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How to make your Financial Plan

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Mutual Funds article in Advisorkhoj - How to make your Financial Plan
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In our post, Importance of Financial Planning, we discussed how financial planning can help you meet your short term, medium term and long term financial goals. While you can engage a professional financial planner or advisor to prepare your financial plan, your engagement in the planning process will ultimately determine its effectiveness because at the end of the day, it is your plan.

In this post, we will discuss 6 key elements, or rather steps that go into making a good financial plan. 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.

  1. 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.

    You should remember that a financial plan is not working towards a singular goal, but multiple goals in different stages of your life. Definite time frames are established for the achievement of each of these goals. Even though, ideally, we would like to achieve or even exceed all our goals, it is useful to prioritize the goals, because our capacity to save is often constrained with regards to how much you can invest and save. The financial planner will take your priority into consideration, when developing your financial plan. It is important to remember that, with changes in your income, lifestyle and personal situations, the goal post will keep changing over time. Therefore, financial planning should not be an one time exercise, but an ongoing process.

  2. 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. Financial planners or advisers may employ different methods to collect the data from the investors. Some financial planners or advisers may send you a survey form or questionnaire that you will have to fill out and send back to your financial planners or adviser.

    Many financial planners or advisers prefer face to face meetings with their clients to collect this data. Face to face meetings are often more effective than just sending a survey form or questionnaire because the financial planner or adviser can clarify certain details about you that you may not have enough clarity on, when filling out the questionnaire. A face to face meeting will also help you clarify doubts, expectations or share additional details with their financial planners or advisers. A New Delhi based financial advisor told me once that, the CFPs employed in his firm preferred to do business with their clients over email or phone. In our opinion, face to face interaction with the client is always more useful, because there is always subjectivity involved in personal finance.

    Let me explain with the help of an example. My father prioritized his children’s education over his own retirement planning. If he had enough money to pay for our education and, at the same time, save enough for his retirement, his thought was fine but since his financial resource was limited, while respecting my father’s emotions towards us, I think his financial priority was misplaced. While education can be financed through a bank loan, no bank will lend money for retirement needs. Though my father wanted to pay for my education costs, I took an educational loan from a bank for my higher education. Though my father hated the idea of me paying interest (it is part of our culture, I guess), I was able to repay the loan within two to three years and my parents had that much more for their retirement nest egg. The point of this example is that, there are always emotions involved in personal financial planning, but a good financial planner is always objective and tries to help his / her clients remain objective. Therefore, the planner / advisor client engagement is very important.

  3. 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. What is the investor’s responsibility at this stage? While all the work in this step is done by the financial planner, as an investor, you should also involve yourself in this process, by scheduling reviews and making sure that you understand the analysis; it is after all, your personal financial plan.

  4. Plan Recommendations:

    Based on my personal experience, financial advisors jump to this step straight away, without going through the first three steps, but the first three steps are very important. 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. Investors should remember that the final investment decisions rest with them, and therefore they should ensure that they are comfortable with their financial plan and execution strategy. Recommendations can change during this step and altered based on the investor’s inputs.

  5. 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.

    You may need to submit the documentation for Know Your Client (KYC) process as per regulatory requirements, fill the application forms for mutual funds, demat and trading accounts for equity investing, and proposal forms for life and health insurance. For insurance policies, you may have to undergo medical check-up as well.

    Your financial adviser will help you fulfilling these requirements, including collecting the documents for KYC, filling the application or proposal forms and their submission to the concerned processing units / companies. However, it is important, that you remained involved in the entire process. Even if you delegate the responsibility of filling the major portions application or proposal forms to your financial advisers, you should make sure that you verify the information in the forms. You should also carefully read the brochures of the products, that you are investing in or purchasing, so that you understand all the terms and conditions of the product(s). If you do not have the time to read individual product brochures, you should make sure that, you ask the financial adviser all the pertinent questions.

  6. Monitoring and Tracking:

    Let us go back to our school days. We had class tests, half yearly and annual examinations. Though many of us did not like tests and exams, it was necessary to review the progress we made against our learning objectives. Though some modern educators and parents may disagree with the form of these tests in our educational institutions, they cannot deny that, a progress review is an essential part of the process. Your financial plan also needs regular progress review. Unfortunately, many investors and financial advisors ignore this important aspect.

    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. But even if your financial planner or adviser does not schedule regular meetings, you should insist on meeting with your financial planner or adviser at some regular frequency, e.g. quarterly, semi-annually, annually etc.

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. In this article, we have discussed some key broad steps in the financial planning process. You should educate yourself about these processes, and engage with an expert financial planner / adviser, to help you prepare your financial plan and execute on it.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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Dwaipayan Bose

An alumnus of IIM Ahmedabad, Dwaipayan is a Finance and Consulting professional, with 13 years of management experience, mostly in MNCs like American Express and Ameriprise Financial, both in India and the US. In his last role, he was the Chief Financial Officer of American Express Global Business Services in India. His key interests are building best in class organizations, corporate governance and talent development

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