financial planning, its relevance in a client’s...

FINANCIAL PLANNING, ITS RELEVANCE IN A CLIENT’S

LIFE

1TrustPlutus Wealth Managers(India) Private limited1/21/2015

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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

1/21/2015

2TrustPlutus Wealth Managers(India) Private limited

WHAT IS FINANCIAL PLANNING?

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“If anything can go wrong, it will”- Murphy’s law

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4

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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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.

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

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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


….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


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.


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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.


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

1/21/2015


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

1/21/2015


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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MARKET EMOTION CYCLE

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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

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