Difference between revisions of "Concept of Financial Planning and importance of Investment Adviser"

Revision as of 11:23, 3 May 2018

Welcome to this session on Financial Planning.

What is Financial Planning?

Financial planning refers to ..

the process of streamlining ..

the income, expenses, assets and liabilities of the household ..

to take care of both current and future need for funds.

So, financial planning checks the present, .. puts it in an order .. so that we have a good future.

It is a process that enables better management of the personal financial situation of a household.

It is an approach

that considers the existing financial position,

evaluates the future needs,

puts a process to fund the needs and reviews the progress.

So, this is a very important concept for all of us.

Need for Financial Advisory Services

Do we need a financial adviser?

To answer this, we need to know what an FA provides to us.

The primary task of the financial adviser is to

link the large range of financial products and services

to the specific needs and situations of the client.

Financial advisers provide

the skills,

expertise,

attention,

information required to manage the financial situation of an individual.

Financial planning services include:

analysis of the personal financial situation in terms of the adequacy of income,

control of expenses,

assets created and their funding and

the level of liabilities taken.

Financial advisers help households plan their liabilities efficiently and how to manage the repayment of the debt.

Insurance planning is a part of financial planning and

involves estimating the losses to the household from unexpected events and

choosing the right products and amounts to cover such losses.

Investment planning involves

estimating the ability of the household to save,

and choosing the right assets in which such saving should be invested

so that the goals are met.

Financial planning helps

assess the impact of taxes on the finances of the household and

advice appropriate saving and investment options.

Estate planning deals with

the most efficient way

to transfer wealth to heirs, charity, and other identified beneficiaries.

Some financial advisers do a comprehensive financial planning and advisory service for the client ..

and charge a fee for their services.

They usually do not take on the execution of the plan or advice.

Some financial advisers offer comprehensive financial planning services and ..

also execute client transactions in the financial products recommended by them.

They may therefore earn both a fee income for their advisory services and commissions and other incomes from the products that they recommend.

Some advisers may not charge their clients for advice,

if it is incidental to their core function of distributing financial products.

Their income comes from the commissions from selling the product.

Wraps and platforms are technology-based advisory solutions that are standardized for execution.

A client or an advisor associates with the platform, and can offer its financial products as model portfolios that investors can buy.

The income of a household is used to meet current expenses and a portion is saved for future needs.

The savings of a household are put to work by investing them in assets

Assets are broadly classified as physical assets and financial assets.

Physical assets are tangible assets and include real estate, gold and other precious metals.

Financial assets represent a claim that the investor has on benefits represented by the asset.

Formula for computing networth:

The net worth of a household is calculated as Assets – Liabilities.

Higher this number better is the financial position of the household.

A budget helps a household plan its income and expenses so that the income available is utilized in the best possible way to meet current and future requirements.

The financial planning process involves

establishing and defining the relationship with the client,

gathering relevant data,

analyzing financial status,

developing a plan,

implementing it and periodically reviewing the plan.

Financial goals are needs expressed in terms of the amount required to fulfil it and the time when it is required.

Two essential qualities:

1. Time frame

2. Amount / corpus

The current cost of a goal is converted to its future value by using the formula current value (1+rate of inflation) ^ years to goal.

The time available to meet the goal will determine:

the amount of money set aside to meet the goal,

the type of investments in which the savings earmarked are invested.

The selection of the right type of investment in which to park the savings will depend upon:

1. the time available before the goal has to be met and

2. the ability of the investor to take risks.

Clients' financial risk tolerance - attitudes, values, motivations, preferences and experiences, is measured with a risk profile.

Risk tolerance depends upon the ability to take risks and the willingness to take risks.

Investors can be classified as:

1. conservative,

2. moderate and

3. aggressive ..

depending upon their risk profile.

The risk preferences of the investor are taken into account while constructing an investment portfolio.

An individual creates a portfolio of investments balanced to meet the required return with an appropriate level of risk.

The process of dividing the portfolio among different assets so that the overall portfolio’s return is protected from the effect of a fall in one or few assets is called asset allocation.

The investments made for the goals will require to be reviewed periodically to ensure that they continue to be relevant to the investor and their performance is as expected.

A periodic review will help to make timely corrections in the financial plan so that the investor’s goals are met.

Related Lessons

• Introduction to Indian Financial Markets
• Securities Market Segments
• Asset Allocation and Investment Strategy
• Investment Adviser and Regulatory Environment
• Investment Products
• Investment Risk and its Measurement
• Measuring Investment Returns