Steps in financial planning process

The financial planning process involves the following steps -

1. Conducting need analysis

2. Evaluating existing resources

3. Conducting risk assessment

4. Developing a financial plan

5. Implementing the financial plan

6. Monitoring the financial plan 

Conducting need analysis:

This step involves -

• Identifying needs of protection, retirement, health, wealth creation, and preservation
• Quantifying these needs
• Arriving at the time frame

In this step, analyzing the macro and socio economic trends is called for. Growth of the economy & progress of society are essential for all round development of the individual. Other concerns include inflation, longevity and after retirement spans to name a few.

Some of the common goals of investors include:

• Education and marriage of children
• Down payment for a house
• Retirement

Before investing, investors need to answer the following questions:

• What are their investment goals? Do they expect short term or long term benefits?
• What is the time horizon of their investment - 3 years, 5 years, 10 years or more?
• How much money do they have to invest and what are their return expectations?
• Do they have any short term financial needs, for example a housing loan, whereby they may not be able to invest as much as they would like to?
• Should they invest in stocks, bonds, mutual funds or pension funds?

Evaluating existing resources:

Existing resources of the client are evaluated as follows

• Cash flows such as Income & Expenses
• Net worth such as Assets & Liabilities

The financial planner also needs to understand and quantify the present and future financial flows of the customer. This helps in quantifying the surpluses available from time to time. A financial balance sheet of the customer also needs to be drawn to arrive at their net worth. The planner should be able to understand various classes of assets and their correlation with each other.

Conducting risk assessment:

Assessment of risk is conducted by

• Risk profile
• Asset Allocation

Risk profile: It is important to determine the style of the investor before investing. Investors may be -

Aggressive Investor - who likes to take risks to earn an extra bit of return

Moderate investor - who is content and believes in earning slow and steady gains

Conservative investor - is risk averse investor whose primary objective is capital preservation and wants a steady growth in income. They are also known as passive investors.

Asset Allocation: Asset allocation is the key to performance of portfolio. Assets can be sacred, serious or aggressive assets. Sacred assets are sacrosanct such as house, gold or fixed deposits which have low risk and low returns. Serious assets could be debt funds or bonds with higher returns and higher risks. Direct equity or equity mutual funds are of this type. Investors, who are willing to accept considerable volatility in their portfolios, invest in aggressive assets.

Developing the financial plan:

Developing a financial plan for customer involves

• Developing the plan for fulfilling protection, retirement, health, and wealth creation / preservation needs of the customer
• Explaining the plan and rationale to the customer
• Giving both upside potential and downside risk, keeping in mind customer's profile & risk appetite
• Understanding tax laws and operating regulatory framework

Implementing the financial plan:

This step involves executing the plan through optimal investment. After getting the customer's approval, the financial plan needs to be implemented with the help of various service providers. It is important to create a proper record of the financial plan and its implementation. Recording of essential details, due dates, and dates of receipt of flows is important.

Monitoring the financial plan:

1. Some guidelines for monitoring the investments are:-
2. Establish a systematic way of monitoring each investment
3. Ensure that monitoring should be practical and routine function
4. Call the client if market conditions change
5. Always contact the client in good as well as bad situations
6. Monitor periodically and make notes for the next meeting
7. Anticipate cash flows and be ready with an action plan
8. Balance maintenance versus new ideas
9. Be selective and document your recommendations
10. Make investment advisory accessible to client through conference calls