financial planning, its relevance in a client’s...
TRANSCRIPT
FINANCIAL PLANNING, ITS RELEVANCE IN A CLIENT’S
LIFE
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What is Financial Planning ?
Financial Planning
Financial Planning in various scenarios
The Financial Planning Process
Common mistakes with regards to Financial Planning
How to make Financial Planning Work?
Axioms of Personal Finance
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WHAT IS FINANCIAL PLANNING?
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“If anything can go wrong, it will”- Murphy’s law
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WHAT IS FINANCIAL PLANNING?
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Constitutional rights
Financial rights: ??
Right to vote Right to equality
Right to
education
Right to
information
Right to income
and wealth
Right to achieving
true potential
Right to financial
independence
Right to a legacy
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WHAT IS FINANCIAL PLANNING?
Assess Risk and opportunity cost
Building blocks
Set Goals
and prioritize
Evaluate current situation
Create and implement Financial plan
Revise and review Plan
Financial Planning is investigating and deciding on the best way
to make your money work for you.
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FUTURE VALUE & PRESENT VALUE
Time value of money: Due to inflation, money loses its purchasing power over time. Thus, thepurchasing power of Re. 1 20 years ago is more than the purchasing power of Re. 1 today.
In the above example, considering an inflation rate of 5% p.a. the purchasing power of today’sRs. 50 Lacs will be equal to the purchasing power of Rs. 1.40 Crore after 20 years. Alternatively,Rs. 1 Crore 20 years hence will be worth ~Rs. 37 Lacs today.
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Future Value of Rs. 50 lakhs over 20 years @5% inflation
Present Value of Rs. 1 Cr 20 years hence @5% inflation
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IF YOU THINK YOUR CLIENT’S DO NOT NEED A FINANCIAL PLAN1/21/2015
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….Think again
WHY FINANCIAL PLANNING?
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“Left to themselves, things tend to go from bad to worse”
- Murphy’s law
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ANCIAL PLANNING1/21/2015
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Why Financial Planning is important…
FINANCIAL PLANNING
You want to take care of old parents You are ambitious but want to devote time to your children You want to maintain lifestyles irrespective of changes in personal life.
Personal choices
Setting aside funds to take care of parents Taking breaks from professional life to bring up children. Financial independence is your goal irrespective of marital status or age.
Financial choices
LEADS TO
FINANCIAL PLANNING IN VARIOUS STAGES & SCENARIOS
“Things get worse under pressure”-Murphy’s law
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INVESTMENT OVER DIFFERENT STAGE OF LIFE
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Source : dallasfed.org
INVESTMENT PYRAMID
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Product
Structure
Strategy
Which Investments?Which Insurance?
Which Loans?
Asset Allocation
Defining & Achieving lifestyle goalsRisk Management
Cash Flow ManagementDebt ManagementTax Management
Superannuation strategiesGearing
Estate Planning
WHERE IS THE REAL VALUE ADD ?
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Source : Brinson, Singer, Beebower
Asset Allocation
is the key to
your portfolio
performance,
yet few follow
this with
discipline and
consistency
ASSET ALLOCATION
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“We depend substantially on our senior management and key management personnel, the loss of whose services would have a material adverse effect on our business, results and financial condition…. Accordingly, our success depends on the continued service of these individuals and the loss of the services of one or more of them could have a material adverse effect on our business and could harm our ability to maintain or grow AUM in existing funds or raise additional funds in the future… The loss of these personnel could jeopardize our relationships, especially with the key investors in funds advised by us and members of the business community, and result in a reduction of AUM to the extent of uncalled or unpaid capital, adversely impacting the growth of our AUM and/or result in fewer investment opportunities. We do not carry any “key man insurance policies” for our senior management and key management personnel, in the event of death or disability of any of such persons while in the service of the Company.”
When a leading Real Estate & PE player mentioned these words in its draft red
herring prospectus filed with the market regulator SEBI for its proposed public
float, the company must have treated it just as a disclosure for an eventuality.
But with the sudden accidental death of its young founder and chief executive
recently, company suddenly finds itself in the middle of a vortex.
CASE STUDY # 1
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• The board of directors of the company has inducted the late founder’s wife as one
of the directors to the board.
• Although lady has not been involved in the business and has no fund management
experience, she gets in by virtue of the promoter group’s holding of 87 per cent
stake in the said company
• The key challenge for the lady is that the private equity business is run as a one-to-
one relationship between general partners (GPs) or fund managers and the limited
partners (LPs) who are the real source of capital for PE firms.
• This leaves with three possibilities for the company:
Internal Succession- Appoint an internal person as the CEO
Acquisition Target- A competing PE fund acquires the company
End Of The Road- The company winds up its operations
HIGH PROFILE PROMOTER DEATH:BUSINESS CONTINUITY
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• Earnings of Michael Jackson from various Albums and other sources during his primetime :
CASE STUDY # 2
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• Despite record earnings from albums and concerts ,
• Jackson's finances were reportedly in disarray before his death, with his outgoingsexceeding his income by an estimated US$20 million to US$30 million a year.
• According to a filing in Jackson's probate case, he died with more than $400 millionin debt.
• The estate is currently negotiating settlements for several lawsuits, includingdisputes over Jackson's "Thriller" album.
MICHAEL JACKSON’S ESTATE PLANNING
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• Very recently, we saw the death of a globally renowned CEO. He was on medical absencesince January 2011, and finally resigned in August 2011. For such a reputed company toreplace its co-founder and chairman was no easy job.
• However if business continuity is planned appropriately, impact of such untimely eventscan be mitigated. This particular case is a classic example. The succession plan was inplace for the business, and the company has continued to report record sales numberseven after such untimely and tragic event of death of its co-founder.
• In view of the terminal nature of the illness, the CEO took several leaves of absence fromthe company not just for receiving treatment but also to ensure his personal finances aretransferred to his inheritors in a smooth manner
Planning is one of the way’s to show you care for your family, colleagues & Society
CASE STUDY # 3: SUCCESSFUL ESTATE PLANNING
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OTHER CASE STUDIES
CASE # 1: Few years back, post the death of a high profile businessmen, two brothers fought and split the large business, solely on account of lack of clarity of succession. This happened because of absence of proper succession plan.
CASE # 2: Having a mere Will is not enough in many cases. Another very high profile business family had seen similar issues on succession where lack of clarity on will led to the reigns of the large business group passing on to their Auditors instead of family members.
CASE # 3: Celebrities are often the victim of improper financial planning. Couple of years back, the death of a Bollywood actor of yesteryears highlighted this fact. Just before the death, the actor and his wife were thrown out of their house by his own brother. This was a clear case of inability to plan for the inactive days for a celebrity.
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You need to plan for Business Continuity and Estate Planning, along
with Finances to ensure a smooth sail in case of eventualities or
cyclical downturn in business. This is even true for celebrities whose
income stream is relatively short.
The underlying message from the case studies is simple:
THE LESSON
HOW TO MAKE FINANCIAL PLANNING WORK?
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Set measurable financial goals
• Set specific targets as well as a time frame for achieving your goals.
• For example, rather than saying you want to buy a “decent” house when you get married, your goal may be specifically to buy a 4-room HDB resale flat for not more than Rs. 3 Cr. when you turn 30 years old.
• Always put a monetary value to your desired goal
Understand the effects of each financial decision
• All of your financial decisions are inter-related. Each financial decision may affect other areas of your life plan.
• For example, a decision to set aside a regular amount of money for your child’s education fund may affect when and how you meet your retirement goals.
Re-evaluate your financial situation periodically
• Financial planning is a dynamic process.
• Revisit and revise your financial plan regularly to ensure that you are staying on track with your long-term goals.
HOW TO MAKE FINANCIAL PLANNING WORK
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Start planning as soon as you can
• Don’t delay financial planning. If you start planning early, chances are that you will achieve better results.
• Develop good financial planning habits such as saving, budgeting, investing and regularly reviewing your finances.
• You will be better prepared to handle emergencies and the various changes that occur in your life.
Be realistic in your expectations
• Financial planning cannot change your financial situation overnight. It is also a lifelong process.
• Remember that events beyond your control, such as inflation, changes in the stock market or interest rates will affect your financial planning results.
Realize that you are in charge
• You are ultimately responsible for your financial well-being. If you need help, take the first step by considering working with a qualified financial planner.
• Ask questions about the recommendations offered to you and play an active role in the decision-making process.
HOW TO MAKE FINANCIAL PLANNING WORK
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Know what to expect from a qualified financial planner
• A qualified financial planner is someone who is trained and has experience in taking a broad look at your entire financial situation.
• The financial planner will focus on your needs first through the financial planning process before recommending course of action that will help you reach your financial goals.
• Various financial products such as stocks and shares, unit trusts and insurance policies are merely tools that are used to implement the appropriate solution
• The financial planner will help you understand why certain recommendations are made and how each financial decision may affect the other areas of your finances.
HOW TO MAKE FINANCIAL PLANNING WORK
AXIOMS OF PERSONAL FINANCE
“Compounding," Albert Einstein said, " is mankind's greatest invention.” He called it the 8th wonder
of the world.
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E15 AXIOMS OF PERSONAL FINANCES
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The Risk-Return Tradeoff: The potential Return rises with an increase in RiskAxiom 1
The Time Value of Money: A rupee today is worth less in the future due toAxiom 2
Diversification Reduces Risk: Investing in different assets which have a low correlation reduces riskAxiom 3
All Risk Is Not Equal: Some risks can be diversified and some can not.Axiom 4
Impartial evaluation of competitive investment opportunitiesAxiom 5
Taxes Affect Personal Finance Decisions: Consider the post tax returns on an investmentAxiom 6
The Importance of Liquidity: Illiquid assets can not be sold to generate cash easily. This can severely affect one’s finances specially during an emergency.Axiom 7
Nothing Happens Without a Plan: It is essential to plan towards achieving one’s goals and aspirations to avoid unpleasant surprises in futureAxiom 8
Best Protection is Knowledge: Knowledge helps in taking informed decisions and avoid the ones which benefit the agent more than the investorAxiom 9
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E15 AXIOMS OF PERSONAL FINANCES
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Protect Yourself Against Major Catastrophes :A diversified portfolio in line with one’s risk profile is essential to tide over uncertain markets. Adequate insurance is essential to protect against accidents/calamities
Axiom 10
The Investment horizon: Investments should be in line with one’s investment horizon. The shorter the time horizon, the more conservative the investments should be.
Axiom 11
The Financial advisor Problem-- Beware of the Sales Pitch: Go with a qualified financial advisor who has your interest in mindAxiom 13
Just Do It!Axiom 15
Money Isn’t Everything: Family, Health are equally if not more important.Axiom 14
COMMON MISTAKES WITH REGARDS TO FINANCIAL PLANNING
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Common Mistakes With Regards To Financial Planning
Mistake 1 Do not have measurable financial goals
Mistake 2 Make financial decisions without understanding their effects on other
financial issues
Mistake 3 Neglect to re-evaluate their financial plan periodically
Mistake 4 Look for a quick financial fix instead of a long-term strategy
Mistake 5 Expect unrealistic returns on investments
Mistake 6 Think that financial planning is only for the wealthy
Mistake 7 Think that financial planning is only necessary when they get older
Mistake 8 Think that financial planning is primarily tax planning.
Mistake 9 Wait until a money crisis occurs to begin financial planning
Mistake 10 Think that using a financial planner means losing control
THANK YOU