Financial Planning

Guidelines to Financial Planning

Financial planning can be described as the process of meeting a client's life goals through the proper management of their finances. Life goals can include buying a home, saving for children's education or planning for retirement.

The financial planning process consists of six steps that help the financial adviser to take a �big picture� look at where the client is financially. Using these six steps, the financial adviser can work out where their client is at the moment, what the client may need in the future and what the client must do to reach their goals.

The process involves gathering relevant financial information, setting life goals, examining a client's current financial status and coming up with a strategy or plan for how the client can meet their goals, given their individual personal situation and future plans.

The Financial Planning Process 

The financial planning process consists of the following six steps as described below. It is so much more important and relevant in light of the Proposed financial Advisory and Intermediary Services Bill 2000.

1. Establishing and defining the client-planner relationship:

The financial planner should clearly explain or document the services to be provider to the client and define both his and the client's responsibilities. The financial planner should explain fully how he will be paid and by whom. The financial planner and the client should agree on how long the professional relationship should last and on how decisions will be made.

2. Gathering client data, including goals:

The financial planner should ask for comprehensive information about the client's financial situation. The financial planner and the client should mutually define the personal and financial goals of the client, understand the client's time frame for results and discuss the client's risk profile and risk tolerance. The financial planner should gather all the necessary documents before providing the client with advice.

3. Analysing and evaluating the client's financial status:

The financial planner should analyse the client's information to assess the client's current situation and determine what the client must do to meet their goals. Depending on what services the client has asked for, this could include analysing the client's assests, liabilities and cash flow, current insurance coverage, investments or tax strategies.

4. Developing and presenting financial planning recommendations and/or alternatives:

The financial planner should offer financial planning recommendations that address the client's goals, based on the information provided by the client. The financial planner should go over the recommendations with the client to help the client understand them, so that the client can make informed decisions. The financial planner should also listen to the client's concerns and revise the recommendations as appropriate.

5. Implementing the financial planning recommendations:

The financial planner and the client should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as a �coach� to the client, co-ordianting the whole process with the client and other professionals such as an insurance agent, investment adviser, attorneys or stockbrokers.

6. Monitoring the financial planning recommendations:

The financial planner and the client should agree on who will monitor the client's situation and adjust the recommendations, if needed, as circumstance require.

Examples of personal risks and needs that you as client my require

Personal risks

The risks that we all face are:

  •  dying too soon
  •  living too long (old age)
  •  becoming disabled
  •  becoming ill
  •  the eroding of our wealth
  •  life hazards and
  •  property hazards

Personal needs

From the above risks, the following needs develop:

  •  the need for capital
  •  the need for income
  •  the need for health care and
  •  the need for the best financial advice

Evaluating needs

When we evaluate needs, we will ask the following questions:

  •  Is the need permanent, temporary or a future need?
  •  Is the need constant or is it increasing?
  •  Is it a capital or income need?

When the financial planner has correctly established the objectives and needs of a client, he/she has to evaluate all the information in terms of affordability and the client's risk profile. The client will then be presented with solutions.

The solutions to personal needs

The solutions can include:

  • life cover
  • disability cover
  • health care
  • short-term savings
  • medium-term savings
  • long-term savings and
  • an investment spread

The products may include:

  • unit trusts
  • endowments
  • retirement annuities
  • medical schemes
  • life insurance
  • short-term insurance
  • shares
  • hard assets
  • money market investment and
  • health insurance

Tax laws will always influence your decision. You need a thorough knowledge of income tax and estate duties to guide your planning.

The scope of personal financial planning

Depending on a client's specific circumstances, personal financial planning usually covers the following areas:

  • investment planning
  • retirement planning and
  • estate planning

The purpose of Financial Planning

The purpose of personal financial planning is to:

  •  optimize the estate of a client
  •  make sure that the maximum available assets will be transferred to the client's descendants and
  •  create wealth in the most efficient way.

In order to draw up the best financial plan for a client, a financial planner has to consider the following factors:

  •  taxes
  •  inflation
  •  investment vehicles and
  •  the risk profile of the client.