What is Comprehensive Financial Planning?
Comprehensive Financial Planning encompasses an assessment of all facets of an individual’s finances. It involves gauging an individual’s present state of finances, outlining financial goals as well as life stage requirements, and creating an action plan to achieve those goals. Areas like investment analysis and management, tax management, and estate planning, among others, form part of a comprehensive financial plan.
How do you create a comprehensive financial plan?
Comprehensive Financial Planning is as different from investment planning as a wellness plan is from a health check-up. While investment planning looks at areas of investment to grow wealth, comprehensive financial planning looks at the following:
A thorough review of finances, including cash flow analysis
Discussing and outlining financial goals and milestones
Developing a plan in light of the above two aspects
The last step is an ongoing one where a financial planner chooses investment products which reflect the goals and risk appetite of his client.
What does the term financial planning for the client mean?
Financial planning for a client involves looking into detail the aspects mentioned above and helping him achieve all he wants to succeed financially. An overlay of events or milestones of life like children’s education and marriage, and similar goals, is necessary for financial planning. Finsight Financial Planners does this via a comprehensive financial planning questionnaire. There are five things that a financial planner can undertake to create an effective financial plan for a client:
Assess the current financial situation of a client: This can be done by assessing cash flows and making rough projections so that various scenarios are available to the financial planner to see how much investable cash is available at different life stages. This entails current salary or business income, any additionally expected cash flows, a projection of an increase in salary or revenue, etc.
Outline client’s goals: This is possibly the most time taking process in which the planner outlines the financial goals of his client and provides suggestions if the client has missed some crucial aspects or areas of planning. Though broad goals will remain the same, some nearer-term goals are fluid and will need to be reviewed periodically.
Risk capacity: This is closely associated with the previous step. While discussing a client's goals, a planner needs to address the risk capacity of a client as well. This will help in making goals more practical for the client. For instance, a client with aggressive goals but limited risk capacity would not be able to achieve goals. Hence, either the targets will need to be modified, or the risk capacity would need to be increased.
Create an investment strategy: After goals and risk assessment have been discussed, the planner will use his expertise to create an investment strategy by using instruments suitable for the client.
Review investment strategy: Continual monitoring and tweaking investment strategy, and sometimes even goals, ensures that all steps remain in sync.
What are the five components of a financial plan?
After seeing the flow of how financial planning for a client works, let’s take a look at its components. A comprehensive financial plan example includes the following areas which a financial planner will need to look at.
Insurance planning: Protecting a client and his loved ones is an essential component of financial planning. From various needs such as life and health insurance to vehicle and home insurance, a planner can look at multiple aspects and suggest suitable products which can serve the client in the time of crisis.
Investment planning: This is the core of a financial plan which is aimed at earning healthy returns for an investment portfolio so that a client can achieve his financial goals. This component is monitored and reviewed the most frequently among the five components.
Tax planning: Efficient tax planning is an essential component of a financial plan as it can help maximize returns for a client, thereby growing his wealth. To achieve a goal, there may be several methods and instruments, but only a few may be beneficial from the taxation perspective. A good financial planner would be able to suggest this to his client.
Retirement planning: Another critical aspect is planning for income when the client retires. It’s never too early to start planning to invest for retirement, and after investment planning, this component needs the most discussion and most frequent review and monitoring. Setting a retirement corpus goal, checking its suitability is given the client's status, and requirements, the possibility of early retirement, regular income after retirement is a few of the aspects this component entails.
Estate planning: This involves outlining the usage of a client’s assets while living and after death and includes issuing powers of attorney in case something befalls the client.
Top 10 Steps of A Comprehensive Financial Plan includes the following -
Identify your goals
Assess your net worth
Trace your cash flow
Detail your expenses
Gauge and manage your debt obligations
Set aside money for retirement
Review your investment portfolio
Keep a tab on tax implications
Have an estate plan handy
Finsight’s comprehensive financial planning group continually monitors the performance of the products and aligns the portfolio with the outlined goals and risk appetite.