Individuals who want to invest and have just earned some money and new for investing are carried away by talk from wrong people and invest in a haphazard manner losing money and in some cases part of the investment itself. This may be probably due to booming economy and growing number of people with loaded pockets. Or the new breed of certified financial planners are bombarding the media with the terms could be blamed. However the fact is that everyday one is faced with the question from someone or the other what is financial planning or wealth management. Let us take the case of SJ, having read many financial makeover stories and case studies, he is intrigued. However, he is yet to meet a qualified financial planner because he doesnâ€™t know anything about financial planning. Even after reading those columns he really donâ€™t understand how it works.
That sounds a valid argument. So, what is financial planning? Comprehensive Financial Planning is the process of proper allocation of financial resources towards ones financial goals. Just like a business plan in place, a personal financial plan is a blueprint for an investor that addresses four important areas of his life. The four areas are risk management, wealth creation, wealth preservation and wealth transfer. Wealth Management is a spiced up version of financial planning. Both serve the same purpose but wealth management is certainly a good ego booster. However, financial planning and wealth management do differ in the terms of the wealth of the client and the bouquet of products and services offered right from budgeting, risk management, investment advisory, limited tax advisory & estate planning services.
A typical process comprises of five steps: data gathering, diagnosis of current situation, preparation of the plan, presentation of the plan and review of the plan at regular intervals. For SJ, he has to go to a qualified financial planer or a firm with qualified personnel. He also should be prepared to fill around 30-40 pages with his financial details, including his financial details, including his financial goals. Just like a doctor or a lawyer cannot give advice without diagnosing situation in detail, no fiduciary advisor will give advice without considering ones overall financial situation and goals. Salesperson will typically come with a product and then try to fit it by highlighting a few attributes of an individualâ€™s needs that the product addresses. Itâ€™s like a chemist coming to a patient and telling that this new medicine will be useful to him and that it can address the long list of problems. No person in his sane mind will go for any medicine without consulting his doctor but it mostly happens in the financial services world.
Once a qualified person goes through the data submitted, he is a position to figure out the individualâ€™s current financial situation. This would allow him to prepare a plan that would help the investor to meet his various financial goals in life such as childâ€™s education, retirement plans among other things. Once a plan is ready, the person would discuss it with the individual and take his inputs. If the investor think the plan suits (in other words, he would stick to it) he can shake hands with the planner with a promise to return at regular intervals for periodic reviews. As you can see, contrary to SJâ€™s apprehension, financial planning is a simple process. People read financial makeover stories and start believing that it is a very complicated process. But the fact is that it is like diagnosing a disease. Once the relevant data is in, a qualified person can have a plan for an individual.
Why is there so much emphasizes on a proper plan? Most people think that their bank deposits, insurance policies and some investments here and there would be enough to take care of their future needs. But this could prove just an illusion. If you havenâ€™t allocated enough funds for each goal, most likely you wouldnâ€™t have enough money to meet those goals. That is why a proper plan is very important.