The nature and scope of financial planning

ASC 360 PERSONAL FINANCIAL PLANNING Prepared by

DR. MOHD ZAKI AWANG CHEK/ DR. FAUZIAH HANIM TAFRI Senior Lecturer Centre for Actuarial Studies Faculty of Computer and Mathematical Sciences Universiti Teknologi MARA

What is Personal Financial Planning?

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There is no common established definition of personal financial planning

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Personal Financial Planning is a process of meeting an individual's life goals through the proper management of his finances.

Examples of life goals • buying a home, going for vacations, saving for a child's education or planning for retirement.

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It is a process whereby the individual’s overall financial objectives and goals are used to develop and implement an integrated plan to achieve his objectives and goals Financial Planning is a process, a methodology that is valid for both practitioners and self-planning individuals

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Why is Personal Financial Planning Important?

• Planning is a basis of every activity that we as individuals undertake in our life • Thus planning is an integral part of our life and when it comes to financial matters planning is quite inevitable ͞if you fail to plan then you plan to fail͟ Quotation by Harvey Mackay • Financial planning helps us determine our short and long term financial goals and create a balance plan to meet those goals

Seven Ages of Financial Health

Age of Birth and Education

Age of Work

Age of Marriage

Age of Parenthood

Age of Career Development

Age of

Retirement

Age of Old Age

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The Scope of Financial Planning • The personal financial planning should be wide enough to cover all areas of the indivi dual’s financial needs and help him to achieve the goals and objectives in each of the relevant areas as shown in the next slide

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The Scope of Financial Planning for Lifetime Financial Plan Cash flow Management Risk Management and Insurance Planning Investment Planning

Tax Planning Retirement Planning Estate Planning 8

Types of Financial Planners • From a conceptual view, a financial planner can be defined according to the breath of services he provides:

• A financial planner can thus be called: – A single purpose financial planner – A multipurpose financial planner – A comprehensive financial planner

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Single Purpose Financial Planner • •

The selling of a single financial product or service to a client in order to solve a single financial problem The following individuals would be examples of this type of financial planners: – A stockbroker who advises a customer to buy shares of common stock of a particular company – A life insurance agent who sells key person life insurance to the owner of a small business – A banker w h o opens a trust account for the benefit of a customer’s handicapped child – An accountant who prepares income tax returns – A real estate agent who advises a customer to buy a house as an investment 10

Multiple Purpose Financial Planner • •

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Some argued that a financial planner should not solve a single financial problem in isolation (as have been discussed in the previous slide) They argued that real financial planning must embrace more than just solving a single financial problem of a client but must extend beyond the selling of a single financial product or service Thus this type of financial planner provides multiple services to solve multiple financial problems Examples – An insurance agent who sells all lines of life, health, property and liability insurance – An accountant who provides tax consultancy and business management advice – A unit trust agents who sells unit trust and life insurance products

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Comprehensive Financial Planner • •

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This type of financial planner provides the full range of services to his clients.

He must consider all aspects of the client‘s financial needs and objectives, and must utilize several integrated and coordinated planning strategies to fulfill those needs and objectives The key features are: – It covers all the personal and financial situation of clients addressed through information gathering and counseling – It integrates into its methodology all the techniques and expertise utilized in more narrowly focused approaches to client financial problem solving – In its purest form, a comprehensive financial planning is a service provided by the planner’s compensation comes from the sale of financial products.

– Thus helping to ensure complete objectivity in al aspects of the plan

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Comprehensive Financial Planner •

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In its true sense of the words, a comprehensive financial planning is a service provided by the planner on a fee basis only and no part of the planner’s compensation (such as commissions) comes from the sale of financial products, thus helping to ensure complete objectivity in al aspects of the plan Thus a comprehensive financial planning is performed for a client all at once.

This is done through a team of specialists to create a one plan that addresses all the clients concerns and utilizes all the needed strategies. The plan is then updated periodically as and when necessary.

This leads us to discuss more of the comprehensive financial planning and the process of doing it.

Financial Planning is a process, a methodology that is valid for both practitioners and self-planning individuals The financial planning is a process with clearly defined steps as shown in the next slide.

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Types of Compensation- Current Market Scenario in Malaysia Single purpose financial planner

Multiple purpose Financial Planner - Unit trust investment analysis

-Investment company/ agency trading, product driven

-Life/general insurance analysis-

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-Insurance company/agency for whole life, endowment or term life plan

Commission + salary

-Will writing

-Mortgage

Comprehensive Financial Planner -Insurance planning -Retirement planning -Tax planning -Investment planning -Estate planning -Business succession

Commission + salary

Fee + commission 14

Objectives of Financial Planning To provide direction and meaning to an individual’s financial decisions

To allow an individual to understand how each financial decision affects other areas of his finances

To allow an individual to adapt more easily to life changes and to feel more secure as a result.

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The Six Steps Financial Planning Process Step 1

• Establishing Financial Goals

Step 2

• Gathering Relevant Data and Determining Goals and Expectations

Step 3

• Analysing and Evaluating the Data

Step 4

• Developing and Presenting the Financial Plan

Step 5

•Implementing the Financial Plan

Step 6

•Monitoring the Financial Plan

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Step 1- Establishing Financial Goals • • •

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Goal setting is crucial in creating a successful financial plan The goals to be established need to be clearly defined, reasonable and achievable The goals need to be quantified Example: “ We want to retire in 25 years time with an income of RM60,000 per year in current ringgit, and we want the income to continue as long as we live without depleting the principle"͟ The goals should be prioritized and ranked.

For example, have to prioritise between savings for retirement and savings for college education.

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Step 2- Gather Relevant Data •

Information and data are gathered – Objective or quantitative information such as list of assets and liabilities, insurance coverages, income and expenditure – Subjective or qualitative information such as hopes and aspirations, fear, preferences, values, attitudes and non financial goals

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The information must be accurate, complete, up to date, relevant to the client goals and well organised

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Need information about the client risk tolerance and their attitude towards risk

Step 3 – Analysing and Evaluating the Relevant Data • •

Once the data have been gathered, organised, checked for accuracy, consistency and completeness, the data is being analysed to determine the individual’s current financial condition The objective is to determine whether the individual is now in a relationship to the goals that were established by him in step one.

Step 4- Developing a Plan for Achieving Goals •

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After the information about the client has been analysed, and if necessary, the objectives to be achieved have been refined, the planner’s next job is to devise a realistic plan for bringing the client from his or her present financial position to the attainment of those objectives The plan must be tailored to the individual, which has been designed based on each particular client’s needs, abilities, and goals and objectives.

The plan must be the client’s plan, not the planner’s plan

there might be more than one strategies of achieving the goals and objectives – these strategies should be highlighted by the planner.

The financial plan that is developed should be specific and should detail out who is to do what, when and with what resources.

The plan should be reasonable and it is acceptable to the client.

The report of the plan should be in writing and the most important thing is that the client should agree with the plan.

Step 5- Implementing the Plan A financial plan is useful to the client only if it is put into action • Therefore it is part of the plaŶŶer’s respoŶsiďilitLJis to see that plan implementation is carried out properly according to the schedule agree upon with the client • It is also the planner ’s responsibility to motivate and assist the client in completing each of the steps necessary for full implementation of the plan.

Step 6- Monitoring the Plan •

This step involves the planner to meet the client at least once a year to review the plan, or more frequently should the need arise

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The review process involves: •

Measuring the performance of the implementation vehicles

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Updates should be obtained concerning changes in the client’s personal and financial situation

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Reviewing the changes that have occurred in the economic, tax, or financial environment