Planner can look at Budgeting and saving, taxes, investments, insurance and retirement planning. This big-picture approach to Client’s financial goals sets the Planner different from other Financial Advisors, who are trained to focus on a particular area of your financial life.
Is it possible to do Financial Planning, without a Financial Advisor?
The client should decide to seek help from a professional Financial Planner if:
- The client doesn’t possess expertise in certain areas of your finances like Life Risks, Investment Risks, Retirement Corpus required.
- Financial Plan needs a Scientific approach
- The client is facing Emergencies like severe illness, Employer terminated Job, inheritance of ancestral property
- The client wants to improve the management of current finance
How to make Financial Planning work for you?
The success or accuracy of your Financial Planning lies in collaborative efforts of both Financial Planner and Client. It is equally the Client’s responsibility also. Please follow the below guidelines :
Set measurable goals
Client’s financial goals must be SMART
S – Specific. For e.g., I want to buy a House in Mumbai to settle myself with my Family
M – Measurable – 3BHK Flat in South Mumbai in 5 Years from Now
A – Attainable – I am not saying I want to buy this flat now, since I know I cannot buy that now.
R – Relevant – This is one of my basic needs Food, Shelter and Clothing.
T – Time Based – Goal should have a time limit.
Understand the effect of each financial decision
All financial decisions are interrelated. To decide on one can affect positively or negatively other decisions. Sending son to the US for higher education can badly affect Retirement Corpus. Financial Planning process provides this picture well in advance and suggests action to mitigate this.
Re-evaluate your financial situation periodically
This is very important to review your Financial Plan periodically. Client’s financial goals may change over the years due to changes in lifestyle or circumstances. There may be up or down variations in Income due to promotional growth or sudden termination from Job.
Start planning as soon as you can
Start Financial Planning as early in life as possible. Develop good financial habits like saving, budgeting, investing and regularly reviewing finances. This will make the client better prepared to meet life changes and handle emergencies.
Be realistic in your expectations
Financial Planning can neither change your life nor can bring money to fulfil your plans overnight. This roadmap of nearly 30 years and require tremendous patience, dedication. This is the planning process to mitigate risks arising out of say inflation, interest rates etc.
Realize that you are in charge
The client should be active in his planning process. Should understand the process, provide complete information required for planning and ask questions on the recommendations and actions offered
Common Mistakes in Financial Planning Approach
The following are some of the common mistakes made by Clients in their approach towards Financial Planning
- Financial Goals are not SMART
- Financial decisions are made haphazardly without understanding its effect on financial Goals.
- Assuming Financial Planning same as Investing or Retirement Planning or Tax Planning.
- Not reviewing the Financial Plan periodically.
- Poors or Middle class cannot have Financial Plan
- Start Financial Planning when there is less time available to deploy money available to many goals when we are on the verge of retirement
- Think of Financial Planning in Crisis
- Expect unrealistic returns on investments.
- Not considering Financial Planner as Family member to share information critical for the process
- Believe that Financial Planning is primarily tax planning.
