Introduction to Financial Planning

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Domestic Budget Calculation Form Name: __________________________ Instructions for use Simply go down the form and fill in the amount spent and the frequency. Don ’t bother calculating totals. Be realistic and honest about the amounts entered. It is not designed to judge your expenses—just identify them Description Per Per Per Per Per Per Other Housing Expenses Week Fortnight Month Quarter 6 Months Year House Cleaner/Ironing/etc. House Tax House Energy Electricity House Energy Gas House Furniture Purchase House Gardener/Lawns House Insurance Contents House Insurance Home House Maintenance House Mortgage House Pay TV House Rent House Tel. House Tel. House Water consumption House Other Food Etc. Expenses Food – (Groc.) Food – Vegetables Food – Milk Delivery Food – Restaurants Food – Takeaway Food – Other Living Expenses Living – Accounting fees Living – Bus Fares Living – Vehicle Insurance Living – Vehicle Payments 65

Description Per Per Per Per Per Per Other Living – Vehicle Registration Week Fortnight Month Quarter 6 Months Year Living – Vehicle Service Living – Club Fees Living – Donations Living – Education General Living – Educ other (Music etc.) Living – Loan Pmt –Personal Living – Newspaper Living – Other 1 Living – Other 2 Living – Presents Anniversary Living – Presents Birthday Living – Presents Other Living – Tax (additional deduct from pay) Living – Transport Living – Video Rentals Personal Expenses Personal – Cosmetics Personal – Clothing Personal – Hair Care Personal – Hobbies Personal – Holdiays Personal – Insurance Life 1 Personal – Insurance Life 2 Personal – Medicine Personal – Medical Dentist Personal – Medical Health Ins. Personal – Doctor Personal – Pocket Money Personal – Shoes Personal – Sport Fees Personal – Other 66

Information Request Sheet Fax back to: 08 1234 5678 or The Manager ______________________________ Telephone Information to: 08 ______________________________ 12345679 Fax: __________________________ Thank you for your assistance Date Faxed to you: ____/ ___ / ____ Dear Sir/Madam, Following our appointment by______________________________, please find enclosed/as per previous fax to you____/____/_____ a letter from the above client authorising access to all information held by you. We would be grateful for information with respect to: All products held by you/Investor Number: Specifically we are seeking: The policy/investor number(s):_________________________ General Insurance ONLY Cover provided (Description e.g. MV, Bldg. & Cont.):–––––––––––––––––––––––––– Amount of Cover: Rs.___________Excess Rs. NCB (if applic.) % Premium: Rs. Special Discounts (Desc.)? Renewal date_____/____/____ Investments (Please provide relevant info) The commencement date of the Investment/Policy ____/______/_____ The current withdrawal value of the Investment: Rs._______ The Account Value/Plan Value (if different from the above): Rs._______ Investment Class/Description:_____________ Super/Rollover Y/N:_______ Current Number of Units (If Applicable) Current unit Price Rs._______ Regular Contribution/Premium Amt Rs. Frequency Auto CPI Inc. Y/N ____ Risk Products Total Death Cover Value (if Applic) Rs._____ Disability Value (If Applic) Rs.______ Trauma Cover Level (If Applic) Rs._____ Special Cover? (details)____________ Income Replacement Benefit Rs. Frequency Waiting Period Term________ Thank you for your assistance. Please Fax back to 08 1234 5678 or telephone info to 08 1234 5679 or email [email protected] J. Kumar CFP ____/_____/______ 67

1.3 Analyze Client’s Financial Status, Risk Profile and Determine Financial Goals A financial planning practitioner shall analyze the information to gain an understanding of the client’s financial situation and then evaluate to what extent the client’s goals, needs and priorities can be met by the client’s resources and current course of action. Prior to making recommendations to a client, it is necessary for the financial planning practitioner to assess the client’s financial situation and to determine the likelihood of reaching the stated objectives by continuing present activities. The practitioner will utilize client-specified, mutually agreed upon, and/or other reasonable assumptions. Both personal and economic assumptions must be considered in this step of the process. These assumptions may include, but are not limited to, the following: Personal assumptions, such as: retirement age(s), life expectancy), income needs, risk factors, time horizon and special needs; and Economic assumptions, such as: inflation rates, tax rates and investment returns. Analysis and evaluation are critical to the financial planning process. These activities form the foundation for determining strengths and weaknesses of the client’s financial situation and current course of action. These activities may also identify other issues that should be addressed. As a result, it may be appropriate to amend the scope of the engagement and/or to obtain additional information. Elements of Data Collection: Personal and Basic Financial Details We now turn to an examination of the data collected in the interview and will attempt to develop some basic inputs and issues to be considered in determining strategies. Through this process we will begin to introduce some of the basic terminology and issues you will face as a financial planner. We will use Reading 3.1 as a framework for discussion that follows. Personal Details Names: Albeit trivial, ensure that you refer to the client throughout your planning work by his/her correct name. Be aware of titles such as Dr., Mr., Ms. and Mrs. Make certain that the sex of each individual is recorded and/or clear. This is required, for example, in determining actuarial life expectancy, insurance premiums, and so on. Dates of birth: Dates of birth are required for determining certain retirement entitlements, calculating income for certain life expectancy based investments, and may provide qualitative information regarding health and lifestyle. For example, you may have an extremely fit 70 year old client whom you assumed was much younger. As we mentioned in Section 1 of Topic 1, age is a critical factor in influencing a client’s needs. Younger clients may face issues of accumulating a deposit for a home or new car or perhaps an overseas holiday, and the need to accumulate capital for retirement in 40 years or so. Younger clients also need to secure their situation through appropriate insurances. In comparison, older pre-retirement clients often have concerns to 68

do with investments of significant capital sums accumulated through employee benefits and other means, and how they will sustain themselves in retirement. You might like to review Figure 1.1 in Topic 1, which outlines some of the characteristics of clients in different age groups. Employment history: This can indicate potential for future earnings; whether eligible to receive provident fund and gratuity and the need for portable superannuation, and insurance. Health/family history: This may be required for budgeting information and for determining life insurance possibilities if applicable. It may also flag long-term funding requirements for disabled children and other needs. With respect to life insurance, any application to an insurer will seek data on smoking status as well as the individual and family health history. Family structures: These can have an impact on estate distribution, maintenance agreements, cultural obligations to support aged family members. Legal structures: Family trusts, companies and partnerships can have a significant impact on taxation and the ability to fund certain investments. Employee benefits: Establish if the client is in receipt of benefits; if so, establish details of benefits and basis of payment rates. Basic Financial Details Asset base Liabilities & debts Cash flow Taxation Risk Profiling In financial markets, the risk profile of an individual indicates his ability to take risk while investing. It is one of the important variables that a financial planner will focus on before recommending a product to an investor. Risk profile categorizes the individuals in various segments such as conservative, moderate or aggressive. Wealth management services providers use psychometric questionnaires to assess the risk profile of a client. The questionnaires comprise queries on day-to-day situations. Generally, the individual taking the test is told to choose one option that best describes his response to the situation out of the multiple options provided along with the question. The responses help the financial planners and wealth managers judge how the individual will react in a given situation. That forms the basis of the individual’s ability to take risks. The questionnaires thus minimize the probability of any biases being introduced by wealth managers in the financial-planning process. An individual taking the test should be honest while answering to the extent that he should select an option that best describes him and not the one he thinks is the right option. 69

Risk Profiling combines two key areas - (1) Estimating financial risk-taking capacity and (2) Understanding the (psychological) risk tolerance level of an individual. We have compiled 10 questions that will help you evaluate yourself on both these parameters. Also, based on your risk profile, we will recommend an asset allocation structure best suited for you. The Risk Analyzer should take you about 10 minutes to complete. 1. Your age is: 1) Under 30 2) 30-40 3) 41-50 4) 51-60 5) 60 or over 2. You have saved a long while to buy a car. A week before you buy the car, you lose your job. You: 1) Postpone your purchase. 2) Buy a new car but do not buy the expensive car you have saved for. 3) Go ahead with your purchase plan and buy the expensive new car. 4) Buy the car and go on a one week vacation to celebrate the new purchase. 3. Your current annual take-home income is: 1) Under Rs100,000. 2) Between Rs100,000 and Rs200,000. 3) Between Rs200,000 and Rs400,000. 4) Over Rs400,000. 4. You are financially responsible for 1) Only yourself. 2) 1 other person in your household besides yourself 3) Between 2 and 3 other persons besides yourself 4) Between 4 and 5 other persons besides yourself 5) More than 5 other persons besides yourself 5. Your current job/career/business: 1) Is not dependable. 2) Is secure. 3) Doesn’t matter because you expect a large inheritance/have enough wealth already. 4) Doesn’t matter because you expect to change your career path soon. 6. After you have made an investment, your feeling on the decision is: 1) Excited. 2) Satisfied. 3) Doubtful. 4) Sorry. 70

7. You are offered a job by a company with a bright future. Which compensation option would You choose? 1) A 3-year job guarantee. 2) An upfront bonus of Rs1, 00,000. 3) A 10% pay increase on your salary of Rs4, 00,000. 4) Employee stock options with a current value of Rs1, 00,000 & prospects for further appreciation. 8. What is your practice on saving money? 1) I don’t believe in saving. 2) I’d like to save, but my expenses and other financial commitments do not permit me to. 3) I try to save whenever and wherever possible. 4) I save 15 percent or more of my take-home salary without exception. 9. You invest Rs1, 00,000 in a share that goes down by 8% the next day. You: 1) Average your cost by investing another Rs1, 00,000 at a lower price. 2) Do not bother because you had done enough research on the company. 3) Book your loss and invest in fixed deposits or bonds. 4) Hold on till the share comes back to your cost price and sell it. 10. Which of the following statements would best describe your level of knowledge as an investor? 1) I don’t understand investment terminology at all. 2) I am a proficient investor who’s able to explain concepts such as EVA, beta and hedging. 3) I know how to identify and invest in mutual funds and secondary market debentures. 4) I understand investment principles and trade shares in the secondary market. 5) I am not very familiar with investment options and financial planning. Determine Financial Goals As with anything else in life, without financial goals and specific plans for meeting them, we drift along and leave our future to chance. A wise man once said: “most people don’t plan to fail; they just fail to plan.” The end result is the same: failure to reach financial independence. Four Simple Steps for Setting Financial Goals Step 1: Identify and write down your financial goals, whether they are saving to send your kids to college, buying a new car, saving for a down payment on a house, going on vacation, paying off credit card debt, or planning for retirement. Step 2: Break each financial goal down into:  Short-term (less than 1 year),  Medium-term (1 to 3 years)  Long-term (5 years or more). Step 3: Educate yourself that proper planning of investments can help you achieve your all financial goals! There are various avenues of investment available and selection of best out of better funds is very crucial. 71

Asset allocation is the important key. To meet short term goals, you will have to invest in Debt funds/Money market funds/ Bank FDs of that duration as short term goal requirement will not tolerate short term volatilities of market. For long term goals, best option is equity through Mutual Fund route. Step 4: Evaluate your progress. Review your progress monthly, quarterly, or at any other interval you feel comfortable with, but at least semi-annually, to determine your program is working. If you’re not making satisfactory progress on a particular goal, re-evaluate your approach and make changes as necessary. Financial planner who has the expertise in the subject and who knows financial markets well will be in a position to evaluate performance of various funds. Do it now: There are no hard and fast rules for implementing a financial plan. The important thing is to start NOW. 72

1.4 Develop Financial Planning Recommendations and Present them to the Client “Developing and Presenting the Financial Planning Recommendation(s),” represents the very heart of financial planning. It is at this point that the financial planning practitioner, using both science and art, formulates the recommendations designed to achieve the client’s goals, needs and priorities. Experienced financial planning practitioners may view this process as one action or task. However, in reality, it is a series of distinct but interrelated tasks. The financial planning practitioner shall consider sufficient and relevant alternatives to the client’s current course of action in an effort to reasonably meet the client’s goals, needs and priorities. After analyzing the client’s current situation and prior to developing and presenting the recommendation(s) the financial planning practitioner shall identify alternative actions. The practitioner shall evaluate the effectiveness of such actions in reasonably meeting the client’s goals, needs and priorities. This evaluation may involve, but is not limited to, considering multiple assumptions, conducting research or consulting with other professionals. This process may result in a single alternative, multiple alternatives or no alternative to the client’s current course of action. In considering alternative actions, the practitioner shall recognize and, as appropriate, take into account his or her legal and/or regulatory limitations and level of competency in properly addressing each of the client’s financial planning issues. More than one alternative may reasonably meet the client’s goals, needs and priorities. Alternatives identified by the practitioner may differ from those of other practitioners or advisers, illustrating the subjective nature of exercising professional judgment. The financial planning practitioner shall develop the recommendation(s) based on the selected alternative(s) and the current course of action in an effort to reasonably meet the client’s goals, needs and priorities. After identifying and evaluating the alternative(s) and the client’s current course of action, the practitioner shall develop the recommendation(s) expected to reasonably meet the client’s goals, needs and priorities. A recommendation may be an independant action or a combination of actions which may need to be implemented collectively. The recommendation(s) shall be consistent with and will be directly affected by the following:  Mutually defined scope of the engagement;  Mutually defined client goals, needs and priorities;  Quantitative data provided by the client;  Personal and economic assumptions;  Practitioner ’s analysis and evaluation of client’s current situation; and  Alternative(s) selected by the practitioner. A recommendation may be to continue the current course of action. If a change is recommended, it may be specific and detailed or provide a general direction. In some instances, it may be necessary for the practitioner to recommend that the client modify a goal. 73

The recommendations developed by the practitioner may differ from those of other practitioners or advisers, yet each may reasonably meet the client’s goals, needs and priorities. The financial planning practitioner shall communicate the recommendation(s) in a manner and to an extent reasonably necessary to assist the client in making an informed decision. When presenting a recommendation, the practitioner shall make a reasonable effort to assist the client in understanding the client’s current situation, the recommendation itself, and its impact on the ability to meet the client’s goals, needs and priorities. In doing so, the practitioner shall avoid presenting the practitioner ’s opinion as fact. The practitioner shall communicate the factors critical to the client’s understanding of the recommendations. These factors may include but are not limited to material:  Personal and economic assumptions;  Interdependence of recommendations;  Advantages and disadvantages;  Risks; and/or  Time sensitivity. The practitioner should indicate that even though the recommendations may meet the client’s goals, needs and priorities, changes in personal and economic conditions could alter the intended outcome. Changes may include, but are not limited to: legislative, family status, career, investment performance and/or health. If there are conflicts of interest that have not been previously disclosed, such conflicts and how they may impact the recommendations should be addressed at this time. Presenting recommendations provides the practitioner an opportunity to further assess whether the recommendations meet client expectations, whether the client is willing to act on the recommendations, and whether modifications are necessary. Customizing strategies and recommendations forms a foundation to communicate meaningful and responsive solutions. This increases the likelihood that a client will accept the recommendations and act upon them. These actions will contribute to client satisfaction. 74

1.5 Implement Client’s Financial Planning Recommendations The financial planning practitioner and the client shall mutually agree on the implementation responsibilities consistent with the scope of the engagement. The client is responsible for accepting or rejecting recommendations and for retaining or delegating implementation responsibilities. The financial planning practitioner and the client shall mutually agree on the services, if any, to be provided by the practitioner. The scope of the engagement, as originally defined, may need to be modified. The practitioner’s responsibilities may include, but are not limited to the following:  Identifying activities necessary for implementation;  Determining division of activities between the practitioner and the client;  Referring to other professionals;  Coordinating with other professionals;  Sharing of information as authorized; and  Selecting and securing products and/or services. If there are conflicts of interest, sources of compensation or material relationships with other professionals or advisers that have not been previously disclosed, such conflicts, sources or relationships shall be disclosed at this time. When referring the client to other professionals or advisers, the financial planning practitioner shall indicate the basis on which the practitioner believes the other professional or adviser may be qualified. The true success of a plan is the implementation of the financial planning recommendations and the client achieving their goals. If the practitioner is engaged by the client to provide only implementation activities, the scope of the engagement shall be mutually defined. Importance of the Written Plan It is critically important that your plan is presented in written form for a number of reasons. 1) The written form provides the client with ample opportunity to consider the advice; an oral presentation normally does not. 2) A written plan is an important document to the planner, giving legal protection and a sound basis for future planning. 3) It is an FPSB requirement that its members provide written advice. For the Client As you begin your financial planning career, you may find that many of your potential clients have an expectation of receiving verbal advice from you ‘on the spot’ at a first meeting. While at first you may be tempted to offer such advice, you must at all times remember that it is your professional responsibility to at first gain a full understanding of the client’s overall financial situation before making any recommendations. For example, you have just greeted the potential new client and the conversation flows along these lines: 75

You: Yes, we could do with a bit more rain couldn’t we? Let’s just hope it keeps up for a few days. Now, how can we help you? Potential Client (PC): Well, I’ve been offered voluntary retirement from ABC Nigam Limited and I need to make a decision within a week on whether or not I want to take it and I want to know what to do with my money. I’ve got Rs 1,200,000 of redundancy payment and Rs 600,000 in provident fund plus some long service leave. Where do you think is the best place to put it all? You: Well, given that you’ve got such an important financial decision to make, it’s really important that we take the opportunity to see how these amounts of money can fit into your long term financial planning. This means that it’s not possible to say to you right here and now that you should invest your money in a particular way. PC: Yes, but how long will all that take? You: In order to gain the information we require to assist you, we need to gain an understanding of your situation through our Client Questionnaire. The next step for us is to prepare written financial planning recommendations for you so that you have our advice in writing and can then take your time to consider our recommendations. PC: Yes, but I’ve only got a week. How long will it take you to do this report thing? You: Well, normally it would take us longer to report back to you but given the time constraints you’re faced with, if you’re happy to go through the questionnaire with me today, we would commit to report back to you within the next week. PC: Look, that’s all right, but why can’t you tell me where to put the money now? You: In order for us to meet our professional responsibilities and obligations to you, we need to go through the processes I’ve outlined. The financial decisions you are about to make are very impor- tant and will impact on your financial prosperity for the rest of your life. We want to be sure that any advice we give you is tailored specifically to your situation and your needs. While there are very many good investments available to you, we want to be sure that the investments we recom- mend are appropriate for you. While we’ve only been talking about investments, importantly we feel that you should use this situation to review your overall financial position in areas such as insurance and also estate planning which looks at wills and powers of attorney. By the way have you got a will? PC: No, I haven’t as a matter of fact. Do you think I need one? You: Well, yes. We think that all our clients should have a will and this is one of the things on which we would report to you in our written report, along with other areas which we would address. 76

PC: I see. Now how much is this going to cost me? You would then go on to outline the cost of preparing the written report. The importance of the client being able to receive financial planning recommendations in writing cannot be over-stated. Indeed, the very essence of a written financial plan is that it provides a medium of presentation through which the client can take time to consider the advice being presented by the financial planner. For many potential clients, a written financial plan is a very complex document which confronts the individual with a vast array of technical topics. Many people will have never before been faced with such an intricate array of recommendations and considerations. In fact, it is reasonable to comment that, for the majority of people who use the services of a financial planner, at no other stage in their life have they received such detailed analysis and reporting from a professional service. Against this background is the need for a comprehensive financial plan to be developed in writing for the client. Various studies have shown that the amount of information absorbed and retained by an individual from a verbal presentation dramatically reduces as time elapses from the time of presentation. The ability of the potential client to absorb, retain and comprehend the verbal recommendations while sitting in your office will vary from individual to individual. Therefore, it follows that all potential clients should have the opportunity to examine and consider the recommendations in their own time following the verbal presentation of the financial planning advice. One of the more important aspects of the written financial plan is that it may serve to reinforce the client’s general comfort with the recommendations. In addition, the written plan provides the opportunity for further questions to arise in the client’s mind which need to be addressed by the financial planner at the next meeting. The role of the written plan in ‘triggering’ questions in the client ’s mind should be seen as a positive aspect to the financial planning process. This is due to the fact that, at the next meeting with the client, the financial planner has a further opportunity to ‘cement ’ the recommendations with the client. As evidence of the positive nature of this aspect is that some successful financial planners will include pages at the rear of the written plan titled ‘Your questions’, with space provided for the client to note the page number from where the question has arisen. Equally important is the fact that the client may become uncomfortable with the written recommendations and choose not to proceed, for whatever reason, with the advice. If this is the potential client’s decision, then it is important that the decision be reached in the client’s own time with the benefit of reading the written recommendations. For the Financial Planner While it is very important that the potential client has the benefit of receiving written recommendations, it is also critically important for the financial planner. In Topic 1, we learned how keeping written file note records of discussions and meetings with clients is a vital part of defending an action by a litigious client. We also learned how, in an action taken by a client against a financial planner, the court may tend toward a judgment based on the interpretation of the ‘ordinary man’. 77

On this basis, the ‘ordinary man’s interpretation of verbal recommendations may differ markedly from the financial planner’s. In addition, such interpretation may fail to recall the basis or rationale for a particular recommendation. Remember the earlier comments that a person’s capacity to recall information presented verbally diminishes with the passing of time. Therefore, the judgment of an action against a financial planner ’s verbal advice may rest on the client’s word against the financial planner’s word. The most proficient way of minimising the risk of such a judgment basis is to provide the client with written recommendations. The advisability of written recommendations is the basis of FPSB Rule 707 relating to the Code of Diligence, where FPSB regards best practice as written confirmation of oral recommendations and disclosure. For the Financial Planning Firm To this point we have considered the importance of written advice for the client and the financial planner. We now turn to the importance of the written advice process for the licensee firm. In Topic 1 we discussed how, at law, it is deemed that it is not the individual financial planner who is giving financial planning advice. Rather, it is the firm who is deemed to be giving advice. It follows that litigation against a financial planner will therefore initially target the firm giving the advice. Financial planning firms have an obligation under the FPSB Rules of Professional Conduct to ‘....have a reasonable basis ...’ for any recommendations made. Rule 712 of the FPSB Code states: Essential Components of a Written Plan We now move on to provide you with an overview of the essential components of a written comprehensive financial plan. You should note that some of these components are essential from a legal perspective, while others are generally regarded as financial planning ‘best practice’ components of a written plan. Executive Summary/Financial Plan Summary Earlier we mentioned:’....for many potential clients, a written financial plan is a very complex document which confronts the individual with a vast array of technical topics’. One method of providing the client with a succinct description of the key advice/recommendations and potential outcomes of the plan is to include an executive summary or financial plan summary near the beginning of the report. Your decision as to whether to use the title ‘executive summary ’ or ‘financial plan summary’, or any other term you may wish to use, will be influenced by the client who is consulting you. For example, a business person/ manager or key executive would more than likely easily relate to the term ‘executive summary’, whereas someone from another walk of life may not. In such situations it may be more appropriate to use a term such as ‘financial plan summary’ to introduce the key recommendations and potential outcomes. An executive summary/financial plan summary should briefly restate the key aspects of the client’s situation followed by key recommendations and potential benefits/outcomes of the recommendations. Such a summary normally follows a covering letter that initially opens the written financial plan. Note that, ideally, such a summary should not exceed 500 words as it is meant to be a brief synopsis of the full written plan. 78

Statement of Current Situation and Financial Objectives Following the summary is the section that restates the client’s current financial situation and financial goals and objectives. It also incorporates the client’s financial concerns and risk profile. This is a most important section as it is the basis upon which you, the planner, are founding the recommendations that appear later in the plan. The section is based on information contained in the client collection form, file notes, and information gathered from the client in other ways. Immediately following a restating of the current situation and financial goals and objectives, you should make a statement to the following effect: Please examine the above information carefully. If we have misunderstood any aspect of your situation or you are aware of any additional relevant information, please notify us before proceeding with the recommendations contained in this report. It is the above information upon which we have based our advice to you. Assumptions A written financial plan is a document that addresses both the present situation and a potential future situation for the client. In order to analyse a potential future financial situation for the client, it is essential that the financial planner utilise certain assumptions. For example, a long- term financial plan needs to make assumptions in the following areas:  inflation;  wage increases;  investment income returns;  investment capital growth returns;  superannuation/provident fund contribution levels;  estimated costs of future purchases—like house/car purchase; holiday costs; and taxation rates. For the client’s benefit, it is important to include a commentary on the assumptions to be used so that the client can follow the calculations being presented. It is advisable to use assumptions that are based upon a measure of conservatism. This is particularly so in the case of investment returns. In Topic 1 we learned how it is important to take steps to avoid creating expectations in your client’s mind that may not be met. Financial planning projections are extremely vulnerable to real life-events. Consider for a moment the events that alter the outcome of financial projections. In Topic 9, you will learn how the financial world is continually changing and how this necessitates ongoing service to the client and the need to regularly review your client’s financial planning position. There will be clients who, for a variety of reasons, will continue to focus on the rates of return used in the initial plan calculations over the ensuing years of the implementation of a financial plan. Generous return assumptions may create problems for the financial planner and the firm if the client believes his/her expectations have not been met. 79

Financial Planning Strategy Financial planning is a process of attempting to take a client from a current position to a preferred position at a future point in time. Key to this process is the strategy used to take the client along the path to the preferred position. The competent financial planner is able to articulate, both verbally and in writing, the detail of the strategy that the financial plan is based upon. Therefore every financial plan should detail to the client the recommended strategy. Reverting to our earlier point that it is essential to write a financial plan in a logical manner and with clarity, it follows that the strategy should be outlined before proceeding to make any specific recommendations to the client. Specific Recommendations The financial plan then moves to address specific areas of the plan such as:  Cash flow (income/expenditure planning);  Investment/savings recommendations;  Mandatory and voluntary retirement savings;  Insurances;  Estate planning (wills and powers of attorney); and  Financial calculations. If and where appropriate, it is here that specific investments and other products are recommended. Projections Normally, the financial calculations/projections (which use certain assumptions as per above) are contained toward the rear of the report. However, the competent financial planner is able to bring forward key information arising out of the calculations and include them in the written word of the plan. Again, remembering that ‘ ....for many potential clients, a written financial plan is a very complex document which confronts the individual with a vast array of technical topics’, it is vital that you accept that your client may not have the capacity to interpret financial calculations. As such the written word may help the client better understand the recommendations you are making. Services, Fees and Commissions In Topic 2, we pointed out the professional requirements under FPSB’s Code of Ethics and Rules of Professional Conduct to disclose all fees and commissions to your client. Your client has a right to know the full cost of implementing the recommendations contained in the financial plan. This information should be openly and frankly disclosed in the body of the written plan. It should not be camouflaged or hidden in appendices at the rear of the report. Such disclosure must contain details of all fees/commissions payable to the financial planner and the firm along with fees payable to investment institution(s) where applicable. Any exit fees must also be disclosed and under FPSB requirements, all disclosure of fees/commissions should be made in rupees wherever 80

practicable. On this point, it falls to the financial planner/firm to justify why it was impracticable to disclose commissions in rupees (but only in percentage terms). Summary of Recommendations At this point in the written plan, the client has read through a substantial amount of written recommendations and calculations. It is important to summarise the recommendations of the plan before proceeding to the next section on ‘Action to proceed’. It can help to make such a summary in bullet-point form. For example: At this point in our report to you, we wish to summarise our recommendations as follows: 1. We recommend that Rahul increase his salary sacrifice to superannuation to Rs. 120, 000 per year to assist with further accumulation of capital toward retirement. 2. We suggest that you consider redeeming from the friendly chit fund scheme with subsequent reinvestment into long term share investments as detailed earlier on page … 3. We are concerned that Rahul holds insufficient life insurance and recommend that application be made for a further Rs.3,000,000 term life cover. 4. It is also vital that you both arrange income protection insurance as per the quotations/indicative quotes on page ... 5. We are concerned that the level of home and contents insurance is less than the amounts required to replace your home and contents in the event of a loss. Please urgently contact your insurer and arrange to increase the levels of cover to Rs…..for the buildings and Rs.......for your home contents. 6. It is important that you consult with your solicitor as soon as possible to arrange the drawing of new wills. 7. You should also discuss establishing reciprocal powers of attorney with your solicitor. 8. If our advice is acceptable to you, we would invite you to engage us to arrange the above investment matters along with the provision of yearly/half-yearly reviews of our financial planning. Action to Proceed In this section, the financial planner outlines the steps that must take place for the client to proceed with the financial plan. It again may take the form of a bullet point format as follows: In order to proceed with the recommendations, the following actions need to be attended to: Take your time to consider the recommendations in your financial plan. We would suggest a period of about two weeks before we next meet. For your questions, we would suggest that you note the page number from where your question has arisen and record it and the question at the rear of this report. At the next meeting, please raise your questions with us. If our advice were acceptable to you we would ask that you sign the Authority to Proceed/Engagement letter which appears later in this report. 81

Upon receipt of your instructions, we shall prepare the necessary documentation to implement your financial plan including: —application forms for investments/insurance; and —written professional referral to a solicitor/accountant. Or You will need to liaise with your solicitor to arrange preparation of Contract for Sale of the property investment. You will also need to arrange to list for sale your property investment with a real estate agent(s). Authority to Proceed/Letter of Engagement A written financial plan should include a section that contains the written instructions from the client to proceed to implement the financial plan. It is a process of formalising the relationship with the client and establishing the basis upon which service is to be provided. Disclosures We have discussed the requirement to provide full disclosure of all fees and commissions that relate to any investments recommended to the client. However, it is also a requirement to disclose if there are any restrictions on the advice that the financial planner can provide. For example, some licensed securities brokers are, in fact, investment institutions in their own right. Such institutions may restrict the range of investments that their representatives can recommend for clients. There may also be requirements that a minimum percentage of the client’s investment capital must be placed into investments with the investment institutions/securities dealer. This is a form of limited advice and must be disclosed to the client. The disclosure requirements also extend to so-called ‘soft dollar ’ arrangements wherein the financial planner may be eligible for benefits such as subsidised costs of investments research and subsidised costs of financial planning software. It also extends to situations where the financial planner and/or the broker/agent receive subsidies for assistance with marketing/advertising costs. Figure 8.1 is an example of a disclosure statement. General Disclosure Page [Insert name of licensed broker/licensed insurance agent/planner] is a securities broker/insurance agent/planner [delete which is not applicable] (licence no: [insert number]).[If a subsidiary of another group/company then insert the following ………+ and is a wholly owned subsidiary of XYZ *If a related company then insert ………………..+ and is a related company of ABC+ Insert name of licensed broker/Licensed insurance agent/planner] may receive financial, marketing and training assistance from both these companies. I and my associates will be entitled to commission directly from the product providers, as shown below. I and my associates may also be entitled to other incentives including allowances and bonuses based on volume, discounted services and awards. 82

Commission Splits, If this business proceeds, Mr/Mrs ___________________________will receive % of the initial commission, being Rs. for the referral of your business to me. Additional disclosures which are likely to influence the recommendations [This section must be com- pleted. If no additional disclosures, state ‘nothing to disclose’+. Refer to the checklist attached for the issues that may influence your recommendation.] Commission to [insert name of licensed broker/ licensed insurance agent/ planner] and/or its associates Amount Establishment Fee* Initial** Ongoing Invested Investment (Rs.) (%) (Rs.) (%) (Rs.) (% p.a) Details Risk Premium Commission to [insert name of licensed broker/ Insurance licensed insurance agent/ planner] and/or its associates Details Rs. Initial Rs. Yearly 1St Year % As % of Rs. future annual Rs. Estimate premium Notes These figures are based on current commissions which may vary. * The establishment fee shown is the only initial fee paid by you into the applicable investment. ** The initial commission is paid by the product provider and is not an additional cost to you. We also suggest that you refer to the remuneration details in the Customer Information Brochure and Prospectus selected for each product. [Insert name of licensed broker/licensed insurance agent/planner],its proper authority holders and their associates may have an interest in, or hold investments in, the products recommended. 83

Disclosure of Investment Risks It is vitally important that the client fully understands the risks associated with the investment strategy recommended. Indeed, it is an FPSB requirement (under Rule 706, FPSB Rules of Professional Conduct) that firms and their authorised representatives disclose material investment strategy and investment type risks to their clients and in a language the client is most likely to understand. Disclaimers A disclaimer is an express statement that attempts to restrict or limit liability. The inclusion of disclaimers in written financial planning recommendations is a method of notifying the client that the licensee and financial planner cannot be held responsible for events that are outside their control. For example, recommendations based on current values can quickly change due to market fluctuations. Similarly, economic events may occur which were not predicted by the major research houses. Disclaimers then are used to advise clients of any limits or uncertain- ties that apply to the advice given. However, if the licensee and financial planner are found to be negligent in their duties to the client, then any such disclaimer will be of little, if any, defence in litigation against them. No matter how carefully worded is the disclaimer; it will be not be of assistance in defending negligence claims. Four Examples of Specific Disclaimers 1. This financial plan is for the sole use of the person to whom it is addressed and for no other purpose. No responsibility is accepted to any third party who may use or rely on the whole or any part of the content of this financial plan. 2. In preparing this financial plan we have relied upon the information provided to us about your current situation, your objectives and needs. A summary of these is included in the plan. When reading the plan please check this information carefully. If you believe that any of the material does not correctly reflect your circumstances or objectives you should bring this to our attention before proceeding. 3. Estimates of income and growth in this plan have been based on assessments of economic conditions and investment manager performance. However no guarantee of future performance is given, and results may vary from the estimates shown. 4. The figures in the plan include taxation estimates which we believe to be relevant. However, matters relating to taxation should be cleared with your own accountant. Supporting Documentation The use of financial calculations/analysis is important as a means of supporting recommendations. Such calculations should be presented in the report at the rear following Disclaimers and Disclosure summaries. The written report should refer to the calculations/analysis. Similarly, information that supports or describes investments that are recommended in the plan should be positioned at the rear of the report but after all financial calculations/analysis. 84

Plan Formats One accepted method of structuring a written financial plan is that it should be similar to an essay format with an introduction, the body of the report and then a conclusion or summary along with the inclusion of supporting documentation. It can be reasonably stated that this is the most widely used format for the structure of a written financial plan. However, no matter what is the chosen format, the essential elements covered in Section 2 of this topic should be included. A most important structural requirement for all styles of plan construction is that the report must lead the client through a logical and understandable process from the current situation, to a potentially more desirable future position. The plan must be written with clarity. Use of Financial Planning Software The use of financial planning software to prepare reports to be included in a written financial plan is an important adjunct to the written word in the financial plan. The software can provide the technology to enable the planner to perform various calculations such as capital growth projections, income projections and asset allocation model- ling. The latter refers to the process of determining the actual allocation to the various investment sectors (shares, fixed interest and cash, property) in the recommended portfolio. It can also be used to calculate and illustrate the client’s present asset allocation position. As an aspiring financial planner, you need to accept that financial planning projection software is not a replacement for the ability to articulate advice in writing. The financial calculation software can produce reports and illustrations that can substantiate/justify investment advice that forms part of the financial plan. Notwithstanding the provision of computer-generated projections, you must be satisfied with the output yourself because ultimately they are your projections. Some forms of financial planning software based on word processing software provide planners with standard reports and commentary on particular aspects of financial planning. For example, some software will provide the financial planner with the capacity to do the following: 1. Input client data such as names and addresses, dates of birth, salary/income, available investment capital and so on; 2. Structure a recommended investment portfolio and develop a financial planning proposal with the software; 3. Transfer the data to a word-processed document and then select various components of ‘standard commentary’; for example the planner may be able to include standard commentary on types of investment (e.g. tax-efficient mutual funds), estate planning, and insurance commentary; and 4. Amend the word-processed document to suit the individual client. The last point is extremely important. Financial plans which are generated on software and which are not uniquely tailored to the individual client’s situation do not meet financial planning best practice standards. The essence of personal financial planning is that it is a professional service tailored to the individual client. 85

Presenting the Plan to the Client The process of presenting the plan to the client involves two important processes—preparation and actual presentation. Preparation Preparation extends to the document itself and to the meeting. Plan Document Preparation The first step is the preparation of the actual document that is to be presented to the client. Remember, this is the document that your potential client is going to take home and ‘digest ’ for some time. As such it is a document that is a window to your professional practices and standards. Some of the things to pay attention to are: 1. Spelling and grammar checking; most modern word-processing software provide the facility to check spelling and grammar. Spelling errors in a financial plan may not imbue an image of professional competency in the eyes of your potential client. Some financial planners will also arrange for an assistant to proof read the document. A second pair of eyes can sometimes detect errors or oversights that the financial planner and the software may not identify. 2. A table of contents; 3. Ensure pages are numbered; 4. Front and back covers; 5. Comb binding or other such professional document presentation aids; 6. Dividing pages to separate sections such as Estate planning, Insurance, and so on; and 7. Clients name(s) on front cover (on letterhead) e.g.: Financial Planning Report prepared for Mr. Sumit Client & Mrs Sushmita Client PRIVATE & CONFIDENTIAL January 26, 200X Preparing for the Meeting In preparing for the meeting to present the financial plan to the client, attention to the following issues will assist with the smooth presentation of a plan: 1. Ensure that your desk and general office area is free from clutter and not crowded with client files. 2. You must ensure that the client who is about to meet with you cannot view the names of other clients and their files. Such a situation is a breach of the confidentiality with which you hold the other client’s information. This rule applies at any meeting with any client. Even the name of another client on a file should not be visible to a client sitting at your desk. The very fact that someone consults with you means that the consultation should be held in the strictest confidence. Even if no details apart from names have been disclosed, you may have breached confidentiality provisions. 86

3. Allow time to read the plan prior to the client’s appointment to refresh your understanding of the recommendations. 4. Make a list of bullet points of the key aspects of the plan and ensure that you ‘tick them off ’ as you address them with the client(s). Such a list, particularly early on in your career, will assist with ensuring a clear and logical presentation of the plan. Note that there are important compliance issues here and such notes should also be filed. 5. Before going to the reception room to greet the client ensure that you are well groomed, as you are also presenting yourself for possibly only the second time to the potential client. 6. On your desk you will need: the plan to be discussed and given to the client; the client file which will include the questionnaire/data sheet; file notes and copies of any other calculations and working papers that you may have used in preparing the advice. Presentation Presenting the Plan at the Meeting The actual process of presenting the plan will vary from client to client and planner to planner. However, the following steps are an effective guide to how you may progress with presenting the plan: 1. Greet the clients in the reception room and make some appropriate ‘small talk’ such as: You: Good morning Sumit, good morning Sushmita! How are you today? Client Sumit: Good, thanks. Sick of this warm humid weather though. You: Yes we’ve had enough haven’t we? Always the way though isn’t it? Still, I guess we need to take it while we can. Anyway, please come through to the office. You would then make your way to your office and guide the clients in to take their seats. You may wish to make additional ‘small talk’ but there is no need to prolong this aspect. You: Well, we should get to the report, so let’s get started. Explaining Cost Structures Associated with Implementation While it is important that the costs of preparing the financial plan should have been outlined to the client at the first meeting and prior to developing the plan, the subsequent costs must be shown in the written plan. In discussing these costs with the client, the financial planner should take the client to the relevant page in the plan document and: 1. Show the client where the cost of preparing the financial plan is recorded; 2. Show the client where the cost of implementing the financial plan is recorded; 3. Show the client where the relevant costs relating to ongoing service and financial plan review are recorded; and 87

4. Show the client the disclosure details of all commissions and fees (entry/exit) relating to all investments and insurance products. (Note: It is an FPSB requirement that all members fully disclose, in percentage or rupee terms, all commissions relating to insurance products [in addition to investment products] in the written plan.) These steps are the order in which the costs should be discussed/explained to the client. As an aspiring professional financial planner, you should be comfortable with your firm’s method of charging fees/remuneration so that you are able to confidently explain such costs to the client. It may be useful to ‘sit in’ with an experienced colleague to witness how that person explains fees and charges to a new client. While there are costs paid to the financial planner/firm, there are charges applicable to the investments and insurance risk products recommended in the financial plan. These costs are generically known as Management Expense Ratios (MERs). Such fees vary from investment to investment and are effectively deducted from the gross return achieved by the investment, before passing on a net return to the investor. The MER is not deducted from the investor’s capital but is taken ‘off the top’ of the gross return on the capital. These fees do not have to be disclosed in writing; however it is good practice to bring them to the client’s attention in presenting the plan. At law, the MER fees must be disclosed in the relevant prospectus, and the financial planner can draw the client’s attention to them. Ensuring Client Understanding At the start of presenting the plan to the client you should invite the client to ask questions as they arise for them. While asking questions may side-track you and even, at times, derail your thinking, clients need to know that they are free to raise any questions they have as they arise. That is why it is good to have a bullet- point list of issues that you want to discuss/explain to the client. When you get side-tracked, you can always refer back to the list. (As you become more experienced, the need for a list will decrease as you become more accustomed to the process of plan presentation.) As you progress your way through the plan, you should seek confirmation of the client’s understanding. For example, after explaining a complex aspect of the plan, you may say something like: Does that make sense? or even Do you have any questions on that particular issue? At the conclusion of walking the client through the financial plan, you should ensure that the client understands the plan and ask if he/she has any questions at this point. You should acknowledge that the client will have further questions after he has had time to read through the report, and you may wish to say: As you work your way through the report at home, note your questions at the back of the report so we can go through them when next we meet. 88

Client Declaration/Agreement Once the client believes that he/she has fully understood the plan (and that is in accordance with your view) and is satisfied with it, it is appropriate to seek formal recognition, through a ‘client declaration’. A recommended format is included as Reading 8.3. Authority to Proceed very financial plan should contain some form of ‘Authority to proceed’ wherein the client instructs the firm and the planner to commence implementation of the plan. Some financial planning firms will incorporate an Authority to proceed in the letter of engagement. Time Frames (Between Tabling of Plan and Acceptance) As stated earlier, for many clients a financial plan is a complex technical document. Therefore the competent financial planner must allow the client time to study the detail and content of the plan. A suggested time frame is two weeks from when the plan is presented to the time of the next meeting. This provides a period of time within which the client will either become comfortable with the plan or indeed uncomfortable with certain aspects of the plan. An essential ingredient to the success of financial planning is that the client must be comfortable with the recommendations and, generally speaking, such comfort may only arise with the benefit of time. Remember also that there can be instances where some aspect of a recommendation may need immediate action, for example insurance to cover an immediate risk exposure. Failure to execute such a recommendation could leave the financial planner open to action should a claim arise. Authority to Proceed I/we [name/address of client(s)] acknowledge that the recommendations made to me/us by [financial planner ’s name+ through its authorised representative *name of proper authority holder+ and entered into on …./…./…..are based on an accurate recording of my/our individual financial planning needs and objectives, and current position. I/we have read and understood the contents of the financial plan,and acknowledge that the plan is for my/our sole use. I/we also acknowledge that [financial planner] and its authorised representative have disclosed and explained:  All relevant information in the plan,  All fees and commissions payable to *financial planner ’s name+ and its representatives as a result of carrying out the recommendations,  The financial risks associated with any recommended investments, the financial risks of inadequate insurance cover, the need for ongoing service, and related costs,  That the plan is based on a number of assumptions, and that the projections given are not guaranteed. I/we hereby authorise *name of proper authority holder+ of *financial planner ’s name+ to proceed with the implementation of the financial plan and the recommendations contained therein. Client signature(s): Date:_________ 89

Accepted for *financial planner ’s name+ by: Authorised Representative: Date:_________ Source: various, compiled by K. Jackson 1999 Coping with Changes to Recommendations From time to time a financial planner will be requested by the client to make changes to the recommendations that were initially made by the planner. Such changes may arise because of a misunderstanding of the client’s current situation or objectives, or alterations may be required because of the client’s discomfort with an aspect(s) of the recommendations. Refer to Rule 711 of the FPSB Rules of Professional Conduct: Changes Due to Misunderstanding/Misstatement of Situation/Objectives 1. Explain to the client that you will confirm the change, and the basis on which it is necessary, in writing. 2. Make a detailed file note of the discussion where the client requested the change and quotes of what was said by the client and how you responded. 3. In the confirming letter to the client, include a proforma letter for the client to return to the financial planner confirming the need for the change(s) and the acceptance of the alterations to the plan. Changes Due to Client Not Being Comfortable with a Recommendation(s) 1. Explain to the client that you are able to make the alterations to the recommendations at his/her request but that you/the firm stand by the initial advice. Explain to the client that you will prepare a letter from the client to you/the firm that states that the changes are being made at the client’s request. 2. Make a detailed file note of the discussion, with particular attention to the stated reasons why the client did not wish to proceed with the recommendation. Include details of your spoken responses. 3. Only proceed to make the alterations after you have received the signed letter requesting the changes. 4. Ensure that your superiors/supervisors are aware of the alterations being made and ensure that you have a written record of notifying the superior/supervisor. Attention to these steps is an important component in ensuring that you and the firm are in a better position to defend any action taken against you/the firm due to the alterations being made at the client’s request. On this point, as an example, if a client was to request that no shares or share investments were to be included in their recommendations, it may be that the investment planning does not meet the capital growth needs of the client over time. The lack of shares, and therefore potentially reduced capital growth, may lead the client to believe that they have been poorly advised by the planner/firm. In such a situation it is 90

vital that the planner/ firm are able to document that it was the client ’s request to not have, or to have reduced allocation to, shares in the portfolio. Implementing the Plan Once the client has considered the recommendations presented to them and agreed to those recommendations (or modified ones), the next step is to implement the plan. The implementation process requires an action plan, which lays out the specific actions to be taken, by whom, and when. The FPSB Rules of Professional Conduct specifies: Action Plan The written financial plan should, where appropriate, include an action plan which may, for example, be presented as follows: Following the next meeting to discuss this report and your questions, if our recommendations are acceptable to you, the following steps need to be actioned in order to implement your financial plan: 1. We would ask that you sign the enclosed Letter of Engagement and Authority to Proceed that set out the basis of your request to engage us as your financial planners and request that we attend to the matters specified. 2. Sushmita to sign the withdrawal request to withdraw the friendly chit fund with subsequent deposit to your joint bank account. 3. Sushmita to sign the applications for investment into the equity mutual fund investments as per the recommendations. 4. Draw cheques for the recommended investments as per the details on page . 5. Arrange an appointment to meet with ABC Insurance to increase your home and contents insurance. We would be happy to assist with arranging this appointment as required. 6. Meet with our insurance planning specialist/XYZ Risk Insurance to arrange an application to increase Sumit’s life insurance by Rs 2,300,000 and to arrange applications for income protection insurance for you both. 7. Arrange an appointment with your solicitor to write your wills and to discuss the issue of powers of attorney. 8. Draw a cheque for payment of our professional fees as per the amount detailed on page . Co-ordination with Other Professionals The above action list details advice or service required from other professionals. These specialists are the general insurance consultant/broker, the life insurance and income protection insurance adviser and the solicitor. 91

Unless you have received written authorisation from the client(s) to discuss their situation with the other professionals, you should not discuss any aspect of the client’s situation. Indeed, some may view disclosure of the client’s name to another party as a breach of privacy and so you should only move to discuss a client’s situation with another professional upon receipt of written authorisation from the client(s). Once you have received written authority from the client, you may then telephone or write to the other professional seeking to arrange appointments for the client(s) with the other professional(s). Professional protocol dictates that formal correspondence should introduce the client(s) to the other adviser/professional such as below: Dear Mr./Mrs. ………. We write to introduce Mr. and Mrs. Client for whom we act as financial planners. Mr. and Mrs. Client have instructed us to liaise with you in relation to their need for……..advice. In our analysis of Mr. and Mrs. Client’s situation, we believe that they are in need of insurance/legal advice as follows: …………………………………………………. …………………………………………………. …………………………………………………. If you require further information in relation to Mr. and Mrs. Client’s requirements, please telephone us. Yours sincerely Refer also to sample letters to other professionals that are included in the discussion in Topic 1, ‘The professional world of the financial planner ’. Internal Implementation Procedures When the client has either accepted the financial planner ’s recommendations, or alternatively chosen not to accept the advice, the client’s records need to be transferred to the practice’s central administration. For the client who is proceeding to accept the advice, this may simply mean that the file, both paper and computer, continue in their existing formats and location within the practice. For large financial planning firms, there may be centralised administration systems that maintain all paper and computer file records for each client. Such firms have their own processes with which the financial planner must comply in order to maintain accurate and complete client data. The smaller financial planner may have a personal assistant/secretary who will initiate and maintain paper and computer files for each client. Whereas for the ‘client’ who has chosen not to accept the advice and therefore chosen not to become a client, both the paper and computer file should be transferred to a ‘not proceeded with’ filing category. In this situation, it remains vital that the financial planner/firm retain all such records generated to date as a means of verifying or substantiating advice if legal action should ever arise against the planner/firm in the future. While record keeping from a legal defence perspective is important, it may also be that the ‘client’ chooses not to become a client at the time of the plan preparation, but may choose to seek further advice or 92

act on the advice with the planner/firm at a later date. As such, it is simply a process of resurrecting the file, both paper and computer, to provide service again to this person. While methods of file/record keeping will vary from firm to firm, it is essential that whichever system is adopted by a firm, it should be used consistently across the firm by all practitioners and staff. Best Practice’ Record Keeping Throughout this introductory unit we have emphasised that a vital ingredient in conducting a successful financial planning practice is the need to maintain accurate and complete records of all aspects of your dealings with a client. (You might like to review the ‘File/interview notes’ section in Topic 1 at this point.) A financial planner has two main methods of file/record keeping. These are the ‘paper ’ file and the computer file and both methods are essential these days. Paper Files The paper file is the one which is on hand and at ready disposal when meeting with the client. Some financial planners maintain just a single file for each client while others operate two paper files. The single-paper file approach sees the file constructed along the following chronological lines:  file notes of first meeting;  client questionnaire/data sheet;  photocopies of client’s investments, insurances, wills and so on; worksheets on plan preparation; copy of final written plan;  file notes and other material arising from plan presentation meeting;  file notes and correspondence/material arising from any third meeting to answer client’s questions about the plan;  copies of all investment applications and cheques drawn;  copies of all new investment acknowledgements/certificates/policies; a running record or data sheet of all investments that shows: — name of investment; — date made; — whose name it is held in; — number of units purchased; — investor/policy number;  copies of all outward correspondence;  copies of all facsimiles and emails to/from the client; originals of all inward correspondence relating to the client;  copies of all portfolio review reports and file notes from such meetings; and copies of all file notes made from any client contact, i.e. in person or telephone. The two-paper file approach sees a separate file for:  file notes;  client questionnaire/data sheet;  copy of financial plan;  inward and outward correspondence; 93

 review reports and file notes; and a separate file maintained for investment record keeping; this file sees a separate section for each invest- ment that records all transaction details for the investment. All files should be codified so as to assist with easy retrieval from the filing facilities in the office. In this regard, there is a significant range of commercial filing systems and coding available. Computer Files Computer file record keeping begins with a database of client information as follows:  names, addresses, telephone numbers;  date(s) of birth; and  investments (including all of the above investment details). Additional computer records maintain details of the initial financial calculations/projections as well as the ongoing portfolio review/management records. In the office of the vast majority of professional services, written correspondence is prepared on word processing software. As such, all such correspondence should be maintained on computer file. Personal computer systems base record keeping on a ‘directory’ structure. One example of how to structure a directory for a financial planning practice is as follows: Directory Structure Under Microsoft Word ®, the ‘path’ of a letter written to clients Sumit and Sushmita Citizen on June 30, 2000 would be as follows: i/users/clients/citizen/letter June 30, 2000.doc Irrespective of how that information is structured, it should facilitate any future FPSB audit. 94

Summary We have stressed the importance of the written plan for the client, financial planner, and licensee. Framing the recommendations in writing meets your compliance obligations under the FPSB Code, and best serves the client. Whilst the format of written plans may vary, there are core elements that must be included for compliance reasons (such as disclosure of interests). Of paramount importance is that the document be structured and presented in such a way to facilitate client understanding of the recommendations and the reasons for them, the total costs of implementing those recommendations, and any limitations or other material matters relevant to the advice given. We have presented examples of best practice in plan presentation, letters/forms and record keeping, and it would be instructive on your part to evaluate your own organisation’s practices in these areas. Reviewing our model of the comprehensive financial planning process (Figure 8.4), we have just completed steps 4 and 5 (shaded), and you can see that one element remains: monitoring and, where appropriate, revision of the plan. This ought not be a ‘bolt on’ consideration after the plan has been prepared and implemented, but rather an aspect that should be set up as part of the plan. (As an example of such integration, refer to Reading 7.2, the ‘Engagement request’.) Plan review is the subject of the next, and last, topic of this unit. Your Financial Goals: Amount Education Loan — Rs.10 lakhs Child’s education – 2008 — Amt: Rs.25,000 House-Site & Construction – 2010 — Rs.40 lakhs (Rs 15 Lakhs own contribution) Holiday - 2010 — Rs.2 lakhs Child’s education - 2013 — Rs.25,000 Holiday - 2015 — Rs. 2 lakhs Child’s education – 2018 — Rs.100,000 Child’s education - From 2020 to 2024 — Rs.100,000 p.a. Child’s Marriage – 2027 — Rs.500,000 Retirement - 2030 -Monthly requirements — Rs.25,000 Our Findings and Recommendations, with Assumptions: All financial goals meet if we consider the following: a. Investments/savings earn a return of 13.5 % p.a. b. Increase of 5% p.a. in Savings till retirement (This is considering that the returns on retirement should be between 6 and 8% p.a.) 95

Current Monthly earnings assumed to be Rs.60,000 p.m. Current Monthly savings assumed to be Rs.25, 000 Only for the year 2006, the savings are assumed to be Rs.30,000 p.m. Current Insurance Cover- Rs.22 Lakhs Current Investments considered: Type of investment Amount PF balance 100,000 PPF Balance 100,000 NSC 65,000 Infrastructure Bonds 80,000 Mutual Funds 471,500 Shares 151,435 Bank Balance 100,000 Bank Deposit 200,000 Total 1,267,935 1. Expense protection cover required: There is a shortage of Rs. 15 lakhs in total corpus assuming that a corpus of Rs. 50 lakhs is required to meet monthly expenses of Rs. 25, 000. Do let us know when we could discuss the same. 2. Action Plan on the basis of the above: A. Investments: According to the plan you need to do monthly investments of Rs.30,000. We recommend investment through the systematic investment route for the same. B. On review of your previous holdings - please see the attached sheets on Mutual Funds and Shares. Shares - We have done a general review of your portfolio and given our recommendations. However we would like to know your objectives for this portfolio, how aggressive you want the portfolio to be - so that we could determine how we should handle your portfolio. Engagement Request To: The Manager/Directors ABC Financial Planning Pvt. Limited 1 Main Street Chowringhee Dear Sir/Madam Client ’s Address 96

ENGAGEMENT REQUEST Thank you for providing me/us with your financial planning recommendations in your report(s) dated ............................................... In relation to this report, and from associated discussions with you, I/we acknowledge that — I/we have read and understood your report and you have provided me/us with other relevant documents, including prospectus, for the relevant investments. — you have explained your report to me/us in discussions, including the manner in which the recommended investment strategy enhances the potential for me/us to meet my/our financial planning requirements and investment objectives; the nature of the recommended investments and the risks involved; any commissions associated with the investments; and, your fees and services. — your statements have been made in good faith with the belief that they are correct, but that you cannot provide a warranty as to their accuracy or reliability, and that you cannot accept any liability for any loss or damage, whatsoever the cause, which may arise from me/us acting on such statements or recommendations. — I/We now request that — you act as my/our financial planner. — you place, on my/our behalf, those investments recommended by you in your investment report, or in amended reports or in subsequent reports or in correspondence or in discussions and detailed in the attached schedule. — and, in addition, you provide me/us with the following service(s) (Delete where appropriate) an Annual Review of my/our financial planning requirements and investment portfolio. Half Yearly Review of my/our financial planning requirements and investment portfolio. Quarterly Review of my/our financial planning requirements and investment portfolio an Insurance Review. Share Portfolio Review. initiate the redemption/amendment of designated insurance policy(s). initiate the sale/purchase of mutual fund holdings. initiate the sale/purchase of listed shares. initiate the sale/purchase of said property. provide documents to and liaise with my/our solicitor for my/our estate planning requirements. (Other)................................................................................................... Yours faithfully ................................................................................ ................................................................................. ................................................................................. .................................................................................. Client Name Client Name ................................... Date 97

Investment Placement Schedule INVESTMENT AMOUNT CHEQUE PAYEE Rs. _______________________________ Rs. _______________________________ Rs. _______________________________ Rs. _______________________________ Rs. _______________________________ Rs. _______________________________ Rs. _______________________________ Rs. _______________________________ Rs. _______________________________ TOTAL____________________ Rs. _______________________________ Note: The author makes no claim that this is a legally binding document. Planners wishing to draft a formal contract enforceable by law should seek legal advice. Client Declaration Introduction: The purpose of this declaration is to make sure that you have read fully all the sections of the financial plan constructed for you and have understood it completely. In case, any aspect of the plan is not clear to you, any fact has been omitted or misstated or not fully captured in the Plan in line with the discussion held with you in the past, bring all these matters to the notice of your Planner (name of the planner) and sort them out before returning this declaration to the Planner. If signed, this document would confirm that you have understood the plan completely and are aware of all risks associated with it and are taking full responsibility of the execution of the plan. Client Declaration: Plan Thoroughly Reviewed: I have read thoroughly of all aspects of the plan put up to me by planner (name of the Planner). The various recommendations for investments of my funds and the risks associated therewith have been explained to me in detail to my satisfaction. Personal Details My Personal details, all the relevant facts and goals stated in the plans are accurate and to the best of my knowledge I have not withheld any information or facts which are material and are likely to have a bearing on my financial plan. My assets and liabilities are shown correctly in my financial plan. 98

Risk and Returns: My financial Planner has fully explained the risk and return matrix to me in the context of the plan created by him. The personal risk profile prepared by the planner is appropriate to circumstances surrounding me and all other factors. I also agree to the asset allocation explained to me and taken note of the risks involved in the said allocation. I take full responsibility of the execution of the plan as I am aware of the same and will not hold the planner responsible on a later date. Income: My financial plan is appropriate to my income needs and I have understood the flexibility provided in the plan if my income need changes. Fees and Charges: All fees and charges for the construction of my financial plan have been explained to me as also the disclosures about the commission to be received by the planner on execution of the plan. Time Frame: My personal financial plan has been prepared consistent with short, medium to long term goals as mentioned by me to him. In case my needs change in future requiring modification in the plan, I would be responsible for bringing the matter to the notice of the planner so that suitable changes could be made in the plan. Ongoing Services: My financial Planner has explained to me the importance of monitoring of the plan and services available from him for continuing review and monitoring and the fees that I have to pay for availing these services. I am aware of these services and would take a view on my own as and when required. Client Management Services: (If the client hands over the continuous monitoring and review of the plan to the financial planner, the terms of such a review would be stated as explained below:) The review of the plan would be done twice a year. However, the planner will meet and correspond with me regularly to fine tune both the plan & its execution so that I derive the maximum advantage out of the plans made for me. My planner will help me to modify the plan consistent with the changes in circumstances and financial needs as also the changes in the market environment affecting the plan. Signed: Date: Signed: Date: (This declaration is a mere specimen and suitable modifications will be required depending on the circumstance of each case.) 99

1.6 Monitor and Review the Client’s Situation In the beginning of this, the first Module of the CFPCM education programme, we saw how, in the early years of development, financial planning focused on the placement of investments; the emphasis in seeking financial advice was the process of being advised on appropriate investments and subsequently making those investments. In this, the final topic in your first module of CFP certification studies, you will learn how the role of financial planners has evolved from one of providing an investment advisory and placement service to a service that only begins with developing a financial planning strategy. We will learn how this initial service is reinforced through the provision of ongoing service and advice to the client. The provision of ongoing professional service is the final step in the financial planning process. Stated quite simply, any individual who fails to review a financial planning strategy is maintaining a position of higher risk. For, as you will now discover, the world is continually changing and so too are the needs of your future clients. Finally, and most importantly, in this topic we return to the theme first introduced in Topic 1 and emphasised throughout this unit: that of professionalism . Here we consider professionalism from a number of different perspectives: relations with clients (for example, in dispute/complaints resolution) and other professionals, and in the context of the need for continuing professional development on the part of the financial planner. Why is there a Need to Review Financial Plans? The reality of financial planning in a world subject to constant change is that changes to every client’s situation will occur. In effect, there will be changes at both a macro and micro level in the financial lives of all clients. Macro Level Changes Let’s now consider the macro financial changes that will occur in the financial life of each and every client. At the macro level the following changes will occur:  interest rates will change in India;  interest rates will change in international economies;  share markets will rise in India and overseas;  share markets will correct (decline) in India and overseas;  property markets will rise and fall both domestically and internationally; taxation legislation will change in India and overseas; social security legislation will change in India;  superannuation legislation will change in India;  investment legislation in India will change;  inflation will rise and fall around the world;  economies will grow and decline cyclically around the world; governments will change both in India and overseas; The value of Indian and international currencies will change on a daily basis; unemployment will rise and fall both in India and internationally; and 100