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WEALTH MANAGEMENT

Unit – I: [15 Marks]


1. Background, Role of Financial Planner; Financial Planning Process;
2. Contract and Documentation;
3. Client Data Collection and Client Data Analysis; Life Cycle; Wealth Cycle;
4. Risk Profiling and Asset Allocation - Strategic Asset Allocation - Tactical Asset Allocation – Fixed Asset Allocation with
Annual Rebalancing – Flexible Asset Allocation;
5. Financial Plan - Goal-based Financial Plan –Comprehensive Financial Plan, Financial Planning to Wealth Management;
Financial Planning in India.

FINANCIAL PLANNING is
1. To develop well defined goals
2. Divide the goals into short term and long-term goals
3. To look at the current income, expenses and savings
4. To map out well defined strategies to turn the dreams into reality

Steps in Financial Planning


1. Identifying the investment objectives
2. Investment Objectives – needs and requirements
3. Determine the required returns to meet the financial objectives
4. Determine the risk tolerance of the individual
5. Design an asset allocation to meet the risk and returns
6. Modify the asset allocation based on any change in needs or risk tolerance

Financial Planning – Increasing complexity


1. Markets opening up
2. Increased volatility in the debt and equity markets
3. Investment Options available with the individuals are increasing
4. Equities, Bonds, Mutual Funds, Derivatives, real estate
5. There are now around 30 mutual funds in India offering 400 schemes
6. Investment options expected to increase going forward
Commodities trading, forex Effective 1 April 2019, the Certified Financial
7. Tax Planning requires an expert Planner (CFP) certification program in India is
directly administered by Financial Planning
Standards Board Ltd. (FPSB Ltd.), owner of the
Financial Planner would provide;
international CERTIFIED FINANCIAL
1. A comprehensive platform of tailor-made services.
PLANNER certification program outside the
2. Customized strategies and product application.
United States.
3. The highest quality in advice.
4. Confidentiality.
5. Single Point contact and personalized service.
6. An experienced Investment Advisor.
7. Resources and capabilities to ensure timely and accurate execution.

Financial Planning Process


1. Establishing and defining the Client-Planner relationship
2. Gathering client data including goals
3. Analysing and evaluating client’s financial status
4. Developing and presenting financial planning recommendations and / or alternatives
5. Implementing the financial planning recommendations
6. Monitoring the financial planning recommendations

Retirement Planning
1. Assessment of current financial status
2. Ascertain post retirement needs
3. Determine what you need to save and how
4. Find extra money for savings

Tax Planning
1. Incomes exempt from tax under sec. 10
2. Deductions under chapter VI A for amounts utilized towards certain purposes qualifies as deduction from total
income
3. Splitting income by creating several entities such as HUF or Trust.
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LIFE CYCLE ANALYSIS
People go through various stages in the life cycle, such as:
 Young and unmarried
 Young and married, with no children
 Married and having young children
 Married and having older children
 Retirement
Position on the life cycle determines the kinds of challenges the client is likely to face and therefore the approach
to financial planning. For instance, younger clients have the entire earning cycle ahead of them. Their insurance
needs will be high. Those with dependents need to have adequate life insurance to protect the family against
untimely demise.
At a young age, saving and spending habits are formed. Systematic Investment Plans (SIPs) are a good way to
ensure that the client does not fritter away any money. They need to be educated on how starting saving early
ensures a comfortable future. Clients need to be advised to invest in a house, not only as an asset but also as a
roof that will be useful in future. Depending on family structure and the family home, need for a house, can
become critical after marriage. While standard of living is a factor to consider, clients should not stretch
themselves to an unsustainable financial position. They need to be advised on the kind of budget they should
consider for the house, the type of loans that are possible etc. Parents with older children need to prepare for
sudden significant outflow, for education or marriage or such other requirement of children. They also need to
plan for their retirement, not only in terms of financial assets, but also corporate perks that may not be available
in future, such as medical re-imbursement, accommodation, car, club facilities etc. On retirement, if salary or
business earnings were to stop, then clients need to be cautious in taking risks. At a younger age, the client can
take greater risk. Asset Allocation is a key decision across the life cycle of the client.

WEALTH CYCLE ANALYSIS


As with life cycle, the position of the client on the wealth-cycle changes over time. The key stages are:
 Accumulation
This is the phase when the client is in the early stages of employment, and major expenses are not imminent.
Therefore, there is good scope to save money and accumulate wealth. During the accumulation phase, the
person can take more risk because future earnings can help the client recover from losses.
 Distribution
This phase comes during retirement, when the client may not have much scope to accumulate wealth. Instead,
the wealth needs to be protected, and used to meet expenses. The client may not be so concerned about
growing the wealth, as in ensuring that the income is adequate.
 Transition
This is a phase when a major financial goal is approaching. The client has to plan the liquidity for meeting the
goal.
 Windfall Gain
During this phase, the client acquires sudden wealth. This can come through several forms such as inheritance,
winnings from lottery, one-time settlements or stock options. The planner seeks to ensure that the client uses
the windfall prudently, to build a sound portfolio of assets.
 Inter-generation Transfer
Here, the client starts planning the transfer of wealth to the next generation. Older clients may have to plan the
transfer for more than one generation

LIFE CYCLE APPROACH TO WEALTH MANAGEMENT

EARLY CAREER: Ranging in age from 25 to 35 years old, early career phase clients are starting to build a
foundation for a strong financial future. Clients in this stage may be planning to start a family, if they have not
done so already. If they do not yet own a home, they might be saving for one. At this stage, keeping income in step
with expenses is a struggle, but it’s important to lay the groundwork for retirement saving now.

CAREER DEVELOPMENT: From ages 35 to 50, earnings rise, but so do financial demands. Keeping expenses in
line with income is a challenge in this stage. Many families are concerned with covering college costs and paying
for ongoing expenses while also increasing the pace of saving for retirement.

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PEAK ACCUMULATION: In this stage, from the early 50s into the early 60s, clients typically reach their maximum
income level. It may be a time of relative freedom for clients whose children have graduated from college. But
this stage can also be a time of financial strain, as late age, or “silver” divorce, is on the rise. Without college tuition
and with lower expenses thanks to their empty nests, they can accelerate savings rates to position themselves
for a more secure retirement.

PRE-RETIREMENT: About three to six years before winding down professionally, clients start restructuring
assets to reduce risk and increase income. By this point, mortgages are usually paid and children are
independent. This is the time to evaluate retirement plan distribution options and the tax consequences of
investments.

RETIREMENT: The final financial lifecycle phase occurs for clients in their mid-60s and beyond. Once clients stop
working, their focus shifts from wealth accumulation to income preservation. In this stage, the goal is to help
clients preserve purchasing power and enjoy their desired lifestyle. Legacy considerations and estate planning
also gain prominence as clients age.

Life Cycle (Detailed)d Analysis

Source: David Maude [Global Private Banking and Wealth Management: The New Realities]

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CLIENT DATA COLLECTION
In order to provide appropriate financial advice, it is important to understand the client and the family. This is
facilitated through data collection, for which planners develop standard forms / questionnaires.
Internationally, this data collection is often performed by para financial planners, who are not qualified to offer
complete financial planning advice.
The data that is collected includes the following:
1. Client name, family status
2. Family structure i.e. age of dependents and independents who stay with the client or for whom the
client is responsible
3. Residence – ownership / rented
4. Bank accounts, depository accounts, Permanent Account Number (PAN)
5. Various investment related advisers that the client deals with, their contact information and the nature
of advice / services rendered
6. Income of each independent member of the family and the nature of such income and its stability /
annual growth
7. Life-style including expense breakup and how they are expected to grow over time
8. Major financial goals, like child’s education or marriage, the likely fund requirement and timing of such
outflow
9. Assets owned, ownership details (held in whose name and when they were purchased), any specific
purpose for which they are held, market value and how it fluctuates, any covenants that limit the re-sale
of the assets or their realisable value for the client
10. Purpose, amount outstanding, interest rate, tenor and monthly outflow for various loans that may have
been taken
11. Life expectancy based on mortality history of ancestors, and details of life insurance coverage for each
earning member of the family
12. Medical history of the family, medical expense policy of employers and details of medical insurance
coverage taken
13. Other risks that the client is exposed to, for example, fire or theft in family shop, and details of general
insurance coverage taken
14. Details of key man insurance policies that may have been taken by the family business
15. Client’s psyche, especially with respect to risk and market fluctuations.

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Client Data Analysis
Professional financial managers use software to analyse the data. Even MS Excel spread sheets can be used for the
purpose. Broadly, the analysis seeks to profile the client on parameters such as
 Position of client on the life cycle
 Position of client on the wealth cycle
 Risk orientation – How much risk can the client take? How much risk is the client prepared to take? Some planners
use customised risk profiling software to assess this.

CONTRACT AND DOCUMENTATION


It is a good practice to set out the terms of the relationship in a suitable contract. The financial planning contract will
include:
1. The parties involved
2. Key deliverables and other services to be rendered, and by whom
3. The data to be provided, and by whom
4. Assurances, if any
5. Limitations, if any. For instance, unpredictability of the markets and the consequent
6. fluctuations in investment performance
7. Remuneration for the planner, and how these will be collected.
Proper documentation of the data collected, discussions held and recommendations made will help the planner manage
the client relationship well. Since the results of financial planning are affected by the market, the planner has to establish
robust systems and documentation to protect against any legal claims that can come up in the business.

Investment Philosophy
There are three major variables in figuring out one’s investment style – the risk tolerance and investment horizon and
time on investment.

1. Risk Tolerance
a. How comfortable will you be seeing your investment decrease in the near term while waiting for it to increase
over the long term?
b. How comfortable will you be to invest in something in which the price changes every day - sometimes
adversely.
c. An investor X may be very comfortable with a downside of 25% in an investment whereas Investor Y could
shy away from any downside in his investments.

2. Investment horizon is a term used to identify the length of time an investor is aiming to maintain their portfolio
before selling their securities. The issuing company creates these instruments for the express purpose of raising
funds to further finance business activities and expansion.

3. Time on Investment: How much time do you want to/are able to spend on investing. Gives rise to the concept of
active investing and passive investing.

 Hence setting investment goals, planning the outlay of investment amount and time horizon and making
appropriate investment choices in line with investor profiles is essential for the success of any investment
programme.

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