18 May, 2015

Financial Plan is not Financial Planning!

Most people tend to think that their life would be sorted out once they get their financial plan done. While the financial plan is the blueprint which one needs to follow, it is just one step in financial planning.
Financial Planning in perspective : Financial planners would understand what their clients want ( goals ) and take into account their financial situation and develop a plan that would help in meeting the goals. This is the financial plan. But the financial plan is the first step in the financial planning process.
Implementing the plan is the next. This is very critical as this is what would breathe life into the plan itself. Without proper implementation, the plan would just be on paper. A paper plan would be worthless.
Monitoring the investments made and making any changes, as required, would ensure that the plan is still relevant and is positioned to achieve the goal.
There may also be scheduled client engagements in quarterly or half-yearly intervals, where the financial planner engages with the client in a dialogue to discuss any changes that might have taken place. The client engagement would also be to mentor and guide the client to stay the course, dictated by the financial plan.
At the end of one year, there would typically be a review process. Data from the client would be compared with the assumptions in the plan and the plan itself will be recast to reflect the changes.
After this, any changes suggested are implemented, portfolio reviewed, client engagements continue in the agreed frequency...
This is the financial planning process, which is ongoing, in which a financial plan is just a sign post that offers a direction. But the process is important to the achievement of the goals rather than just the sign post.
Investments for goal is not financial planning: There are many product manufacturers who have used the term Financial Planning rather liberally. They tend to portray that by buying some of their products, consumers would be doing financial planning! This is even worse than believing that financial planning is a financial plan. Here they are made to believe that going for a product to meet some goal is financial planning.
Insurance companies do this all the time. Mutual fund companies have come with pension products and other goal-achievement products like children education funding products and call that financial planning.
Making these investments can assist in the achievement of certain goals. But adhoc investments to achieve goals seldom results in a cogent plan. Infact, it is the other way round.
A plan would analyse the requirements, look at the cashflows and investments available, analyse available options and strategise what needs to be done and come up with investments options to achieve the goals. Product recommendation would be borne out of this.
To summarise, financial planning is a much abused word. Hence, it is wrongly understood most of the time. Hence financial planning is often confused with investment management too. It is important to understand, which is which. That was the intent of this article... to make the reader understand that financial plan is not financial planning. And investments is an even smaller fragment in the overall financial planning process.

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