Introduction to Financial Planning

Introduction to Financial Planning ‘Approved courseware for the Certified Financial PlannerCM certification education programme in India’ 1

Introduction to Financial Planning This course provides a comprehensive examination of the entire financial planning process, along with an overview of  Risk Analysis and Insurance Planning  Investment Planning  Retirement Planning  Tax Planning and Estate Planning The course introduces methods of gathering client data and teaches students how to work with clients to set goals. “Every effort has been made to avoid any errors or omission in this book. In spite of this errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice, which, shall be taken care of in the next printing. It is notified that neither the publisher nor the author or seller will be responsible for any damage or loss of action to anyone of any kind, in any manner, therefrom. No part of this book may be reproduced or copied in any form or by any means or reproduced on any disc, tape, perforated media or other information storage device, etc. without the written permission of the publisher. Breach of this condition is liable for legal action. All disputes are subject to Delhi jurisdiction only.” ISBN 81-905887-1-3 Revised and Reprinted-2019 Price : Rs. 8,500 (Inclusive of Workbook) ©copyright 2002 International College of Financial Planning Ltd. All rights reserved 2

Introduction to Financial Planning Published by International College of Financial Planning Ltd. © International College of Financial Planning Limited 2002 ISBN 81-905887-1-3 No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording, scanning or otherwise without the prior written permission of the publisher. This subject material is issued by the International College of Financial Planning Ltd. on the understanding that: 1. International College of Financial Planning Ltd., its directors, author(s),or any other persons involved in the preparation of this publication expressly disclaim all and any contractual, tortious, or other form of liability to any person (purchaser of this publication or not)in respect of the publication and any consequences arising from its use, including any omission made, by any person in reliance upon the whole or any part of the contents of this publication. 2. The International College of Financial Planning Ltd. expressly disclaims all and any liability to any person in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or partial, upon the whole or any part of the contents of this subject material. 3. No person should act on the basis of the material contained in the publication without considering and taking professional advice. 4. No correspondence will be entered into in relation to this publication by the distributors, publisher, editor(s)or author(s)or any other person on their behalf or otherwise. Author Sanjiv Bajaj CFPCM, MBA (Finance), ICFA (CII - London) Reproduced By Madhu Sinha CFPCM, Certified International Wealth Manager (Switzerland) PGDFM, CAIIB, B.Com (Hons) Author of “Financial Planning A Ready Reckoner” and “Retirement Planning A Guide for Financial Planners” Unless otherwise stated, copyright and all intellectual property rights in all course material(s) provided, is the property of the College. Any copying, duplication of the course material either directly and or indirectly for use other than for the purpose provided shall tantamount to infringement and shall be strongly defended and pursued, to the fullest extent permitted by law. 3

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Syllabus Course Title: Introduction to Financial Planning Course Description: This module would serve as an introduction to financial planning. The module would cover the six-step process which includes financial planning process, client interactions, time value of money applications, personal financial statements, cash flow and debt management, asset acquisition, education planning, overview of risk management investment planning and retirement planning, special circumstances, plan integration, ethics, and business aspects of financial planning. Learning Objectives: At the end of this module, a student should be able to: 1. To implement the financial planning process, while following the CFP Board’s Financial Planning Practice Standards and Code of Ethics and Professional Responsibility. 2. Understand the economic, social, political, and technological environment and be able to determine how financial plans should accommodate those environments. 3. Understand the potential goals a client may have, help them enunciate their goals and evaluate strategies to help clients achieve their goals. 4. Understand basic investment topics (including investment types, risk and return, diversification, passive versus active management) and specific investment strategies necessary to allow clients a mechanism to achieve realistic goals. 5. To structure and choose the optimal business format for the delivery of financial planning services for services for specific for specific target client markets. Detailed Class Outline: Part I: The 6-Step Financial Planning Process 21-120 1.1 Establish and Define the Relationship with the Client 1.1.1. Explain the client the purpose of Financial Planning, the role of Financial Planner and his/her Professional Competencies. 1.1.2. Discuss Financial Planning needs and expectations of the client with respect to Financial Planning Components 1.1.3. Determine whether the Practitioner can meet client’s needs with regard to the financial planner competencies 1.1.4. Define the scope of engagement including services to be provided including monitoring responsibilities 5

1.2 Collect Client’s Information 1.2.1. Collect quantitative and qualitative information 1.2.2. Assess client’s values, attitudes and expectations 1.2.3. Assess the client’s level of knowledge and experience with financial matters 1.3 Analyze Client’s Financial Status, Risk Profile and Determine Financial Goals 1.3.1. Analysis of client’s background and current financial status 1.3.2. Assess the client’s objectives, needs and priorities 1.3.3. Determine client’s risk tolerance level by ascertaining risk appetite and risk capacity 1.3.4. Identify client’s personal and financial goals, needs and priorities through interview/questionnaire 1.3.5. Define client’s time horizon for each goal 1.4 Develop Financial Planning Recommendations and Present them to the Client 1.4.1. Identify and evaluate Financial Planning Alternatives to meet client’s goals and objectives 1.4.2. Develop the Financial Planning Recommendations 1.4.3. Present and discuss the Financial Planning Recommendations with the client 1.4.4. Obtain the feedback from client and revise the Recommendations as necessary 1.4.5. Provide documentation of Plan Recommendations 1.4.6. Confirm client’s acceptance on Recommendations 1.5 Implement Client’s Financial Planning Recommendations 1.5.1. Agree on implementation responsibilities 1.5.2. Assist the client in selecting products and services for implementation 1.5.3. Coordinate as necessary with other specialists 1.6 Monitor and Review the Client’s Situation 1.6.1. Review performance and progress of the plan with the client 1.6.2. Discuss and evaluate changes in client’s personal circumstances (e.g. birth/ death, age, illness, divorce, retirement) affecting/modifying goals 1.6.3. Review; evaluate changing tax laws and economic circumstances 1.6.4. Assess impact of rise/fall in interest rates on financial goals 1.6.5. Make recommendations to accommodate new or changing circumstances 1.6.6. Provide ongoing services to client Part II: Financial Management- General Principles and Behavioral Finance 121-204 2.1 Brief Overview to Financial Markets 2.1.1. Capital Markets-Primary and Secondary 2.1.2. Market Indices and Parameters 2.1.3. Money Market 2.1.4. Derivatives Market 2.1.5. Foreign Exchange market 2.1.6. Commodity Market 2.1.7. Services- Life and Non-Life 6

2.2 Debt Management 2.2.1. Debt-Purpose, needs and responsibilities 2.2.2. Long Term Debt vs. Short Term Debt 2.2.3. Fixed Rate vs. Variable Rate Mortgages 2.2.4. Consumer loans 2.2.5. Refinancing 2.2.6. Hire- purchase 2.2.7. Credit cards 2.2.8. Leasing 2.3 Personal Financial Statement Analysis 2.3.1. Cash inflows and outflows- Cash Management 2.3.2. Income and expenditure statement 2.3.3. Budgeting and forecasting 2.3.4. Monitoring budgets and provisions for savings 2.3.5. Personal Balance Sheet and Net Worth 2.4 Forms of Business Ownership/ Entity Relationships 2.4.1. Sole Proprietorship 2.4.2. Partnership Firm 2.4.3. Limited Liability Partnership 2.4.4. Limited liability companies 2.4.5. Trusts 2.4.6. Foundations/ exempt organizations 2.4.7. Cooperative societies 2.5 Concepts in Behavioral Finance 2.5.1. Prospect Theory 2.5.2. Herd Behavior 2.5.3. Anchoring and Contrarian Investing 2.5.4. Mental Accounting and Gambler’s Fallacy 2.6 Behavioral Finance- Investor Psychology 2.6.1. Value Investing and Behavioral Finance 2.6.2. Role of emotions in financial decision making – Common errors 2.6.3. Skewness of Asset Allocation due to cultural or historical bias 2.6.4. Basic investment style and its drawbacks 2.7 Economic Environment Analysis 2.7.1. Demand and Supply 2.7.2. Inflation and Recession 2.7.3. Deflation and stagflation 2.7.4. Interest rates/yield curves 2.7.5. Equity investment and real return 2.7.6. Government Monitory and Fiscal Policies 2.7.7. The impact of business cycles 7

2.7.8. Impact of global economic environment 2.7.9. Impact of global factors on Foreign Exchange Rate 2.7.10. Key indicators- leading, lagging and concurrent Part III: Financial Mathematics 205-264 3.1 Calculation of Returns 3.1.1. Nominal Rate of Return 3.1.2. Effective Rate of Return 3.1.3. Internal Rate of Return (IRR) 3.1.4. Internal Rate of Return- irregular cash flows (XIRR) 3.1.5. Compounded Annual Growth Rate (CAGR) 3.1.6. Real Rate of Return after adjusting inflation 3.1.7. Rate of Return after adjusting taxes 3.1.8. Analysis of Return 3.2 Time Value of Money 3.2.1. Present Value 3.2.2. Net Present Value 3.2.3. Future Value 3.2.4. Annuities- Immediate and Deferred 3.2.5. Growing Annuity and Inflation Adjusted Annuities 3.3 Loan Calculations 3.3.1. EMI calculation 3.3.2. Loan Restructuring- Present value of future payments 3.3.3. Loan Repayment Schedules 3.3.4. Repayment Schedules with Varying Interest Rates 3.3.5. Amortization 3.3.6. Home Equity 3.3.7. Refinancing Cost 3.3.8. Fixed EMI vs. Fixed Tenure 3.4 Total assets, Net Worth and Financial Ratios 3.4.1. Net Worth and its Components 3.4.2. Liquidity Ratios 3.4.3. Debt to Income Ratio, Debt to Financial Assets, Debt to Total Assets 3.4.4. Savings Ratio Part IV: FPSB India’s Financial Planner Code of Ethics, Professional Responsibility and Model Rule of Conduct 265-276 4.1 The Code of Ethics and Professional Responsibility 4.1.1. Code of Ethic 1 – Client First 4.1.2. Code of Ethic 2 – Integrity 4.1.3. Code of Ethic 3 – Objectivity 4.1.4. Code of Ethic 4 – Fairness 4.1.5. Code of Ethic 5 – Professionalism 4.1.6. Code of Ethic 6 – Competence 8

4.1.7. Code of Ethic 7 – Confidentiality 4.1.8. Code of Ethic 8 – Diligence 4.2 Ethical and Professional Considerations in Financial Planning 4.2.1. CFPCM Professional’s responsibilities towards clients and public at large 4.2.2. Client agreements and confidentiality clauses 4.2.3. Model Rules of Conduct for CFPCM Professionals 4.2.4. CFP marks usage for CFPCM Certificant 4.2.5. Other relevant legislative requirements and responsibilities Part V: Regulatory Environment Related to Financial Planning 277-320 5.1 Regulation Relating to Individuals 5.1.1. Contracts 5.1.2. Negotiable Instruments 5.1.3. Torts 5.1.4. Professional Liability and Fiduciary Responsibility 5.1.5. Agency law 5.1.6. Consumer Protection Law 5.1.7. Family Laws-Divorce 5.1.8. Indian Succession Act ‘Grade2’ 5.2 Function, Purpose and Regulation of Financial Institutions 5.2.1. Banks 5.2.2. Brokerage companies 5.2.3. Insurance companies 5.2.4. Mutual fund companies 5.2.5. Credit Rating Agencies 5.2.6. Non-Banking Financial Companies 5.3 Other Relevant Regulation 5.3.1. Indian Companies Act- 1956 5.3.2. Indian Partnership Act- 1932 5.3.3. Limited Liability Partnership Act- 2008 5.3.4. Foreign Exchange Management Act- 1999 5.3.5. Disclosure and Investor Protection Guideline- 2000 issued by SEBI (DIP Guidelines) 5.3.6. Prevention of Money Laundering Act-2002 (PMLA) 9

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Study Advice 11

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Introduction First of all, some advice to help you become a successful distance education student. This is not a complete ‘how-to-study’ guide, nor does it attempt to teach you how to read faster, improve your recall, or become a better examination candidate; however, we have provided a list of references which can assist you in these areas. As successful professionals, you will already have a wide range of intellectual skills and knowledge that you will find helpful as you progress through the programme. However, as many of you will be doing the course at home, in your own time, some special organisational skills will be required. Planning Distance education students generally enjoy being able to work at their own pace (within certain limits), at the times which suit their lifestyle and in their own environment. However, nothing comes easily! Studying at home or work requires more self-discipline, commitment, motivation, independence and organisation than on-campus study. Planning and organisation are the keys to successful distance study. What you gain in having the flexibility to fit your study programmes around your other commitments is balanced by the need to realistically plan your own study sessions and stick to your plan. Making Time Your life is probably busy already, with long work hours, family commitments and some essential leisure activities. Trying to fit in, on average, 7 to 10 hours of study each week per unit can become an enormous burden unless you have done some planning. Early in the semester, you will need to make a weekly study timetable. This does not have to be arduous; just making a notional plan such as ‘I’ll study for two hours after dinner on Mondays and Tuesdays and then put in a half or whole day every weekend’ will be sufficient for those of you who are disciplined and have few commitments. However, if this does not sound like you or you have not studied by distance education before, it will be highly beneficial to do the following procedure:  Draw up a weekly grid and divide each day into morning, afternoon and evening sections. You may like to divide each day into hour-long blocks if you find you need the space when you are filling in the grid. Be sure to identify any pre-work that is necessary to achieve your timetable goals.  Think clearly about your work, family, home, leisure and other commitments, and chart them accurately on the grid. Note every weekly commitment that you have —this includes hearing the kids’ reading, cooking meals, sport club meetings, whatever.  Pencil in the time slots that will be most suitable for your study, bearing in mind that a maximum of two hours study will probably be all you will be able to cope with after a day at work. However, you will need a minimum of an hour each session to really focus on the material. Do you really have enough time to meet the 7 to 10 hours a week per unit commitment? Is it time to rearrange priorities such as watching that serial on TV?  Pencil in times in which you will exercise. You really do have to keep your body functioning, and the more you can exercise (within reason), the better your concentration should be. Likewise, you need to sleep. A schedule that eats into your normal sleeping time will probably not be sustainable over a whole semester. 13

Work to your study timetable for a week and then make any adjustments. You will need to be flexible, of course, but if your plan is realistic enough, it should be a good guide for the next few months. If you fall behind in one week, try to make it up in the next. Sunday Monday Tuesday Wednesday Thursday Friday Saturday Morning Afternoon Evening Finding the optimal time for study and fitting it in with work and family commitments may take a bit of experimentation. It may even be a bit depressing; however, the benefits of such an exercise are that: you will identify not only study time but other important activities, particularly family ones, that you should not reduce; and by allocating specific blocks of time to study, you can protect these periods from incursion by other less important tasks. A Semester Plan What about busy periods at work, conferences or family holidays? This requires a whole semester plan. The suggested study schedule in each study guide will help you to plan how you can organise your progress through the topics and assessment commitments over the semester. Adjust the schedule so you can fit in all your extra commitments and still keep up, and then write your own date deadlines for completing each topic next to the listed week number. If this is too complicated with all the commitments you have to fit in, draw another grid for all the weeks in the semester, containing all your long-term time commitments. You should also immediately note the examination date in your diary and do whatever is possible at this stage to ensure that you will be fairly free in the weeks leading up to those dates. If you are still thinking, ‘But what if I get sick, or my team gets into the grand finale, or someone dies?’ Remember that adults are reckoned to have several such crises each year. So, you will need to be flexible and not so highly committed that such events would spell disaster for you. Whatever you do, don’t fall behind your schedule without clearly thinking through the consequences —when will you catch up that time? And Where? Planning where to study is just as important as deciding when to study. If you don’t have the ideal spot at home, i.e. a quiet area with a comfortable work space and good lighting, you should investigate alternatives. What are the local library’s opening hours? Is there a quiet place at work that you could use at lunch time or before or after work? Can you use commuting time on public transport? Or what about joining your children for an organised session of study/homework on week nights? 14

Organising Your Time Your success as a distance student will also depend very largely on how effectively you manage your detailed programme. This will involve not only making time to study, but also:  Finding the times at which you can study most effectively; having a plan for how best to use each study session;  Monitoring your own study to ensure that you are doing something productive each session, not just reading aimlessly. Coping with all the other pressures on your time will mean finding a source of motivation that will work for you in actually getting you to your desk. Keeping up with the other members of a study group or network is a stimulus that many people find helpful. Other people find that it is establishing a strict daily or weekly routine that seems to work best. The most important technique is always to have your own goals for each week or session — targets to aim for, and deadlines to meet. Organising a Study Session As we just said, settling down to work is much easier if you have a set of deadlines to meet. If you start each session by referring to your target deadlines for the completion of each topic on your semester grid, or using the suggested study schedule in the study guide, this should give you a helpful sense of urgency in each session. Once you have your goal for the week, you can then allocate a block of work to each study session. Subsections in each topic can be used as targets for an individual study session. For example, in a two-hour session, you could aim to finish a large section of reading before taking a break. If you really have no idea how fast you will go, you can see how much you achieve with maximum effort in 40 minutes on the first day, and use that as a guide. In the beginning especially, your concentration span will be short and there is not a lot you can do about it besides being aware of the problem, removing all the distractions you can, and gently disciplining yourself back to work. You will find that as soon as you sit down to study, thoughts from your working day, family or social life will present themselves. Be aware of the threat they represent to your precious time! Make a note of the things that occur to you that you should have done, but keep going. Studies show that the first half hour of a study session is notoriously unproductive, but once you break through the scatterbrain barrier, the next half hour or so can be extremely productive. You will need breaks, but try to span out your concentration periods to at least 40 to 60 minutes — or the end of a section if at the end of a 40-minute period you are nearly there. Then have a good 15-minute break. 15 minutes should be ample to refresh you, even if you don’t feel particularly fresh; then it is important to get straight back into it until your next planned break. Your second hour can also be very productive and you should again aim to span it out for at least 40 to 60 minutes before taking another good break. By your third hour, you will probably be feeling tired and may be better off just reviewing your notes and the topic objectives, or doing some light reading in the subject area. 15

Settling Problems Some people may feel they lose concentration after just 20 minutes or so, especially in the beginning. It is pointless pressing on if ‘nothing is going in’, but rather than give in to the temptation to have an early break, try to stay at your desk. Do some stretching, then turn back to the topic outcome goals and think about the importance of what you are trying to nut out in this session. Re-reading your notes for the session will also help you put the new material into perspective and increase your motivation to continue. Brushing up Your Study Skills In addition to the fundamental study skills of being able to plan and use your time effectively, the CFPCM programme will require you to improve your reading skills and to cope with material with which you may be unfamiliar. We also assume that you will be proficient in the use of a financial calculator. If not, it is your responsibility to gain this knowledge. The guidebooks that come with financial calculators can be a helpful resource. Becoming an Active Learner The greatest danger, while studying on your own, is allowing yourself to drift aimlessly through the reading; this is particularly easy to do late at night! The CFPCM course involves a lot of technical reading, and many of the readings are written in specialist financial or legal language that is not particularly ‘user friendly’. Part of our intention is to help you become familiar with this language, as you will need to continue to read such material to keep abreast of changes in the financial planning field; but we do recognise that it can be difficult. Breaks will help keep your mind fresh to assimilate the concepts and gradually become comfortable with the language, but there are other skills that will ensure that you are using your time profitably. Skimming Some of the readings in the CFPCM course are marked for further information only and do not have to be read closely. These readings are intended for summary, further interest and future reference. The main bulk of information that you need to know is contained in the other readings and the white pages of the study guide. These ‘for further information’ readings may be skimmed. Skimming is allowing your eyes to travel over each page very quickly, just aiming to pick up the main ideas. Reading the headings and the first sentence of each paragraph will give you many clues as to the writer’s main points. The study guide author may have given you an outline of what he/she considers are the main ideas to be found in the reading, and you should keep these in mind as you skim each page. Where you find a passage that seems particularly pertinent or interesting, you can drop out of skimming mode and read closely for a while, then slip back into it again when the detail seems to become burdensome and irrelevant for your purposes. Underlining key words and sections will help you maintain concentration and save you time if have to review the reading for examination preparation. Skimming is a skill well worth mastering for your future professional life. 16

Close Reading For text that needs to be read closely, the key is understanding. This still does not mean looking up every difficult word in the dictionary — for many of them, an educated guess based on the word’s context will be sufficient — but you will have to look up some of them to make sense of the context. For this kind of reading, you should use all the techniques that you find successful for reading effectively at work — making margin notes, highlighting, drawing diagrams, jotting down key points and items you want to clarify or follow up — anything that forces you to interact with the material rather than assuming it will become embedded in your brain of its own accord. Making Notes Making notes and writing answers to questions in the text is one of the surest ways to keep yourself awake. It forces you to focus on main points, and then tests and reinforces your understanding of them. A good collection of your own notes is also a handy revision tool for you to use at examination time. Don’t worry about whether you will remember all you are reading while you are reading. The important thing to focus on at this stage is whether you understand it. If you do understand the material, and have taken comprehensive notes of the things you think you need to remember, it will be an easy exercise to memorise your notes later. The notes you take should not be just a shorthand copy of the text, but an attempt to ‘pick out the bones’ of it, then restate these ideas in words, pictures and symbols that are meaningful to you. Summarising in visual ways, such as flow charts, tables and geometric representations, works well for some people, while lists of headings with notes underneath them work better for others. Following, are two examples of visual notes that you might like to copy. The first is a kind of flow chart that can be used to represent passages of text that deal with a series of events or processes. Arrows can (and should) be used in most diagrams to show a relationship, cause and effect, problem and solution. In the next illustration, we have taken some text from one of the CFPCM units and developed a flow diagram from it. This will demonstrate how you may be able to use such an activity as you work your way through the course material. 17

Applying Investment Fundamentals Every investment product has its own profile in terms of yield, safety, cost, volatility, liquidity, flexibility and tax efficiency. Such profiles are subject to constant change, from cyclical economic influences on the one hand to legislative reform on the other, particularly in the areas of superannuation, social security and income tax. As a competent financial planner, you have a professional and ethical responsibility to be conversant with invest-ment planning and with a range of products that will enable you to work collaboratively with your clients to meet their identified needs. The following diagram illustrates the synergistic relationship that must exist between the various factors that determine the investment portfolio that is selected. Study Groups and self-help Networks One of the most common experiences of students starting a distance education course is the feeling of isolation from other students. While you may revel in the freedom of working at your own pace, there will almost certainly be occasions when you will wish you had someone else to talk to. The people who will best understand your problems will obviously be those also enrolled in the programme. By making the effort to contact fellow students early in the semester, even if you live in a remote area, you will have a support network to fall back on when you need it. A study group need not be large; even two or three people communicating occasionally can help reduce the feelings of isolation and provide new ideas or perspectives and a chance to test out your own thoughts. If you have the opportunity, meeting regularly with others at work or in your local area can provide motivation and stimulus to help keep your study programme on target. Each unit contains exercises and activities that can be used as a starting point for group discussions. Being part of an active study group will involve a definite time commitment, but the benefits for most participants are well worth this effort. To keep a study group going, you will need dedication and at least a minimum amount of organisation, including a programme of some sort for each meeting and someone to organise and chair each meeting. As a student of the CFPCM, you may find that being involved in a study group is a valuable exercise in group dynamics, as well as a source of ideas and alternative viewpoints about the study materials. 18

Support at Work Your peers and colleagues in the workplace will be an important resource for you while you are studying. The units of the CFPCM are structured in such a way that you are able to draw not only on your past experience, but also on your current professional environment to assist in making the learning experience valuable and relevant. As you work through the materials, you will find that many of the learning activities have application in the workplace, and in fact require you to use the workplace for their solution. You can draw on the experience and knowledge of your colleagues to contribute to your learning as well; it is an important part of professional education that you are able to recognise the value of your own and others’ experience to the discussion that is developed in the study guide materials. Your colleagues can be useful sounding boards for your ideas and reflections on the material you are studying, and can play an important role in helping you question the material and reflect on the knowledge you are developing as you study. 19

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Part - I The Six Step Financial Planning Process 21

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Part – I The Six Step Financial Planning Process Learning Outcome: After reading this chapter, you will be able to learn  Basics of Financial Planning  Regulatory framework  Steps of Financial Planning  Formats of various forms to be utilized in Financial Planning Process  Credentials of a good financial planner  Importance and format of written Financial Plans Introduction Financial Planning is the process of meeting financial goals in our life through the proper management of finances. Financial goals can include buying a house, saving for your child’s higher education or planning for retirement. A financial plan is a road map to help you achieve your life’s financial goals. Here are three basic questions that you will answer during financial planning: Where are you today? What is your current financial situation? Where do you want to get to? What is your vision of your future financial situation? Will you be able to get there? How do you plan to achieve your vision? The financial planning process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan for how you can meet your goals given your current situation and future plans. It is a critical exercise in ensuring long-term financial security. During the financial planning process you analyze what your financial needs and goals are. Then, you quantify in money terms what resources you need to meet those goals, and quantify the time period during which you want to achieve these goals. Finally, you write an action plan on what you need to fulfill your plan in terms of what products to buy and what types of savings to make. Sometimes you may feel you can do financial planning on your own, you might want to answer the following questions:  Is your family going to be financially secure, whatever happens to you?  Is your finances tax efficient? Do you know how to legally save taxes?  Are you confident that investments give you the best return in a rising or a falling stock market?  Do you have enough money to pay for your son or daughter’s education? What about provision for their wedding?  Do you wish to retire in the mountains or next to the beach? Is this just a wish, or have you enough money to turn this wish into reality?  If you don’t have a Will, do you know what will happen to your hard earned assets upon your death? 23

Financial Planning is a broader term than mere investment advice / recommendations and subsequent placement of funds. It is comprehensive planning which covers all aspects of a client’s financial well-being from wealth creation to wealth protection; selecting the products which suit specific needs; monitoring and reviewing his/ their financial situation on a regular basis and revising the plan if need arises. Financial Planning is nothing but simply arranging the finances in the light of keeping in mind the financial goals, i.e. taking a goal – oriented approach and mapping out appropriate strategies to realize them goals as defined by the client. The Financial Planning also Includes:  Using a monthly spending plan, or budget, to keep finances on track.  Making decisions about the job and its benefits.  Getting the most out of other financial resources, including insurance and employer provided benefits.  Saving and investing money. In most efficient manner  Controlling expenses and staying out of debt.  Planning for estate transfer. The Need for Financial Planning Why do we need financial planning? Subconsciously, we all know about what our life’s goals are. The need for financial planning arises from the need to meet the financial goals. Goals are determined by one’s understanding of the present situation, status, income level, wealth, responsibilities, aspirations, risk profile, ability to save, past and present lifestyle, etc. Financial Planning requires a thorough analysis of an individual’s current position. Over the last few years, the need for financial planning has been driven by the changes in the Indian financial markets. The Equity and debt markets have become dynamic and more volatile due to global and local factors. Indian markets have become more integrated with the global financial markets, thus calling for constant monitoring of the markets as well as the client’s financial situation. The investment options are also increasing and now include bank deposits, bonds, mutual funds, equities, derivatives, gold, real estate Structured products, commodities and equities of foreign companies. The universe of investment options is likely to expand further. Reforms have put more money in the hands of investors. Very few people among these have the time and expertise to make a complete financial plan for them. Hence, there arises the need to take the help of a professional financial planner who can guide the individuals to achieve their financial goals. Education levels and the average age of investors is increasing. It means that the working span and post- retirement span is almost equal. Therefore a person has to save more and invest wisely to ensure security throughout the long retirement period after meeting all the earlier goals properly. Comprehensive financial planning can go a long way in assisting investors to build financial security for themselves and their families. 24

Who is a Financial Planner? A financial planner is a person who uses the financial planning process to enable the client to achieve his financial planning objectives. A professional financial planner is one who understands the universe of the various investment options available. He also understands well the risks and return attributes of these options. Financial planner does the risk profiling and puts his clients in one of the categories: Conservative, Moderately conservative, Moderate, Moderately aggressive and aggressive. An aggressive client has to be convinced to become moderately aggressive. Taking the help of a good financial planner to manage one’s finances can help to avoid investment mistakes that can seriously damage one’s financial health. It is essential to plan one’s finances prudently throughout the earning phase of one’s life in order to meet the goals arising at different intervals of life and also to save money for meeting post- retirement expenses without having to cut down on “annual living costs”. Retirement corpus has also to be prudently invested to ensure reasonable post inflation return. Financial planning professionals are a disciplined group of individuals, who adhere to ethical and regulatory standards, possess specialized knowledge and skills, and apply this knowledge and skills in the interest of individuals who wish to be benefited from their knowledge. A financial planner inculcates the discipline of saving regularly among his clients. India is not alone in witnessing the emergence of the financial planning profession, as several other countries have adopted the’ Certified Financial Planner ’, CFPCM, marks from the US-based CFPCM Board of Standards. In recent years we have seen Australia, United Kingdom, Germany, France, Japan, Canada, South Africa, New Zealand, Switzerland, Singapore, Malaysia, South Korea, and Hong Kong securing the right to use the CFPCM mark as a means of designating the standing of a financial planner. The CFPCM designation is based on the education and experience of the practitioner. Your enrolment in the CFPCM Professional Education Program is one major step toward achieving CFPCM status. You will find three types of advisory services in India:  Sales driven – (commission based) where the primary goal is to sell as many, high margin investment products as possible  Goal driven – (Fee based) where the primary goal is to help people create a logical, rational investment plan that helps in meeting financial goals. For which they charge fees  Change driven – where the primary goal is to create as much positive change as possible for their clients (which could also involve helping them work with emotional issues / relationship to money issues / etc.) Internationally, it is not just the wealthy and those about to retire who are turning to financial planners for advice. For example, families with young children, a loan and other financial commitments are increasingly seeking professional advice on managing their current finances and building a sound financial future. Financial planners are in a unique position to assist all Indians who are willing to put a value to sound 25

financial advice because of the range of services they can offer. An increasing community awareness of such services is no doubt linked to the growth in the profession. A career in financial planning offers the potential to gain both personal satisfaction from assisting clients meet their financial objectives and personal financial security for the successful practitioner. While it is a rewarding career, it is a career which requires an ongoing commitment from the practitioner to continuing education and professional development. The Work of the Financial Planner Financial planning, as a distinct professional service, has been growing and developing internationally since the early 1980s and while the work of the early financial planner largely centered on investment products distribution, the work of financial planners is now increasingly based on a comprehensive approach to advice-giving. Accompanying this change to comprehensive advice-giving is an increasing emphasis on the provision of ongoing service to the client. At this point, let’s briefly give you a ‘thumb nail’ sketch of just what a financial planner does, before we explore the work of the planner in more detail throughout this topic. In essence, financial planners help people achieve their financial goals, whether it be buying a home, saving for their children’s education, protecting their family through insurance, investing their hard earned money, managing debt, or planning for retirement. The planner helps clients to:  Make informed decisions about their money and how it can be used to best advantage;  Develop a sound financial plan covering all aspects of their financial well- being (from wealth creation to wealth protection);  Choose products that meet their specific needs; and  Review their financial situation on a regular basis and revise their financial plans as necessary. As you would gather from the list above, this involves on the part of the planner not only technical skills, but also communication and inter-personal skills. Drawing on an analogy, a financial planner is akin to the medical general practitioner (GP), but cares for the financial health of the client. And just as the good GP spends a lot of time listening and getting to know and understand the patient’s health condition, so the planner spends time getting to know the client’s financial position and exploring their financial goals and what they wish to achieve in life. So, financial planning is very much a people -oriented profession. It’s about establishing long term, trusting relationships with clients, which confers on planners a number of professional responsibilities and obligations that we explore in this topic, and in the appendix to the unit. In this first section of the topic we look at a number of issues that surround the work of financial planners and their relationship with other professionals. The Regulatory Framework Public confidence in the financial system is essential for any economy. If people do not trust the organisations in the financial markets, they will not be prepared to invest or lend funds and the economy will stagnate. Investors and lenders need to be confident that companies are prudently run and those securities markets are efficient and fair. 26

All investment involves some degree of risk. The regulations that are imposed on the financial markets seek to increase investor confidence by ensuring investors have all the information they need to make their own informed assessment of the risks involved. Furthermore, the possibility of prosecution by the regulators provides a deterrent to fraudulent and reckless actions by market participants. Regulation is also important in terms of maintaining India’s credibility with the international investment community. If India is perceived as a low investment risk by international investors, they will be more willing to lend money at lower interest rates and provide capital at lower expected levels of return. The regulatory framework for Indian financial system has evolved to a large extent and is in the process of further revolution. The Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory and Development Authority (IRDA) are the three apex regulatory authorities in the financial services industry. Currently, depending on the services provided, a financial planning business is regulated by a number of laws, principally the Securities (Contracts) Regulation Act, 1956 and the SEBI Act, 1992 for securities trading, the Insurance Act, 1938, the Insurance Regulatory and Development Authority Act, 1999 for life and general insurance and the Consumer Protection Act, 1986 for protecting consumers against misconduct, misrepresentation, and unfair trade practices. Pension Fund Regulatory and Development Authority (PFRDA) is regulator for pension sector. Businesses will also be regulated by the various codes of practice, namely the FPSB’s code of practice and the life and general insurance codes of practice. Codes of conduct/practice will be used, primarily to establish best practice standards for meeting the requirements of the law (and where appropriate, practice in areas not covered by law). However, the codes will continue to be administered by the industry and not SEBI. Interestingly, it is not mandatory for an industry participant to be a party to a code, but members of the FPSB are bound by the FPSB India Code of Ethics and Rules of Professional Conduct, which we will consider later in this topic. The financial planner may not be regulated directly as such. For example insurance agents are licensed and regulated (apart from internal regulation from the company for which they work) by the IRDA, securities brokers and sub-brokers are licensed and regulated by the SEBI and distributors of mutual funds have to pass an NISM (MF) Distributors’ examination to be associated with Mutual Funds. In addition, the financial planner is subject to a number of laws of the land. A number of laws also become applicable when he/she deals with clients and it is essential that the financial planner be aware of them. In case of any litigation by a client, the financial planner needs to have at least basic awareness of his defences under the law. A basic understanding of legal issues may also prove useful in advising clients in their dealings with investment institutions and other companies. The legal aspects of financial planning have been explained subsequently in Section 6 in this topic. Scope of Services The comprehensive or holistic approach to financial planning provides for an initial analysis of the client’s total financial well-being - both now and in the future. Apart from considerations of investments, the approach addresses the areas of estate planning, insurance risk management, income and expenditure (cash flow), retirement benefits, wealth accumulation and taxation. (These areas form the basis of the other 27

modules in the CFPCM education programme.) As well, the work of many financial planners includes a strong focus on the need for ongoing service to clients. While the comprehensive financial planning service is increasingly the dominant service delivered to consumers world-wide, it is possible for a consumer to access restricted advice either by requesting a limited service or through dealing with a firm that provides a limited range of services. For example, a consumer may only wish to place investments and may not wish to be advised on insurances and estate planning. Or indeed, the firm itself may not provide comprehensive services, but restrict its services to retirement planning. Importantly, the financial planner must clearly establish at the commencement of dealing with the client that a limited service is being provided. If the client has requested a limited service, the financial planner should obtain such a request in writing from the client. How is Financial Planners Remunerated? The two main methods by which financial planners are paid for their services are commission and fees for service. While in the early years of financial planning, internationally, many businesses and practitioners earned their income through being paid commissions by financial institutions for the placement of investments, anecdotally, there appears to be an increasing trend toward payment for services by fees. The two methods are delineated by the processes which they represent. Commission payments represent a process of ‘selling’ investments; that is, a process designed to convince the client that he/she should invest in particular investment products. Therefore, it is largely a transaction driven process wherein the planner is only paid whenever investment transactions take place and one which relies on future income being earned from the next new investor, or when changes are made to an existing investor ’s portfolio. One view of the commission- based approach to remuneration is that the process incurs the risk that the client may question whether or not the recommendation to make a particular investment was influenced by the level of commission being paid? This view also holds that the same question may continue to arise in the client’s mind whenever a recommendation to change an investment is made by the financial planner. Notwithstanding this view, there are many successful financial planners who are remunerated by commission and clients who would rather have their advisor remunerated from entry/exit fees from the investment rather than writing out a separate cheque for the fee for service. The process of being paid on a fee-for-service basis is a function of a service based process. In such cases, the client pays a fixed fee for the provision of advice and ongoing reviews as agreed between the two parties. Some financial planners base their fees on hourly rates for time taken on the clients’ business or on a scale of fees based on the rupee value of assets under management. Some planners execute a service agreement with their clients which spells out what services they provide and the cost for a defined period. Who are our Clients? One of the most critical parameters for judging the success of your personal financial planning enterprise is the number of loyal clients you manage to acquire through powerful networking and cutting-edge self- promotion skills. One of the most effective, convincing and credible marketing methods is to showcase your knowledge and expertise by holding regular seminars and events in your neighborhood. This is passive marketing at its best. You aren’t aggressively pitching your stuff and the audience is impressed because they get value addition 28

and expert information. This is the best platform to meet people, to socialize with potential clients and obtain references of interested customers from the audience in attendance. This a surefire method of bagging a solid client base in the initial stages of the business when you haven’t built your brand value and identity. Start with people in your circle of influence like family and close friends. It gives you the practice and confidence to take on business customers outside your social circle. You can take references from family members and friends about their friends and acquaintances who they think might need your services, and expand over a period of time. Professional associates can also be tapped for references and recommendations. The crux of the strategy is to exploit all your contacts and the contacts of your contacts as well. You can also make your presence felt in specialized forums and community discussion boards. Trigger smart discussions that help showcase your expertise and offer a few tips and ideas to people as a marketing strategy. You can set up a free information and discussion blog and list down the services you offer in it. Build a strong business profile in social networking sites and be active in the discussion threads of various communities in them. Proactively contact people in these sites to let them know of your services. Writing knowledgeable and informative articles is another great way to market your business credibly and gather some good clients on the internet. These articles will regularly show up on search engines when people look for pertinent information, thus giving you the much needed exposure. Though finding clients for your personal financial planning can be challenging in the initial stages of your business, a cohesive promotion plan can be a highly rewarding and financially productive platform for building a strong enterprise. Categories of Potential Clients Broad Age Group Characteristics category 21-25 Young adult 25-40 Typically, whether employed or not, young adults are just starting to 40-50 accumulate assets. Often this means going for loans. They may also Young family 50-55 be looking for some regular investment commitment Often burdened with debt, primarily a loan, both partners may be Mature family 55-65+ employed or one partner may stay home with young children Children are approaching the end of their education or have become ‘Empty nesters’ relatively independant. Debts such as loan should be substantially Self-employed/ reduced and concern for security in retirement is starting to be Business owner raised. High-income earner Children usually leave home or attend tertiary education. Level of Pre-retiree/Retiree income increases. Retirement Planning, debt reduction, asset accumulation and risk management would be important in this stage. Perhaps a businessman or self-employed professional earning a moderate income. Proprietor of a small- to medium-sized business Either employed or self-employed. Usually a professional but not always. These people are very clearly focused on retirement package. Married or single, with no dependant children and usually no debts. 29

The Financial Planner’s Relationship with Other Professionals The day-to-day practice of a financial planner quite often includes communicating with the client’s other professional advisers such as the accountant and solicitor. In communicating with a client’s accountant and/or a lawyer, the financial planner will be seeking either further information about the client, or providing information about the client. Importantly, the laws relating to confidentiality and the professional ethics of such information transfer dictate that no such liaison should take place until approved by the client. For example, if a financial planner is wishing to liase with the client’s accountant, the client should have approved such liaison either in writing or by telephone to the accountant. For the legal protection of both the financial planner and the accountant or solicitor, the written authorisation may be along the following lines: Dear Accountant We hereby authorise you to liaise with our financial planner Ms Sunita Citizen of Professional Planners in relation to our accounting and taxation matters. Please consider this authorisation as being valid until revoked by us in writing. Yours sincerely, Amit Client Madhuri Client Date: . . . /… /…. A financial planner may also, for example, refer a client to a solicitor to have a will or power of attorney established. Such a referral may take the following line: Dear Lawyer, We write to introduce our clients Mr Amit Client and Mrs Madhuri Client whom we have referred to you for advice relating to Wills and Powers of Attorney. Our clients own a small business ‘Beautiful Interiors’ which operates under a partnership struc- ture. They have three adult children all of whom are married with children. Their eldest son is an employee of the business and is, according to our clients, interested in taking over the business. Mr Amit Client suffers from a heart condition and would like to reduce his workload as soon as possible. As such there are business succession planning issues which need to be addressed through their Wills. Would you kindly advise Mr and Mrs Client accordingly and in due course provide us with certified copies of Wills and Powers of Attorney for our file. If we can further assist please do not hesitate to contact us. Yours Sincerely, PROFESSIONAL PLANNERS Sunita Citizen Authorised Representative 30

In providing service to a client, the financial planner may also need to liase with insurance advisors (both general and life), provident fund managers and bank managers. With regard to the client’s general insurance advisor, the formal liaison may take the following format: We have recently prepared comprehensive financial planning recommendations for our mutual clients Mr. Amit and Mrs. Madhuri Client. We are concerned that our clients appear to be insufficiently insured in the areas of home buildings insurance. In relation to these matters, we ask that you review all of Mr. and Mrs. Clients’ insurances to ensure that they are adequately protected. Would you also please review the insurance provisions for their business ‘Beautiful Interiors’. In due course, would you kindly notify us of changes as soon as they take place. Yours sincerely, PROFESSIONAL PLANNERS Sunita Citizen Authorised Representative In the case of liaison with, say, a mutual fund, such communication may formally appear as follows: Dear Sir/Madam, Investor Policy Number: 123456789 Mr Amit Client Would you kindly provide us with details of Mr Amit Client’s current account statement. We make the above requests under written authorisation from our client and attach same for your file. If you require further information about this request, please telephone us on ............. Yours sincerely, PROFESSIONAL PLANNERS Sunita Citizen Authorised Representative Excluding the letter to the mutual fund, the above letters to the lawyer, accountant and insurance advisor/broker clearly recognise the delineation of areas of expertise between the financial planner and the other professionals. Unless a financial planner is a qualified lawyer, or holds a life insurance agency(s) broker licence, he/she is not able to provide the client with other than incidental advice on estate planning or sell the insurances himself/ herself. Similarly, the lawyer and accountant can, only give the client incidental financial planning/investment advice. This delineation of expertise must at all times be recognised by the relevant professional. 31

The Six Step Financial Planning Process Establishing relationship Collect Clients Analyse Client’s Financial Status, Risk profile and determine financial goals Develop financial planning Recommendations Implement client’s financial planning Monitor and review the client’s situation 1.1 Establish and Define the Relationship with the Clients We start examining the financial planning process in more detail. In this topic we look at the issues involved in the first step of the process – establishing the relationship. The client would like to know how you could help him or her and you would like to know what the client expects from you. It’s at this stage that the scope of the engagement is mutually defined by the financial planning practitioner and the client prior to providing any financial planning service. The initial meeting sets the stage for the development of the client -planner relationship. It is also during this stage of the financial planning process that client trust is established and nurtured. The Financial Planner’s Most Valuable Asset: Trust From time to time financial planners consider the asset they are building within their practice. Indeed you may have heard financial planners discuss such matters as ‘How many clients do you have ?’ or ‘How much (funds) under management do you have?’ The number of clients is an important issue as it largely determines the level of income and thus business survival for the financial planner/planning firm. For financial planners who receive trail/ongoing commission as part of their remuneration, the level of funds under management will impact on the overall income of the planner/firm. However, as valuable and as important as these issues are, it is vital that you recognise the fact that both issues are totally reliant on the single most important asset held by any financial planner — that asset is the 32

trust held by the clients in the financial planner. A loss of trust by clients in a financial planner will clearly lead to a loss of clients. A loss of clients will clearly lead to a reduction in funds under management. And so, without the clients’ trust, the financial planner has a business threatened by the commercial reality of reduction and, potentially total loss, of income. Trust carries with it a significant sense of responsibility. Ethically, it is indicative of a special relationship between individuals which naturally implies confidence and reliance. It also suggests care and concern. It is these associated ideas that underscore the notion of a ‘fiduciary relationship’ which the law recognises for certain professional and legal relationships with consequent legal implications. One difference between a relationship that claims to be built upon the ethics of trust rather than a legally recognised fiduciary relationship is that the former usually requires a period of ‘gestation’ before it can be said to exist between an advisor and client. Client trust is an asset that must be vehemently defended and upheld by every financial planner. Adherence to a high standard of business ethics and professional conduct is an essential ingredient in the retention of client trust. The Initial Client Interview We have argued that the initial client interview is the more appropriate opportunity to complete a data collection form. The first interview also gives you the opportunity to get to know the client more generally, explore with the client other issues of concern, and explain fully your role. Remember that a professional relationship built upon trust also carries another important implication. The trust a client places in a financial planner carries with it a preparedness to expose themselves to certain risks in reliance upon the advice of the financial planner. Naturally, the client will want to know whether they can repose that confidence upon you. In this respect, the first meeting is of vital importance to the client. You, as a financial planner would want to know what the client expects from you. The initial interview is an opportunity to get to know the client, build the relationship and inspire confidence. Confidence carries with it a sense of safety and security. Individuals who believe or understand there to be a relationship of confidence are able to be open, honest and frank with the other party. These characteristics should describe the professional relation- ship between the financial planner and his or her client. For this reason, the first meeting is of vital importance to the financial planner as well. Preparing for The Meeting Carrying out a successful interview requires sound interviewing techniques. It is also good practice to confirm details of the meeting and what you expect the client to bring to the meeting, if anything. For example, you might ask the client to bring in his/her investment certificates, insurance policies, tax returns, and so on. You should also indicate, either verbally or in writing, an estimation of how long the meeting may take. Typically, comprehensive data collection can take anywhere from one to two hours. It is also important to ensure that those charged with making decisions, and who possess the information you need, attend the meeting. If one partner of a couple is responsible for the domestic budget and does not attend your meeting, the data you collect will probably be inaccurate and this will ultimately be reflected in 33

your advice. You are also denied the opportunity of assessing the qualitative/inferential data from the absent partner. Similarly, you face the risk of providing information to one party in the hope it will be accurately communicated to the client’s partner. Whilst your written recommendations should always ‘standalone’, face-to-face meetings are preferred so that matters requiring clarification can be dealt with immediately. Again, these types of problems can be avoided by requesting the attendance of both partners with your initial contact. Projecting a professional image It is good practice to hold the meeting in your office. Apart from the obvious benefit of keeping away ‘domestic distractions’ that may exist in the client’s home, you will have resources on hand if the need for specific information arises. Further, and less tangible, is the image portrayed by a professional office environment as opposed to a brief case full of prospectuses and a notebook computer. There is much literature on how perceptions and judgments are made within the first few minutes of contact with a professional. How you present yourself, the clothes that you wear, your general professional demeanor, and the office itself (e.g. is it bright and tidy?) all contribute towards that first impression. There is no doubt that how you deal with your client in the first minutes will have a major bearing on your ultimate success in securing them as a long-term client. However, you should remember that it is of no use trying to establish an environment, office atmosphere or product statements or documents if you are not able to develop trust and confidence in the client. This can only be communicated through sincere action and practice that constantly reinforces in the minds of clients that trust is the actual basis of the relationship. The image can merely establish ‘proxies of confidence’ that will be easily discredited. Whilst the purpose of this topic is not to deal with marketing per se, you should take careful note of the following material dealing with the client interview. How you handle the interview will have a significant bearing on your success with the client and your ability to provide proper, accurate advice. Getting the Client to Talk If you have not met the client previously, you should spend some time making the client feel welcome and providing them with an opportunity to talk and to feel comfortable with you. A good ‘ice breaker ’ is offering the client a cup of coffee or tea. Many financial planners fall into the trap of believing that a client has come to hear the planner’s words of wisdom, and the planner will immediately launch into a discussion about markets, performance and other matters. In fact, the client has come in to tell the financial planner of their problems and wishes to have the planner help solve them. You might start with ‘small talk’ to help the client open up and feel at ease. For example: Planner: So Mohan, did you have any trouble getting a parking spot? Client: No, not really, I was fortunate today. Planner: That’s fine, I’m sure we’ll be finished in two hours. I’ll get my secretary to give us a reminder call if we look like going over time. 34

Having stated the need to allow the client to open up, you also need to ensure that this doesn’t go too far. You need to maintain control of the meeting and may sometimes need to get the meeting back on track whilst not offending the client. This can be done quite simply by ‘asking their permission’. Planner: I got booked there for parking too. Anyway, we’d better get on with this or we will run the risk of getting you booked as well! Is that OK? Clients may also want to open right up and start ‘firing information’ at you. Once again, you may need to carefully get back on track with a comment such as: Planner: Well Mohan, what I suggest we do is work through the issues in order - that way we’ll be sure not to miss anything. Is that OK with you? Explain Your Role First, you might explain the process of comprehensive financial planning and how it may differ from the work of investment advisers. As you will recall, in Topic 1 we identified that many Indian consumers are not aware of the financial planning profession and that there are many advisers who claim to be offering a financial planning service yet are simply sellers of financial products. You should point out these differences and stress that comprehensive financial planning involves a holistic approach to solving financial problems. You should explain the process that you are about to embark on to the client, and following this overview, confirm with the client that they wish to proceed. The discussion may go something like this … As you haven’t been to a financial planner before, I think I should detail exactly what we do and what the process involves. Ok? This meeting is to complete our data collection, where we collect information about you, your investments, see if you have any particular concerns, and identify your objectives and let you know if we are in a position to help. We will then set the next meeting and, in the interim, we’ll spend time obtaining current information; we’ll look at possible strategies, work out the pros and cons ready for our discussion at the meeting. At that meeting, I’ll provide you with a written report that you can take away. The report will detail all of our recommendations, the reasons, supporting calculations, and we’ll explain exactly what to do and how to do it. I’ll then ask you to take the report away and read it. If you want to, you can seek out other opinions and then we’ll meet again. If you’re happy with the contents and the recommendations at that time, we can commence the preparation of the documentation and proceed to implement the plan. If you’re not comfortable with the recommendations, we can change it to address those concerns. If the data collection has been done properly, the likelihood of the final sentence is remote. 35

An alternative way of explaining your role is to ask a general question such as ‘What do you know about the services we can offer?’ and then clarify and elaborate on the client’s response. Defining the Scope of The Engagement Prior to providing any financial planning service, a financial planner and the client should mutually define the scope of the engagement. The process of ‘mutually-defining’ is essential in determining what activities may be necessary to proceed with the client engagement. This is normally accomplished by:  Identifying the service(s) to be provided;  Disclosing financial planning practitioner ’s compensation arrangement(s);  Determining the client’s and the financial planner ’s responsibilities;  Establishing the duration of the engagement; and  Providing any additional information necessary to define or limit the scope. The scope of the engagement may include one or more financial planning subject areas. For example, a client may only seek advice in managing his savings and investments. It is not necessary that every client approach you for preparation of a comprehensive financial plan. It is acceptable to mutually define engagements in which the scope is limited to specific activities. This serves to establish realistic expectations both for the client and the practitioner. As the relationship proceeds, the scope may change by mutual understanding. Clarity of the scope of the engagement enhances the likelihood of achieving client expectations. A mutually defined scope of the engagement provides a framework for the financial planning process by focusing both the client and the practitioner on the agreed upon tasks. This enhances the potential for positive results. The profession benefits when clients are satisfied. This is more likely to take place when clients have expectations of the process, which are both realistic and clear, before services are provided. We will see later in this topic that it is extremely important that you manage client expectations effectively. Disclosing Information: A Client’s Right to Know An informed client will generally be a happy client. This is true right through the financial planning process and, indeed, almost all clients who abandon an adviser cite ‘lack of contact or information’ as the main reason for seeking another planner. This axiom is true from the very beginning and you can do much to enhance your image and that of the profession by being up front with information and addressing concerns the client may have. Address Client Concerns Where your new client has never been to a professional financial planner before, they may have a number of questions in their minds when they attend the first meeting. Many planners and clients have identified the following issues as being critical concerns and you should consider raising these with the client before commencing the data collection process. By doing so, you are demonstrating a degree of professionalism and that there is ‘nothing to hide’. This can go a long way to reassuring the clients that they are dealing with a professional who empathises with them. 36

Disclosure Statements to Prospective Clients Financial planners and their firms can make a standard disclosure statement for all clients. Clients are interested to know of your qualifications and experience. If asked for, you should show them your CFP certification and full membership status with the FPSB. Many experienced financial planners will give references of their existent clients to a prospective client. The FPSB Rules of Professional Conduct states: Other Client Concerns You may also want to discuss how products are selected and strategies are developed. If you have independant research, you should briefly explain how this works. Clients are as interested in your business as you are in theirs. If you use computers to develop plans, you can explain this to your client. Whilst they don’t wish to know how your software works, they may find comfort in knowing that calculations are performed using computers to ensure accuracy. You should briefly explain the implementation process: who arranges transfers of funds, who liaises with accountants and solicitors, who prepares documentation and who oversees the implementation process. Briefly explain the importance of ongoing service and review. This is one area that may differentiate you from those engaged in product placement. You may also need to temper unreasonable expectations that your prospective client may have. Much of this may stem from the client’s impression of the type of work you do; many will have come to you simply seeking better returns on their funds. Once again, these objectives are very real and need to be addressed. However, you need to ensure that the client understands that returns are very much a small part of the overall intentions of a financial plan. Dealing with Client Expectations The next reading (Reading 2.1) touches on much that we have covered so far, and emphasises the financial planner’s core skill of being able to establish a constructive relationship with a client. Dealing with a variety of client expectations requires considerable skill and often a deal of intuition and delicacy. The author goes on to cite four types of potential client who can seek your services, and how you might handle them. This topic has dealt with a number of important issues, including some of the professional aspects of providing professional financial planning advice. The importance of building a relationship based upon trust was emphasised. We introduced some of the techniques that help build a good first impression. We examined the importance of defining the scope of the engagement and the issues that should be addressed at this stage of the client-planner relationship. The benefits of full disclosure to the client from the outset were highlighted and the issues you might consider to raise at the commencement of the meeting were included. We examined how timely disclosures not only make you comply with professional requirements but also help you build confidence in a client. Disclosures relating to professional capacity, compensation arrangements, planner ’s responsibilities, confidentiality and conflicts of interest(s) were discussed. 37

1.2 Collect Client’s Information After a relationship of trust has been built, the next step of financial planning is to identify the investment objectives of an individual. The financial goals can be segregated into:  Short term goals  Medium term goals  Long term goals Each of the goals has a time frame and an amount attached to it. Some goals have priority over the others. Goals and objectives should be quantified in terms of money, for example, I wish to spend Rs.10 lakhs on the marriage of my daughter which will take place any time after 12 years or, I wish to save Rs.8 lakh for my son’s education Rs.8, 00,000 which he will be requiring after 8 years, etc. and so on. These goals should be realistic. Goals and objectives give focus, vision and direction for the financial planning process. Another important factor in the financial planning process is to determine the risk tolerance of the client. The risk absorbing capacity of a person depends on his income levels, age, liabilities, attitude towards risk and also on the time horizon. The data that is gathered from the client about his existing financial position should be accurate and complete, as without accurate and complete information about a person’s existing financial position, without this it will become difficult for a financial planner to make a comprehensive financial plan and provide recommendations which will enable the client to achieve his goals at the appropriate time. Professional Requirements Knowing Your Client As was mentioned under ‘Gathering the data’, as a financial planner you should follow international best practices of gaining a thorough understanding of the client’s situation before proceeding to provide recommendations about securities. Prior to making recommendations to a client and depending upon the type of client engagement and its scope, you should determine what quantitative information and documents are sufficient and relevant. You should obtain sufficient and relevant quantitative information and documents pertaining to the client’s financial resources, obligations, and personal situation. This information may be obtained directly from the client or other sources through interview, questionnaire, client records and documents. A financial planner should also communicate to the client a reliance on the completeness and accuracy of the information provided and that incomplete or inaccurate information will impact conclusions and recommendations. If you are unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, you can either: (a) Restrict the scope of the engagement to those matters for which sufficient and relevant information is available; or (b) Terminate the engagement. 38

You should always communicate to the client any limitations on the scope of the engagement, as well as the fact that this limitation could affect the conclusions and recommendations. You should also note that Rule 703 of the FPSB Code of Ethics and Rules of Professional Conduct (see Topic 1) stipulates the need to collect sufficient information to ensure appropriate advice is given. Types of Information Required In this section, we explore the types of information that you should collect. Broadly speaking, information can be classified as either quantitative information or qualitative information: Quantitative information might be described as statements of fact. A client’s name, date of birth and salary are examples of quantitative information. Qualitative information is more difficult to obtain and indeed define. In some respects, it might be defined as ‘relevant information that is not factual in nature’. Examples of qualitative information include attitude to risk, and future employment prospects. Qualitative information relates more to the personal and social attitudes of the client. These aspects are very important in assisting with the development of a plan containing recommendations in keeping with what a client will find acceptable. Sometimes it can be difficult to elicit certain information from a client, and later in this topic we will explore some strategies and techniques which might be used. It is usually relatively easy to obtain quantitative information from a client but eliciting useful qualitative information can be more difficult. In some cases you may need to obtain qualitative data inferentially. This means that through a client’s statements or comments, you may be able to infer information that will be used in framing your advice. You should not underestimate the need for, or importance of qualitative data. One of the roles of being a professional is to provide advice specifically to the client’s needs and wishes. Sometimes, what may be apparent initially may not be the final position. By obtaining good qualitative data, your perception of what is required may change. The following example may help to illustrate this point. Quantitative data: Client is a scientist. Client does not want shares in her portfolio. Qualitative data: She has never invested in shares, but bases her concern on the fact that her brother lost several thousand rupees in ‘junk’ stocks in the mid 1990s. Inferential qualitative data: Client probably has limited knowledge of shares but is reasonably intelligent, and if properly discussed with her, may see the benefits of including quality shares in her portfolio. Data Collection Forms By now you should appreciate the need to keep accurate records of client data and some of the issues that will need to be considered in obtaining that data. By far the easiest way to ensure that you have the required quantitative and qualitative information is to use a data collection form. This form takes a variety of names — client data sheet, client questionnaire, and fact finder. This example is not definitive and you should be prepared to enhance the form as you see necessary, and as required by your client. Sufficient space should be provided for notes; this allows you to record comments and objectives that will assist you in preparing the advice. 39

The data collection form should contain at least the following sections: Personal Details Names, birth dates : Include full names, dates and places of birth for all family members and dependants. Health status of all members: Consider not only current status, but also possible future status through family health history (e.g. are the parents still alive and well?). Also consider whether ‘smoker ’ or ‘non-smoker,’ as this influences future health status and is a relevant factor in determining personal insurance premiums. Family structures and history: Family situations can be complex, with separation, divorce and re -marriage complicating issues for the financial planner. Categories can include: single, married, de facto, divorced, separated, widowed, dependants young and old. Getting details of dependants, whether young or old, is crucial to the process. Employment information: Employment history can give insights into the client’s values, lifestyle and aspirations and can clarify their potential for future earnings, or likely business outcomes. Work status for a client and partner could include: fully employed, part time, self-employed, home duties, unemployed, early retired, retired, student. Social security situation: Present or future eligibility for pension benefits. Categories to consider include ex- service, government or private sector employment. Each of the above categories, while quantitative in nature, can provide a gateway to qualitative discussion with the client. Assets and Liabilities The planner should gather a comprehensive picture of all existing assets using a checklist to assist the client to recall any of the following examples (generally classified as non-income producing lifestyle fixed assets): principal residence, holiday home, farm, land, business interests, collectibles and commodities, motor vehicles, and recreational equipment. It is also important to identify which items have estimates of value only, compared to ones which have a recent accurate valuation. At the same time each item needs to have noted any outstanding liability attached to it. Detailed information on income producing (investment) assets needs to include: Investment name/type Owner (client: partner or joint) Original date invested Original quantity Original amount invested maturity date (if applicable) Present number current value Return rate (per annum) estimated growth rate (per annum) Cash Flow Detailed information on income sources and expenditure is a critical part of establishing the reality of a client’s needs. Unfortunately, estimates of the domestic budget are often given only cursory attention and, more often than not, rough estimates are provided by the client; hence the need for a more rigorous approach to this area. To assist clients calculate their domestic budget, financial planners mostly use an expense calculator. Often at this point of the interview the client needs to go away and undertake more 40

detailed research in order to arrive at more accurate details. Estimates of these types of expense can be notoriously inaccurate (with 50% error not uncommon) with serious consequences for the outcome of the final recommendation. Unidentified expenses can have a dramatic effect on the outcome of an otherwise well-balanced plan. Set out below are the elements typically found in a detailed expense calculator: HOUSING rent/loan repayments water rates, utilities (electricity) telephone/s, Internet fees home and contents insurance house repairs and maintenance TRANSPORT petrol/fuel services/repairs registration and third party insurance comprehensive insurance public transport/taxi fares loan/lease repayments parking/tolls/other HEALTH health benefits insurance doctors expenditure/specialists/dentist/optical pharmacy This exercise is often complicated by the lack of detailed records, different perceptions, variable memory and the fact that expenditures can occur weekly, monthly, six-monthly or annually. Figure : Simple Budget Calculator E x p e n s es Rs.0.00 Resources/ incomes Housing: Rs 0.00 Salary/Wages (after tax): Rs 0.00 Food: Rs 0.00 Rs 0.00 Rs 0.00 Pensioner Benefit: Rs 0.00 Transpo r t: Rs 0.00 Interest/Dividends: Rs 0.00 Health: Rs 0.00 Non-taxable income: Rs 0.00 Rs 0.00 Rs 0.00 Personal/Miscellaneous: Rs 0.00 Tax Refund: Rs 0.00 Education: Rs 0.00 Gifts: Rs 0.00 Rs 0.00 Dependant/Child Care: Rs 0.00 Windfalls/Inheritance: Utilities: Rs 0.00 Other: Rs Insurance: Total Income: Rs Entertainment: Holidays/gifts: Emergencies/Other: Total Expenses: Your Balance (income–expense) is: Rs 41

Insurance The financial planner has a responsibility to identify the insurance policies currently in place. These should include life insurance, asset protection, income protection, disability cover, and trauma/critical illness cover. In addition, the financial planner should identify the level of insurance protection over fixed assets as detailed in Item 2 earlier. Estate Planning The financial planner should confirm that the client has a current, valid will and that its location is known. Similarly, is the client aware of the benefits of having relevant powers of attorney in place for all those in the family with assets? Qualitative Information and Attitude to Risk This should begin with a grasp of the client’s general knowledge of financial matters. When the financial planner begins the process of strategy selection within the plan, it becomes critical that there is a good understanding of the client ’s attitude to risk. This requires some judgements to be made from their answer to the question: ’What type of investor are you?’ The planner needs to establish degrees of concern in regard to the following:  Inflation: How concerned is the client about having their portfolio keep pace with inflation?  Tax advantage: To what extent is the client concerned about getting tax relief which is legal, logical and suitable?  Security/volatility: To what extent is the client concerned about capital stability of their investments? Liquidity/flexibility: How concerned is the client that cash be available to meet emergencies or investment opportunities?  Income and growth: What levels of importance does the client place on generating maximum income as opposed to achieving capital growth? Over the short term? the long term?  Ease of management: To what extent is the client concerned that their investment portfolio can be easily managed?  Estate: To what extent is the client concerned about maximising the value of the estate? Other qualitative information you might seek include: Investment experience: Has the client invested in shares and/or non-residential property investments? Income needs: Does the client wish to live off only the income from investments, or income and capital? To what extent is capital to be preserved? Pension plans: What is presently in place, is it sufficient and what else might be included? What is the client’s vision for retirement? 42

Investment time horizon: What time frame is the client looking to invest over? Is there a specific purpose for which funds will be needed in the short, medium, or long term? One method of determining a client’s attitude to risk is through risk profiling. Essentially, this technique involves asking the client a prescribed series of questions whose answers are designed to produce a ‘value’, or point on a scale, that indicates the client’s risk acceptance. Risk profiling is considered further in Topic 4 (under ‘Risk and return’). As part of eliciting qualitative data on the client’s attitude to risk, it is sound practice to discuss the nature of various investment risks with the client so that the data you gather is based on a full client understanding of those risks. In fact, such a practice is consistent with the planners’ overall obligation to disclose fully the nature of investment risks, under Rule 706 of the FPSB Rules of Professional Conduct, when a planner makes investments recommendations. Financial Objectives This is the reason the client has sought advice. It should cover short, medium and long term goals and, in most cases, follows a detailed data collection process along the lines of the bullet points in Item 6 above. Estimates of future requirements (e.g. rupee amounts for desired retirement expenditure) should be closely scrutinised for best information and care should be taken to include future ‘special’ requirements such as a wedding, children’s higher education, new car or extensive holiday. This section of the data collection form is extremely important and forms the basis of the financial plan. It is explored in some detail later in this topic. Activity Review the list below and identify which of the following data are qualitative and which are quantitative. Mark the qualitative items with an ‘a’ (for ‘attitudes’) and the quantitative items with an ‘i’ (for ‘information’) Then turn to the end of this topic and compare your results. short-term needs personal long-term objectives financial strengths and weaknesses current assets identification of future priorities specific income requirements income and asset protection future asset acquisitions existing insurances current sources of income realistic changes to income sources present liabilities current expenditure commitments attitude to capital growth requirements need for inflation protection pension status (now and future) retirement plans retirement plan in place need for access to capital taxation considerations attitude to risk or loss list of dependants and details time frame for major planned life events concerns for estate planning existence of wills and powers of attorney attitude to various investment types/ time frame for review sectors 43

Completing the Forms As a professional financial planner, you need to consider the advantages and disadvantages of having the client complete the data collection form or fact finder themselves. Indeed, some planners will request the client complete the document prior to the first meeting. The primary advantage is the time saved by the financial planner in completing somewhat mundane tasks. The major disadvantage lies in the loss of time to build a rapport between the client and planner and the subsequent lost opportunity for collecting qualitative information about the client. Similarly, some clients may feel affronted by the very personal information sought on the form if the need for the information has not been explained. Generally speaking, you should complete the data collection form with the client present and use the occasion to build up the very important relationship between you and your client. This reintroduces the concepts discussed in Topic 1 where we considered the differences between a planner engaged in the mere placement of investment products and a planner providing comprehensive financial planning advice. In essence, the financial planner needs to decide what type of work they wish to do. You will also recall in our discussion of file/interview notes in Topic 1 that it is very often inappropriate to lead off the interview with an attempt to fill out the data collection form. Early on in the first interview, the experienced planner will take file notes to record key information that the potential new client is conveying. As the interview proceeds, the planner will then judge at what point to introduce the data form. The completion of an accurate data collection form is the first step in producing a comprehensive financial plan. Activity Critically assess the data collection form used in your organisation (or if you are not employed in one, the data collection form of an organisation that you know):  What do you perceive as its strength(s)?  What do you perceive as its weakness(es)? Gathering the Data The actual data collection portion of the meeting is likely to be fairly smooth and it will simply be a case of accurately recording the information provided. We have already made the point that you can best ensure that all necessary information is collected by using a comprehensive data collection form. However, from your own experiences as an interviewee, you will know that form filling can be rather boring, clinical and impersonal if not handled professionally. You need to develop a conversational way of asking questions which allows the client to expand detail without further questioning (see ‘open-ended questions’ below.) Some Tips 1. It is probably best to start with quantitative information as there is an expectation on the part of the client that this will be required. 2. Start with questions about the person, rather than their financial position. For example, ask about their family, job, children, health, ambitions, past investment experience, and why they have sought financial planning advice at this point in time. This allows the prospective client to do the most 44

talking and avoids them feeling as though they are being interrogated. It also demonstrates that you are interested in them, not just their money. It helps to separate you as professional from a product seller who might be more interested simply in how much the prospective client has to invest. 3. Ask open-ended questions like ‘tell me about the investments you have ’, rather than closed-ended questions such as reeling off a list in the format of ‘do you have any fixed deposits, shares, mutual funds, bonds?’ The client can choose in what order to tell you about their investments, funds, assets and liabilities. That alone may tell you a bit more about the client. You might follow by another open-ended question, such as ‘so you have a variety of investments at the moment. Why did you choose these?’ In comparison, closed-ended questions tend to encourage only a ‘yes’ or ‘no’ answer or very specific response useful if you are gathering pure facts or seeking confirmation or denial of information. However, they don’t allow the client to give expanded answers, the sorts of answers that will reveal valuable qualitative information. As you move through the data collection form, you can use the questions to explore different areas and build up your qualitative database. You may need to be adept in moving from one place to another on the form, as it may be preferable to allow the client to continue without interruption at times. Comments made throughout the meeting, although apparently trivial, can become valuable threads of information to explore and learn more about your client. With experience, you will become better at recording the data unobtrusively, while maintaining client interest, conversation and eye contact. Being an Active/good Listener It’s clearly important that you be not only a good questioner but also a good listener. Active listening is an important skill for every interviewer. It involves listening closely to what is being said to you, and then summarising that information and repeating it back to the person in your own words. Let’s look at an example of active listening. Pankaj is the financial planner and Sudha is the client. Sudha: I’m a bit wary of the stock market. You hear all those stories of people my age putting their life savings in shares, and then losing the lot in the inevitable crash that follows. Pankaj: So you would prefer to invest in products other than shares? Sudha: Yes, I think so. I don’t want to be worried all the time that I might lose my money. By using active listening, Pankaj is able to show Sudha that he is listening, and that he understands what she is saying. If Pankaj had not understood Sudha, she would have the opportunity to correct him when he repeated his understanding of what she said. Active listening is very useful, but the interviewer must be careful not to summarise every sentence. Often a client will need to follow one train of thought without interruption. When the client stops for a break, it is 45

then okay to summarise using your active listening skills. An interviewer should use this technique with discretion so that they are supportive rather than annoying. Example of ‘Authority to release information’ letter. To whom it may concern We/I .........................................................of ...................................................................... request that all relevant information on our/my investments, insurances, superannuation, bank accounts or other financial information be released to Sanjay Agarwal, authorised representative of ABC Securities, on request. ABC Securities Pvt Ltd is a financial planner and the address is......................................................................................................................... ..............................................................................................................Please also accept a photocopy or facsimile copy of this letter as authority, as the original will stay on file at ABC Securities Pvt. Ltd. Yours faithfully Signed:............................................... Signed:............................................... Date:......../......../........ Date:......../......../........ The challenge for a financial planner is to identify and distinguish between needs and wants and to apply one’s professional training in identifying those needs. In some cases, these needs may not be apparent initially. As a professional, your role is to help the client identify these needs. For example, the client may state that he has a short time to live and wants to cash his retirement funds. During your data collection, you identify he does not have a will. This is a need that you must bring to your client’s attention. Needs must be dealt with as a priority; wishes or wants should receive secondary attention. Consider a scenario where you visit your doctor to get some advice on giving up smoking. The medical profession, through your doctor, would argue this is a need; in your mind, it is a wish to give up. During the course of the consultation, your doctor notices that a mole on your arm has changed colour. There is a chance that this mole may be cancerous. You would have an expectation that the doctor would point this out to you. So, in the course of the consultation, your doctor has explained the need to give up smoking and has identified that in fact your wish is a need, and has also identified another need to have the mole seen to. The same can be said when a client visits a professional financial planner. There is an expectation that you will apply your professional skills and knowledge to the benefit of the client even if the issue has not been specifically identified. The difficulty with financial planning is that much of this ‘diagnosis and treatment’ can be influenced by so many variables, and the merits or failures of a strategy cannot be seen for some time — in some cases years away and often when it is too late to take remedial action. Indeed, this issue is currently being considered within the financial planning profession. How much of the planner ’s own impressions, interpretations and opinions should be applied to the client’s strategies in determining what is needed as opposed to what is desired? Ranging from the needs to have certain insurance products in place right through to more aggressive investment strategies, the influence of the planner on a client is great. Notwithstanding, there is a responsibility both ethically and legally to ensure the advice is appropriate. There is no simple answer. The 46

only partial solution is to ensure that the client is fully informed of the proposed strategy and the associated risks and costs, relative to an alternate strategy which may involve different risks and costs. In this scenario, the client is empowered to make a decision in an informed environment. Another aspect of the goal setting exercise relates to the fact that goals have to be monetarily defined. It is a basic precept in financial planning that each need must be quantified as to the amount of benefits required and the current cost of providing it. A planner needs to apply his questioning skills here to get the required information in specific and measurable terms. A question like ’What kind of retirement are you looking forward to?’ will nine times out of ten elicit the response – ‘I want a comfortable retirement.’ This is an abstract statement that provides no basis for financial planning. A quantified pension need would state something like this: ‘When I retire I need an income of amount (a) and a lump sum of amount (b) when I retire at age 60.’ Always help the client to set his or her goals in current money terms. It is part of your job, not the client’s, to project future prices. Based on the information above, the planner can then develop alternatives like this: ‘In order to provide both of the goals, Mr. Client will need to build a pension fund of amount (c) before he retires at say, age 60. In order to achieve this, he will need to pay amount (d) in contributions each year for n years. Equally, if he cannot afford the required contribution, quantification enables me to see the effect of under-contribution on his pension. For example, if he can only afford a contribution of half amount (d), I can see how much this will reduce his pension at 60, below the amount he needs to live on. I can also identify how much Mr. Client needs to increase contributions in future years to achieve his target pension. Alternatively, he may have to retire later at, say, 65 to provide adequate time for him to accumulate the pension fund he needs.’ In the above example, we have only considered the client’s gross pension need. In fact, part of this pension may already have been provided through membership of pension schemes like Employee Provident Fund (EPF) in the past. The client may also have some savings that will generate income in retirement. So the individual’s actual pension need is only the gross pension they need to live on minus the amounts available from existing resources, as identified from the data gathering exercise. The reduced figure is normally referred to as the shortfall need. The principle of shortfall is very important as it quantifies the actual need and avoids over -provision of benefits at the expense of over-stretching the individual’s current ability to contribute. It applies to all financial planning needs and can bring the cost of funding several different financial needs at the same time within the individual’s capacity to pay. Most people have multiple financial planning needs at the same time. Even when the shortfall principle has been applied to all needs, many people will not be able to afford to pay for meeting all their needs. In these circumstances, it is necessary to prioritise needs. Which benefits need to be funded first? What needs to be deferred till future? When will it be possible to contribute more money to realise deferred needs? One thumb rule that financial planners follow in prioritising needs is to have unpredictable needs take precedence over predictable needs. 47

We noted earlier that clients’ needs change according to changing personal circumstances. This reinforces the need to review financial plans regularly. You should see that inadequate benefit provision is remedied as soon as possible. We will examine issues in monitoring recommendations later in this unit. Concluding the Meeting First you need to confirm and summarise the client’s perceived goals and objectives as they emerged during the interview. This section on the client data collection form should address the prime reason for seeking advice in the first instance. Verbally, you might seek mutual agreement in a number of ways, for example: ‘From our initial discussion, am I right in saying that’ ‘So, in summing up, it would seem that your main financial objectives are to’ ‘OK, so what you need is’ At the conclusion of the meeting, you may ask the client to sign the data collection form to confirm that the information is accurate and that the advice provided will be based on that information. Agreement on the Next Step At this point, you would usually propose to prepare the financial plan. If the prospective client agrees with your proposal, and becomes your client, it’s recommended that the client signs an acknowledgement requesting the financial planner to prepare the financial plan, as illustrated in the following figure. Example of a request to prepare recommendations. Request for Preparation of Financial Plan We, Mr and Mrs. S Client, of 123 MG Road, Bangalore request that Mr. Sanjay Agarwal, Authorised Representative of ABC Securities Pvt Ltd, financial planners, prepares a comprehensive financial plan following our initial discussions on ........ /........ /......... agree that we will pay Rs....................per hour/Rs................... (set fee) for the preparation of the financial plan, payable on presentation of the plan. Acknowledge that the financial plan will be limited because: .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. Signed:............................................... Signed:............................................... Date:......../......../........ Date:......../....... /........ Company seal if applicable. Such a form is not required under law, and you may not be charging on a fee for service basis. However, such a form can avoid potential misunderstandings. You should also clarify what happens next. Some financial planners will forward minutes of the meeting to the clients along with a list of ‘things to do’, where further 48

information is required. Others may simply prepare a simple hand written note for the client. It is also at this point that you would ask the client to sign the authority to release information form(s) considered earlier in the discussion. If you do not intend to hold a follow-up data collection meeting, you should provide the client with an idea of how long it will take to prepare the financial plan. If you are not in a position to schedule a time for the presentation of the plan at this point in time, you should explain who will instigate the next contact. You might also choose to reiterate how you will go about preparing the plan from the data gathered, and what will be presented at the next meeting. However, if at all possible, it is advisable to schedule a next appointment at the meeting because:  it commits the client to returning; and  it commits you to completing the financial plan by a specific time, otherwise, it is possible to keep shifting the job on to the ‘to do’ list. As a final point, you should recognise that as a professional financial planner you are likely to become privy to some very personal and sensitive information. In many cases, the financial planner will be one of the few individuals who have a detailed knowledge of a client’s total financial situation. You will also not only know of their attitudes to things such as investments and the future, but may also find that the client reveals their attitudes to relatives, children and other things. Ethical conduct was discussed in Topic 1, but you should be aware of the need to apply rigorous standards of confidentiality and discretion when dealing with your clients’ affairs. The FPSB’s Code of Ethics and Rules of Professional Conduct mandates such confidentiality (see Statement 5 of this Code). Over time, you may well become a trusted part of your client’s confidants. You have a very serious responsibility to respect that trust. Closure of the Data Gathering Stage By the end of the first meeting with the client you will have gathered considerable information. Much of that information will have been collected on the data collection form; other data, particularly of a qualitative kind, will have been recorded on the file notes taken at the meeting. Your file notes will also record all future discussions with your client — whether those discussions be in person or by telephone, email or any other method—as well as notes on what work/actions are to be taken by you and/or your client. Once those approached for information in the ‘authority’ letter have returned their data, you are now in a position to complete the data collection form. Together, the completed data collection form and the associated file notes will provide a solid foundation for the advice that you will prepare. You should now have a pretty good grasp of the client’s key priorities, concerns, and needs, and have begun to think through the sorts of realistic opportunities to pursue. We introduced and defined the two types of information required from the client, namely:  Quantitative data - data which is factual in nature; and  Qualitative data - data which is not factual but is important in framing recommendations. Some of this data may need to be inferred from the client’s statements and comments. 49

We stressed the importance of using a data collection instrument to ensure that comprehensive and accurate data is collected, and showed what a data collection form should contain. The interview itself was discussed, and there were a number of strategies and techniques introduced to provide guidance on how to handle client meetings. We raised some of the common difficulties you might encounter in data gathering and offered some strategies to handle these problems. The initial client interview is also concerned about setting a client’s financial goals. We first considered some of the many reasons why a client has turned to a financial planner and the importance of differentiating between the client’s needs and wants or wishes. The role, and influence, of the financial planner in this aspect of planning was discussed, and throughout this topic we have stressed the need to negotiate with the client so that there is a match between client needs and financial planning services offered. Overall, you should have an appreciation that the data collection meeting is a critical step in the financial planning process, and accuracy is vital to ensure that the advice you prepare is appropriate to your clients’ needs. You should also be conscious of the privileged position you will hold with respect to the confidentiality of client data. Suggested Answers Activity i short-term needs a personal long-term objectives a financial strengths and weaknesses i current assets a identification of future priorities i specific income requirements a income and asset protection a future asset acquisitions i existing insurances i current sources of income a realistic changes to income sources i present liabilities i current expenditure commitments a attitude to capital growth requirements a need for inflation protection i social security status (now and future) a retirement plans i Retirement Plans and/or rollovers in place a need for access to capital a taxation considerations a attitude to risk or loss i list of dependants and details i time frame for major planned a concerns for estate planning life events i existence of wills and powers of a attitude to various investment attorney types/sectors I time frame for review 50