Topic 4: What’s best when making a goal?
While Certified Financial Planners (CFPs) and financial advisors may know these steps, it will be useful for investors to familiarize themselves with the process, so that they can work efficiently and effectively with their financial planners or advisers.
Defining Goals:
This is the first and also, one of the most important steps in financial planning. The more specific and quantitative your goals are the more effective will be your financial plan. Sometimes you may not have enough clarity about all the financial goals in your life, especially if you are young. Sometimes people set impractical goals. An experienced financial planner or adviser can help you define the goals across your savings and investment lifecycle and determine the specific numbers you need to reach specific goals.
Data Collection:
The second step in the financial planning is to collect the data regarding the investor’s income, expenses, assets (both physical and financial like property, gold, bank deposits, stocks, bonds, mutual funds etc), liabilities (like home loan, car loan, personal loan etc), life and health insurance, and other important factors, that will form the inputs in the investor’s financial plans. Many financial planners or advisers prefer face to face meetings with their clients to collect this data. A face to face meeting will also help the investor to clarify doubts, expectations or share additional details with financial planners or advisers.
Data Analysis:
This is the third step of the financial planning process. The financial planner will review all the data collected from the client, e.g. investor’s income, expenses, assets, liabilities, existing insurance policies (both life and non-life insurance), number of family members, legal documents (if required), short term, medium term and long term financial goals.
Through a structured financial analysis process, the financial planner will determine your asset allocation strategy and insurance (both life and health) needs to meet your financial objectives.
Plan Recommendations:
In the fourth step, your financial planner or adviser will make the actual recommendation with respect to your comprehensive financial plan. This will include your asset allocation strategy, alternate investment options (e.g. mutual funds, equity investing, traditional debt products etc.), life and health insurance needs. Your financial planner or adviser will schedule a meeting with you, to discuss these recommendations.
This is a very important step in the financial process for you, as a client. You should make sure that you understand all the recommendations and the reasons thereof. You should ask as many questions as you would like to, regarding each strategy or product, because they will be crucial in meeting your financial objectives.
Implementation / Execution:
In business we say that, a great strategy or plan is completely useless without good implementation or execution. Fortunately, in the personal finance space, the evolution of the financial services industry in India has made implementation of the easiest part of a financial planning process. Implementation involves the actual process of purchasing the investment and insurance products needed for your financial plan. At this stage various regulatory and procedural requirements need to be fulfilled, depending on the products involved.
Monitoring and Tracking:
You should review your financial plan, to evaluate the effect of changes in your income levels, your financial situation, your tax situation, new tax rules, the performance of your investments, and suitability of new products with respect to changes in market conditions. Normally, your financial planner or adviser will schedule meetings with you at a regular frequency, to review your portfolio and discuss if any change needs to be made in your financial plan, asset allocation strategy and product strategy.
Conclusion
We should also remember that financial planning is not a static, but a dynamic exercise. As discussed earlier, your financial situation, goals and aspirations may change over time. Therefore, you should meet with your financial planner or adviser on a regular basis, to ensure that your portfolio is doing well and at the same time, ensure that any change to your financial situation, goals or aspirations is appropriately reflected in your financial plan, and executed upon.
Defining Goals:
This is the first and also, one of the most important steps in financial planning. The more specific and quantitative your goals are the more effective will be your financial plan. Sometimes you may not have enough clarity about all the financial goals in your life, especially if you are young. Sometimes people set impractical goals. An experienced financial planner or adviser can help you define the goals across your savings and investment lifecycle and determine the specific numbers you need to reach specific goals.
Data Collection:
The second step in the financial planning is to collect the data regarding the investor’s income, expenses, assets (both physical and financial like property, gold, bank deposits, stocks, bonds, mutual funds etc), liabilities (like home loan, car loan, personal loan etc), life and health insurance, and other important factors, that will form the inputs in the investor’s financial plans. Many financial planners or advisers prefer face to face meetings with their clients to collect this data. A face to face meeting will also help the investor to clarify doubts, expectations or share additional details with financial planners or advisers.
Data Analysis:
This is the third step of the financial planning process. The financial planner will review all the data collected from the client, e.g. investor’s income, expenses, assets, liabilities, existing insurance policies (both life and non-life insurance), number of family members, legal documents (if required), short term, medium term and long term financial goals.
Through a structured financial analysis process, the financial planner will determine your asset allocation strategy and insurance (both life and health) needs to meet your financial objectives.
Plan Recommendations:
In the fourth step, your financial planner or adviser will make the actual recommendation with respect to your comprehensive financial plan. This will include your asset allocation strategy, alternate investment options (e.g. mutual funds, equity investing, traditional debt products etc.), life and health insurance needs. Your financial planner or adviser will schedule a meeting with you, to discuss these recommendations.
This is a very important step in the financial process for you, as a client. You should make sure that you understand all the recommendations and the reasons thereof. You should ask as many questions as you would like to, regarding each strategy or product, because they will be crucial in meeting your financial objectives.
Implementation / Execution:
In business we say that, a great strategy or plan is completely useless without good implementation or execution. Fortunately, in the personal finance space, the evolution of the financial services industry in India has made implementation of the easiest part of a financial planning process. Implementation involves the actual process of purchasing the investment and insurance products needed for your financial plan. At this stage various regulatory and procedural requirements need to be fulfilled, depending on the products involved.
Monitoring and Tracking:
You should review your financial plan, to evaluate the effect of changes in your income levels, your financial situation, your tax situation, new tax rules, the performance of your investments, and suitability of new products with respect to changes in market conditions. Normally, your financial planner or adviser will schedule meetings with you at a regular frequency, to review your portfolio and discuss if any change needs to be made in your financial plan, asset allocation strategy and product strategy.
Conclusion
We should also remember that financial planning is not a static, but a dynamic exercise. As discussed earlier, your financial situation, goals and aspirations may change over time. Therefore, you should meet with your financial planner or adviser on a regular basis, to ensure that your portfolio is doing well and at the same time, ensure that any change to your financial situation, goals or aspirations is appropriately reflected in your financial plan, and executed upon.