10 November, 2009

Financial Planning in a Nutshell

Financial Planning is a buzz-word, we all tend to hear quite often these days – Mutual Funds, Banks, Insurance companies & IFAs - all talk about it. Lots of them also sport designations like Financial Advisor, Financial Mentor, Financial Consultant & even Financial Planner. This certainly leaves the investors confused.
Investors are bewildered. Like blind men describing an elephant based on which portion they have touched & felt, investors have vastly differing opinions on what constitutes Financial Planning.
Financial Planning is a blueprint created specifically for the individual / family, to achieve their goals & objectives, through proper financial management. This definition, leaves lot of room for creativity, to all the constituents in the Financial Services space… which is why all of them talk of this and seem to imply that if you buy their products, your financial plan will be in place.
Facts lie elsewhere. Financial Planning is not about buying products of MF, insurance, bonds etc. It is about analyzing a particular individual/ family situation and based on their needs, coming up with a specific solution that addresses their needs and takes them forward on the path of goal achievement.
Financial Planners would analyse the client’s income, expenses, assets, liabilities, investment, insurance & goals before coming up with a plan. What has been done in the past is put under the scanner and their suitability in the current situation is validated. Cashflow position now and in future are analysed to find, if there are any deficits showing up when we factor in the goals. If deficits do show up, it is discussed with the client to clearly understand which goals are to be retained, diluted or dropped. Sometimes, it might be possible to achieve a goal, if more time is given for that goal itself. This is when the client will understand if their goals are realistic or are they just being overly optimistic.
Proper cashflow management is at the heart of a financial plan. The liquidity requirements of the client is analysed and specific allocations are made to cash/ bank balance and to other near cash options. There may be certain cash outflows that may happen in specific months only – like holidays, school fees, insurance etc. To take care of surges in payouts in certain months, special buffers are built to especially take care of this. This will ensure that they will not be swept away in the tidal wave of huge expenses, in some months.
Risk assessment is done taking into account the past insurances, any cover available from the employer, savings/ asset build-up & liabilities. Based on this, the actual requirement of life insurance is arrived at and a suitable cover is recommended. Similarly, requirements for Medical insurance is looked into. Since medical costs have substantially gone up and has the potential to surge in future too, adequate cover for the entire family & other dependants ( like parents ) is recommended.
There would be surpluses now that need to be deployed to address the goals. That will be done after taking into account their specific situation in life, the number of years to retirement, dependencies, risk bearing capacity, alternate income possibilities… After this, the plan is implemented and all the investments & insurances done are monitored/ managed. Review is typically done at the end of the year.
You would agree that this is not what is done during product sales, where they would like to push specific products without adequately understanding the underlying needs, much less their overall situation. Financial planning is substantially different. The client focus, specific study of the individual/ family’s needs, the elaborate analysis & a comprehensive solution, managing / monitoring what has been done & reviewing the plan at regular intervals, makes the Financial Planning process comprehensive & results in a specifically targeted solution.
Beware then. Clearly understand what you are getting into. Many may talk of Financial Planning, but it may have nothing to do with it actually!

Published in Sify.com Finance section on 7/11/09

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