Chapter 1

FINANCIAL PLANNING AND ADVISING

 FINANCIAL PLANNING & ADVISING
• Financial Planning is the process of estimating the capital required and determining it’s competition. It is
the process of framing financial policies in relation to procurement, investment and administration of funds
of an enterprise.
• As Indian service industry is rapidly growing and it is influenced by the world of economic, technological
and social changes, the role of financial planning has become very important in the Indian community.
Financial planning means planning towards meeting life's goals and management of finances. Financial
planning helps people achieve their financial goals, whether it is buying a home, saving for their children’s
education, securing their family through insurance, investing their money, managing their debts and
planning for retirement.
• The concept of Financial Planning envisages the following:
• Make decisions about the money in hand as well as future generation of income as to how it can be utilized
to the best advantage.
• Identify the needs and study the various options available to achieve the needs.
• Ensure that a secure future is established to lead a comfortable life by proper planning and management of
funds/earnings/receipts, etc., and providing adequate for expected as well as unexpected outflow of money.
 OBJECTIVES OF FINANCIAL PLANNING
1. Protecting Oneself and Family: Major cash outflow under the contingent expenditure category is on account of the medical expenses.One who has
aged parents and young kids must take enough care to provide for all the financial requirements of medical treatments for them. First objective of
one's financial plan is to protect the family and self through the best Mediclaim policy available in the market. This option will not only give
protection against huge medical expenses to self and family but also, provides the income tax benefit under section 80D of the Income Tax Act.

2. Securing the Family in Case of Any Inevitable Happening to One's Life: In the event of an unexpected calamity striking the family due to the
sudden demise of the only breadwinner, the misery and the suffering that the family will be subjected to is immeasurable. If one has availed a
home/mortgage loan and he is the only breadwinner for the family, then the family is in a major trouble in case of any disability or death of the
breadwinner. For instance, one has taken a home loan of Rs. 35 lakhs and staying with the family in that home. In the event of his/her unfortunate
death, what will happen to the family? Obviously, the lending institution will inform the family to repay the loan or move from the house so that the
house can be sold and the loan amount is recovered. If the life of the breadwinner is adequately insured, this situation can be avoided as the insurance
company settles amount to the bank and the family can continue to live in the house.

One must take adequate insurance cover to provide for such situations in a cost-effective manner. The finest solution for this is to take a term insurance
policy. One can study the features of a term policy, decide the level of protection required and pay a premium for that policy. Term policy normally comes
with less amount of premiums and huge protection if taken at a fairly young age. The other important aspect of term policy is that it provides tax exemption
under Income Tax Act.
 OBJECTIVES OF FINANCIAL PLANNING
3. Protecting the Assets: The costly assets like home, vehicle, home appliances, furniture items, etc., acquired out of earnings have to be protected against
natural calamities/theft/fire, etc. In the event of an accident involving the vehicle owned by one resulting in death or major disability to the victim, third-party
claim for compensation will be very huge. Unless the insurance cover is taken for third-party claim, financial loss o the family will be very huge. Hence proper
financial planning is required to provide for such contingencies.

4. Meeting the Unexpected Situation: There are certain circumstances in one's life during which there may be urgent requirement for money like undertaking
long distance travel by air, helping a close friend/family member in distress, etc. A good financial plan should be in place to meet such contingencies.

5. Planning for the kid/s: Providing for higher education and marriage expenses of the children is another aspect in one's financial planning exercise. Though
the child may be doing very well in the studies, merit seats are allotted in professional institutions to a few students only as the competition is very tough and
even half a mark difference matters a lot. Till such time the children settle down, they have to be provided adequate financial assistance in pursuing their careers.

Next major expenditure is the marriage celebration of the children. It is a once in a life-time event and one needs to set aside sizeable portion of the earning
towards this. There are good schemes offered by insurance companies to meet such circumstances. By choosing the best among them and regularly paying the
premiums one can comfortably meet such expenses at the appropriate time. By involving the children also in this exercise, savings habit can be inculcated
among them also.
 OBJECTIVES OF FINANCIAL PLANNING

6. Planning for Retirement: This is another important part one must

take care of. If one plans well for the retirement from the beginning of
the career, there is no worry at a later stage in life. Retirement plan must
have long term focus. It is left to one's wish to decide on the age to
retire and what amount will be needed every month after retirement for
sustenance. Once this is decided, an investment plan to achieve these
goals should be prepared. The possible ways one can plan the
investment particularly for retirement are furnished below:
Equity/Mutual funds/Index funds/ULIP/Bank FDs
 Importance of Financial Planning

• 1. Income: Financial planning helps to efficiently manage and utilize the income earned. The cash available and
need analysis along with income expenditure budgeting will help one to find the best possible way in managing
the finance. Out of the income earned, a part of it will go for tax payment and other routine expenditure and what
is left would be the saving. Therefore, proper management of income is very important to ensure a comfortable
present as well as hassle-free future financially. Assessing the quantum and time of receipt of income and the
expected as well as contingent expenses through a proper financial planning helps in leading a stress-free life
financially.

• 2. Cash Flow: Cash flow plays a very important role in keeping track on income as well as expenditure. Financial
planning will help to suggest what should be done to create adequate cash flow to meet the regular expenses,
unforeseen expenses and also to save to make investment possible. Tax planning, careful budgeting and prudent
spending are aspects that need to be paid attention to in generating cash flow.
 Importance of Financial Planning
3. Capital: It helps to build a long-term capital-base and shape one's financial future. Once there is an increase in cash flow, it means
that there is an increase in capital base too. This permits one to venture into investment in various portfolios. With a strong capital base,
one can aim for a broader portfolio of investment and it will help to increase the wealth and also mitigate the risk of investing in a single
sector. A broader portfolio ensures that the losses, if any, incurred in one or two avenues are compensated by adequate profits generated
in the other investment options. Hence, to build up a strong capital base, financial planning is a must.

4. Investment: FP helps to identify investment opportunities appropriate to one’s financial situation. FP can help in assessing the best
investment opportunities. A good investment planning can transform goals from dreams into realities. Apart from picking the ‘right’
investment, it shows how to allocate the money among different kinds of investment. This has a greater effect on the success of the
investment strategy

5. Family Security: FP is important to provide for one’s family financial security with proper coverage through right kind of insurance
policies. One has to take charge and plan for the family’s future financial security. One needs to think how much income should be
required for the family’s financial security in the event of an unfortunate happening in the house like death of the only earning member.
While doing these projections, inflation effects must also be considered. This is where the financial planning plays a vital role.
 Importance of Financial Planning
6. Financial Understanding: Financial Planning is important to get a whole new approach to budgeting and
taking control over ones lifestyle. One can assess the level of risk in an investment portfolio or rework a retirement
plan (due to changing family situation) only if he/she understands the financial systems well. Financial
understanding is attained when measurable financial goals are set and they are met ultimately. The effect of each
financial decision is assessed when the financial situation is periodically evaluated, and suitable corrective
measures are taken by proper financial planning with realistic projections/expectations.

7. Standard of Living: Financial planning helps to maintain the family's current standard of living by maximizing
the insurance portfolio. One can make a personal and family financial plan so that there are clearly defined goals or
targets and there is enough savings to achieve that. For instance, one can make sure that there is enough disability
coverage to compensate any loss of future income projected. This can ensure that the family remains financially
protected if the head of the family or the breadwinner dies. Thus, the family standard of living doesn't get affected
and will be maintained at the same level.
 Importance of Financial Planning

8. Savings: Financial planning is required to save for the rainy day. Sudden changes in one's financial position change the standard of

living of the family. An emergency fund is a must in these circumstances. It must always be very liquid, i.e. it should be very easy to

convert into cash. Savings bank or money market investments are investments are examples of investment with high liquidity. A systematic

and structured saving and investment plan can be provided to fund children's education and to secure a comfortable retirement.

9. Assets: Financial Planning is important to ensure assets accumulation and liability clearance and creating a maximum amount of

wealth to one's heirs. In the process of accumulating assets, many fail to understand that it usually comes with a liability package. To

determine the true worth of any asset, the liabilities attached to it (by way of loan availed for acquiring the same) must be settled.

Only then, the true value of assets would be of use and help for the heirs. If not, assets can easily lead to unwanted or unexpected

financial burden.

10. Financial Security and Stability:To achieve the ultimate objective of financial security and stability, financial planning will offer

directions and meaning to one's financial decisions. It generates an understanding of how financial decisions made can affect the

other areas of finances. By viewing each financial decision as part of a whole exercise, the short and the long term effects on one's

life goals can be measured. This will help in adopting appropriate strategies and feel more secure and stable financially.
 NEED OF FINANCIAL PLANNING
1. Financial Planning Process: Personal financial planning is a process, but not a product. It is an organized, well-
planned system of developing strategies for using one's financial resources to attain both short- and long-term goals.
The following questions are to be asked by one while doing the financial planning.
• Where am I?
• Where do I want to go?
• How do I get there?
• When should I start planning?
It is very important to start planning for the future as soon as one can. Time passes very fast - it is never too soon to start
planning for tomorrow.
There are only limited ways to create wealth such as: inherit it, win the lottery or spend less than you earn. Obviously, only
one of those options is realistic for most people that is spending less than you earn. The sooner one starts to save, the larger
his/her wealth will be. The average person in his 50s should have to save more than half his yearly gross income to retire at
the age of 65, whereas a 30-year-old who starts saving just 10% of his income will be able to maintain the stability of
lifestyle after retirement. The most important thing is start saving, no matter what the age is or how little one can afford to
save.It is easy to do; but there's no magic wand to achieve one's financial goals. One has to plan, work out the plan, monitor
at periodical intervals and take corrective action where needed.
Financial planning for individuals should have two components.
a) One has to save some money to invest.
b) One should learn how to invest it. (preferably through a financial adviser).
 NEED OF FINANCIAL PLANNING
2. Identification of Financial Problems/Requirements

After fixing the financial goals, one should work out a plan to achieve the same. How to do it? The
entire information about the present income, expected increase in income and period when it will
take place, commitments towards children's education, marriage, acquisition of assets like house,
vehicle medical expenses, (at present as well as contingent) any loan already taken and the
repayment commitment towards the same, current age and age of retirement, pension and such
other details are to be jotted down stage wise and period wise. This is also called need
identification exercise. After identifying all the above aspects, the information is to be analyzed to
identify the financial problems, if any that are likely to be faced. If there is any serious issue like
high rate of interest on loans availed, etc., it should be addressed first before proceeding to the goal
funding strategies.
 NEED OF FINANCIAL PLANNING
3. Preparation of Financial Plan: After analysing the problems and assessing the
requirements, suitable planning should be made to achieve the goals set for oneself.
Whatever may be one's caliber in doing this by self, it is advisable to get the help of
professionals like Financial Advisers who are competent and experienced in this line.
The risk taking nature of the investor is also to be taken into account while preparing the
financial plan. The risk taking can be attempted by an youngster as he has long years of
service left while the middle aged person should aim for protecting the wealth.
4. Balancing the Portfolio Depends on Various Factors: A well organized investment
plan must have proper diversification and balance between equity and debt. Equity is
always risky compared to Debts. With the advancement in age, the risk taking capacity
of a person decreases. To find out what is the affordable ratio of Debt and Equity for a
person, there isa simple rule. Reduce the age from 100 and up to the resulted percentage,
one can invest in equity and rest in Debt. For example, if an investor's age is 30, then
100-30= 70. In this case, he can invest 70%in equity and the rest 30% in debt. Balancing
one's portfolio properly depends on the age and income
 NEED OF FINANCIAL PLANNING
5. Monitoring
The progress of the plan should be monitored periodically. If there are changes
in the figures originally arrived at while preparing the plan, the strategies are to
be suitably redefined to achieve the goals. If the expected income is not
forthcoming, or the estimated expenditure has gone up considerably, then
suitable reallocation of the available resources has to be made.
While implementing the financial plan through various investments, monitoring
the same is also very important. Through a regular monitoring, one can identify
the strong and weak areas in the portfolio and take corrective steps. Monitoring
not only gives the opportunity to recognize the investment’s performance but
also enables to balance the portfolio with reference to the major factors like the
investor’s age, objectives etc. Generally, the monitoring process must be gone
through at least once in 6 months
 Financial Advising - Introduction
• A financial adviser or personal financial guide is a professional who renders
investment advice and financial planning services to individuals and businesses.
They help the client in maintaining the desired balance of investment income,
capital gains, and acceptable level of risk by using proper asset allocation methods.
Financial advisers use stock, bonds, mutual funds, real estate, options, futures,
notes, insurance and other investment products to meet the needs of their clients.
• Financial advisers get remuneration by way of service charges from the clients.
They also get commission for the various financial products that they sell as an
agent. Fee-based planning is becoming increasingly popular in the financial
services industry. They help the clients in protecting their wealth, growing it in a
meaningful and reasonable manner, avoiding costly mistakes and implementing the
investment strategies on time.
ESSENTIALS OF FINANCIAL
COUNSELLING
• A financial adviser provides assistance to his clients in the following manner:-
 Establish where they are now - net worth, income, expenses, debt, etc.
 Record, evaluate and direct the flow of money in their life.
 Enact small, systematic, daily changes to transform their life in the financial
front.
 Make informed decisions about personal finances based upon a greater
understanding of the money options.
 Develop simple strategies that work every bit as soundly in bad times as in good
times.
 Succeed in the process of financial responsibility.
ESSENTIALS OF FINANCIAL
COUNSELLING
• Financial planning is a six-step process, which is usually followed by all the
financial advisers.
Step 1: Establishing the relationship
• The Financial Adviser must explain or document the services to be provided
to the client and define both his/her and client's responsibilities. The adviser
should explain fully how he will be paid and by whom. Client and Adviser
should agree on how long the professional relationship should last and on
how decisions will be made. Every relationship is built on the foundation of
trust. Financial Adviser must create a kind of relationship based on trust that
the client is ready to take the risk associated with the investment in any
financial product.
ESSENTIALS OF FINANCIAL
COUNSELLING
• Step 2: Data gathering and goal setting
• The Financial Adviser should ask for information about client's
financial situation. The Client and the adviser should mutually define
client's personal and financial goals, understand clients' time frame for
results and discuss, if relevant, how the client feels about risk. The
Financial Adviser should gather all the necessary documents before
giving the client the advice he needs.
ESSENTIALS OF FINANCIAL
COUNSELLING
• Step 3: Identification of financial problems
• After getting all the required information, the Financial Adviser
analyses this information to identify financial problems, if any. It is
also called need identification exercise. If there is any problem like
high rate of interest loans, then it should be addressed first before
proceeding to the goal funding strategies. When the future outcomes
of the financial strategy are falling short to achieve the goals, it
becomes a future problem. In this case, the financial planner should
suggest the client alternative strategies like changing the assets
allocation to achieve his goals.
ESSENTIALS OF FINANCIAL
COUNSELLING
• Step 4: Financial planning recommendations and analysis of
alternatives
• The Financial Adviser should offer financial planning
recommendations that address the client’s goals based on the
information the client provides. The adviser should go over the
recommendations with the client to help the client understand them so
that the client can make informed decisions. He should also listen to
the client's concerns and revise the recommendations as appropriate.
 ESSENTIALS OF FINANCIAL
COUNSELLING
• Step 5: Implementing
• The client and the adviser should agree on how the recommendations will
be carried out. The adviser may carry out the recommendations or serve
as the client's 'coach', coordinating the whole process with the client and
other professionals such as attorneys, accountants and/or stockbrokers.
• Step 6: Monitoring
• The client and the adviser should agree on who will monitor the client's
progress towards their goals. Ifthe adviser is in charge of the process,
he/she should report to the client periodically to review their situation and
adjust the recommendations, if needed, as the client's life style changes.
 WHO IS A FINANCIAL ADVISER?

• A professional who helps individuals to set and achieve their long-term financial
goals, through investments, tax planning, asset allocation, risk management,
retirement planning, and estate planning is known as a Financial Adviser. The role of
a Financial Adviser is to find techniques to increase the client’s net worth and help
the client to achieve all of his/her financial objectives.
• A financial planner is a practicing professional who helps people (through proper
planning), to deal with various personal financial issues such as: cash flow
management, education planning, retirement planning, investment planning, risk
management, insurance planning, tax planning, estate planning and business
succession planning (only for business owners). In executing the planning function,
he(financial planner) is guided by the financial planning process to create a financial
plan for a clients specific situation and to meet his specific financial goals.
 FUNCTIONS OF A FINANCIAL ADVISER
• (a) A Financial Adviser is one who uses the financial planning techniques/processes to help the client
understand how to meet his life's financial goals. The planner takes a 'clear view' of the client’s financial
situation and makes financial planning recommendations that are suitable for him. The planner analyses the
entire financial needs of the client including budgeting and saving, insurance, investments, taxes and
retirement planning. The planner also works with the client on an individual financial issue but within the
framework of the overall situation. This approach of financial planner to achieve the clients financial goals
makes him distinct from other professionals and service providers like Insurance Agents, Stockbrokers, etc.,
who may have been trained to concentrate only on a particular area of the clients financial requirements.
• (b) A financial planner is the best friend who advises the client on the ways of achieving the financial goals
set by the client. He is a client-oriented professional who works in the best interest of his customers. When
one has a professional relationship with a Financial Adviser that does not mean that he replaces other
professionals like Chartered Accountants or Investment Consultants. The Financial Adviser is a coordinator
who works with other people in making the Financial Planning process work.
• (c) The Financial Adviser discusses and suggests a very well organized, well-planned system of adopting
strategies for using the client’s financial resources to attain both short- and long-term financial goals.
• (d) The Financial Adviser’s role does not stop with giving suggestions to the client. He also reviews,
monitors at regular intervals and suggests changes in the strategies of the client for achieving the financial
goals.
ROLE OF FINANCIAL ADVISERS IN DIFFERENT
MARKET SITUATIONS
 In principle, financial advisers can handle finances by improving returns and ensuring greater
risk diversification among less sophisticated investors. Indeed, delegation of portfolio decisions
to advisers opens up economies of scale in portfolio management, because advisers can spread
information acquisition costs among many investors. Such economies of scale, as well as
possibly superior financial practices of advisers, create the potential for individual investors to
improve their portfolio performance by delegating the financial decisions.
 Financial advisers are generally equipped with the knowledge of investing in the stock market,
and with this knowledge, using statistical software and spreadsheets; financial analysts evaluate
data, identify patterns, and formulate predictions to make recommendations about selling or
buying various investment and securities products. Analysts with asset management
responsibilities often make purchasing and selling decisions for their clients. Some analysts
focus on determining risk levels connected with different investment possibilities and advise
the clients to invest their money in different stocks at different market situations.
 FINANCIAL ADVISING AS A CAREER
 Financial planners and financial analysts help guide businesses and individuals in making investment choices. Both
carry out financial research and analysis, which they use to provide investment suggestions to clients. Financial
analysts evaluate the economic outlook of different sectors and industries for organizations that wish to invest.
Personal financial advisers work with individual clients and focus on a wide range of personal investment needs.
 Securities analysts are employed by insurance companies, banks, securities firms, pension and mutual funds, and
other organizations interested in assisting their customers in the investment process. Analysts research industry
statements and use company sales, costs, commodity prices, tax rates, and expenses to evaluate a company's current
and projected value. Analysts also meet with the company’s executives to evaluate an organizations leadership and
market outlook. In addition, analysts research whole industries, evaluating business strategies, product trends and
market competition. In order to correctly interpret a company's success and value, analysts must also be familiar
with and understand the market effect of industrial regulations and policy changes.
 Personal Financial Advisers (sometimes referred to as financial consultants or financial planners) combine their
experience and understanding of tax laws, insurance, and investments to help clients accomplish their short- and
long-range financial objectives. The areas advisers typically focus on are estate planning, saving for higher
education, marriage and medical expenses, retirement as well as general investment.The typical adviser can provide
recommendations in many aspects of finance, but there are some who concentrate on specific areas like asset
protection, retirement or estate planning.
FINANCIAL ADVISING AS A CAREER
• Advisers start by sitting down with a client looking at their financial situation to help them identify
financial goals. From this information an adviser creates a financial plan for the client that
addresses problems and suggests ways to fix them, and then identifies possible investment ideas
that best meet the needs of the client. Very often these recommendations are verbal, although some
advisers prepare formal reports. Once a plan is in place, advisers generally meet their clients on a
yearly basis to revise and adjust the plan to life changes and new investment opportunities.
• In addition, advisers respond to questions about the impact of life changes and benefit plans on
their financial situation. There are advisers who act as brokers, buying and selling stocks, bonds and
other investment products, while others recommend the services of other professionals. For
instance, an adviser may recommend a particular accountant or insurance agent or lawyer. In
addition, many advisers act as asset managers for their clients. The most essential skill a financial
adviser should have is the ability to attract and retain clients. Happy clients are the best resources
for finding more happy clients. Some advisers use seminars and finance classes to attract new
customers.