Introduction to financial planning
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Introduction to financial planning Presentation Transcript

  • 1. Module 1 Introduction to Financial PlanningCertified Financial Planner Module 1: Introduction to Financial Planning
  • 2. This session will help you understand • Financial Planning- the concepts and implementation • Regulatory, ethical and professional aspects of financial planning. • Cash flow planning and budgeting. • Personal Asset management. • Financial Statement analysis and mathematics. • Economic Environment and indicators. • Forms of business ownership. • Ways of taking legal title to property.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 3. Financial Planning • Process of meeting life’s goals by efficient management of your financial resources • Process involves defines short-term and long-term goals and prioritizing and Assessing current financial situation and commitments Role of Financial Planning Defining and prioritizing Defining and prioritizing Accessing current Deciding where you want Accessing current Deciding where you want short & long term goals finances & commitments finances & commitments to be in the future to be in the future short & long term goals Identifying realistic Identifying realistic Putting the plan into Putting the plan into Monitoring Performance Monitoring Performance strategies to achieve the strategies to achieve the action action goals goalsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 4. The Financial Planning process involves 6 steps: 2.Establishing and 2.Establishing and 1.Monitoring the 1.Monitoring the 3.Gathering Client Data & 3.Gathering Client Data & Defining the client- Defining the client- recommendations recommendations Goals Goals Planner relationship Planner relationship The Financial Planner The Financial Planner The Financial Planner should: should: should Discuss his objectives & Analyze information expectations Obtain information & documents Discuss the services available Identify problems & opportunities across each major Clarify responsibilities and time Help your client “refine” or financial planning discipline frame crystallize goals Finance – Asset & Liability Finalize the scope of the Structure, Cash Flows engagement Help your client develop an understanding of his/ her Investment Taxation – Determine the fee/compensation values & attitudes arrangement Ordinary and Income Risk Management – Insurances & Asset Protection Law – Estate, Charitable & Legacy PlanningCertified Financial Planner Module 1: Introduction to Financial Planning
  • 5. The Financial Planning process involves 6 steps: 5.Developing and 5.Developing and 4.Analysing and 4.Analysing and 6. Implementing the 6. Implementing the Presenting Financial Presenting Financial Evaluating Financial Evaluating Financial Financial plan Financial plan Planning Planning Status Status recommendations recommendations Recommendations/ Recommendations/ Alternatives Alternatives The Financial Planner The Financial Planner The financial planner should: should: and the client should: Prepare & present a Assist the Client or manage Review changes in personal personalized financial plan the process as defined in the circumstances Engagement Agreement Establish a review cycle Review and evaluate impact of changing tax laws Review and Discuss changing life circumstances Make periodic adjustments or recommendations as necessaryCertified Financial Planner Module 1: Introduction to Financial Planning
  • 6. Objectives of Financial Planning • Emergency Funding: To accumulate liquid assets to fund the short- term financial needs. • Protection against personal risks: To provide for personal risks such as premature death, sudden disabilities, medical emergencies and so on. • Special needs funding: to accumulate savings to fund special needs • higher education for children, • wedding expense for each of the children, • a lump sum for the down-payment deposit for a condominium (apartment), • an overseas holiday tour for the family and so on.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 7. Objectives of Financial Planning • Capital accumulation for • Education funding. • Retirement funding. • General investment fund. • Reduction of tax burden • During one’s life time • After death for income accruing to the heirs. • Estate planning • Investment and property managementCertified Financial Planner Module 1: Introduction to Financial Planning
  • 8. How to make Financial Planning work: • Set measurable goals • Understand effects of financial decisions on other financial issues • Periodically Re-evaluate Financial Plans • Start as early as possible and start with what you have got • Take charge of the financial planning engagement • Look at the big picture – It is more than just retirement planning or tax planning • Don’t confuse financial planning with investing • Don’t expect unrealistic returns on investments • Don’t wait until a money crisis to begin financial planningCertified Financial Planner Module 1: Introduction to Financial Planning
  • 9. Establishing the Client- Planner EngagementCertified Financial Planner Module 1: Introduction to Financial Planning
  • 10. Responsibilities: Client & Planner Client Planner • Express concerns, hopes and •Evaluating client’s financial and goals other needs • Do not procrastinate •Explaining financial concept and • Be honest with your answers to questions clarify client goal • Live within your current •Analyzing client circumstances income and do not live up to or and prepare financial plan beyond it •Implementing and monitoring • Be open to formulating a financial plan and identifying financial plan strategies to reach goals and objectivesCertified Financial Planner Module 1: Introduction to Financial Planning
  • 11. Gathering Client Data and Determining Goals and ExpectationsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 12. Data obtained from Client- 2 types • Quantitative Data- • May be described as statements of fact. • A clients name, date of birth and salary are some examples. • Qualitative Data- • These may be defined as ‘relevant information that is not factual in nature’. • More difficult to obtain and define. • Relates more to personal and social attitudes of the client. • Examples : attitude to risk, future employment prospectsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 13. Data Collection Form • Very useful tool to obtain useful qualitative & quantitative information from the client. • Should contain at least the following sections: • Personal Details • Basic Financial Details • Cash Flow • Insurance • Estate Planning • Qualitative information • Attitude to riskCertified Financial Planner Module 1: Introduction to Financial Planning
  • 14. Personal Details Personal details should include the following: • Name • Date of birth • Employment history • Employment history • Health/family history • Family structures • Legal structures • Employee benefitsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 15. Basic Financial Details • Financial planner should gather detailed information on client’s financial assets & Liabilities • Planner should ensure that they have a full list of the real and estimated value of assets. Identify what is real and which has been estimated. • Note the date of acquisition of the assets and the purchase price. • Be sure to differentiate between lifestyle, or personal assets and investment assets wherever possibleCertified Financial Planner Module 1: Introduction to Financial Planning
  • 16. Cash Flows • Related to Income Sources & expenditures of the client. • More rigorous approach required in this area, as only rough estimates usually provided by client. • Financial planners mostly use an expense calculator to assist clients in calculating their domestic budget. • Main elements typically found an expense calculator are housing, transport, health, education and personal.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 17. Insurance • The financial planner should find out which insurance policies the client has in force • Should include life insurance, asset protection, income protection, disability cover, and trauma / critical illness cover. • In addition the financial planner should identify the level of insurance protection over fixed assets.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 18. Estate Planning • The financial planner should confirm that client has a current, valid will and that its location is known. • Similarly the financial planner should confirm whether the client is aware of the benefits of having relevant powers of attorney in place for all those in the family with assets.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 19. Some tips for better data gathering • Start with personal questions, rather than their financial position • Ask open ended questions • Listening Skills • Avoid negative non-verbal communication at all timesCertified Financial Planner Module 1: Introduction to Financial Planning
  • 20. Goal Setting • Financial Planning process begins with Goal Setting • Goals may be short term (take less than 12 months to achieve) or long term (take more than 12 months to achieve) • Goals may be focused and specific (establishing a budget) or comprehensive (retirement planning) • Goals sometimes compete for available Funds; they sometimes overlap; and sometimes interact • Goals must be an extension of your valuesCertified Financial Planner Module 1: Introduction to Financial Planning
  • 21. Goal Setting Goals must be SMART - Specific - Measurable - Action Oriented - Realistic - Time BoundCertified Financial Planner Module 1: Introduction to Financial Planning
  • 22. Analyzing Client Objectives, Needs & Financial SituationCertified Financial Planner Module 1: Introduction to Financial Planning
  • 23. Clients seek advice from financial planners to • Simplify investments by having someone else do the paperwork • Reduce tax paid • Ensure appropriate application of a windfall gain; • Protect against time off work due to sickness, accidents, or untimely death; • Overcome lack of savings or rising debt obligations • Have a second opinion on a financial plan developed by them;Certified Financial Planner Module 1: Introduction to Financial Planning
  • 24. Financial Objectives Needs and Wants • The process of mutually-defining is essential to determine what activities may be necessary to proceed with the client engagement. • Personal values and attitudes shape a clients goals and objectives and the priority placed on them. • Wants and Needs are two different things. • Wants‘ are desires or things hoped for; needs are requirements or things.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 25. Clients Needs can be categorized into • Protection Needs – The need to protect assets against losses • Safety Needs - the need to accumulate funds for expenses ("saving to spend" needs) as well as to provide a liquid source of funds for financial emergencies. Also a temporary "parking place" for funds to be invested elsewhere in the near future. • Income Needs - the need to receive a constant, consistent cash flow from assets. • Growth Needs - the need to invest funds in wealth building or appreciation oriented products to achieve longer term, capital-intensive goals, such as education or retirementCertified Financial Planner Module 1: Introduction to Financial Planning
  • 26. Identifying the Client’s Attitude to Risk • Quantitative information may not be sufficient for a financial planner to formulate strategies for the client • Qualitative information is required to understand the client’s appetite for risk • Planner should evaluate the clients grasp on general knowledge on financial matters • When the financial planner begins the process of strategy selection within the plan, it is critical to understand the clients attitude to risk.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 27. Analysis of relevant information Personal Details: The main points to consider are : • The age and life expectancy of the income earner in relation to the likelihood of death or disablement; • The gender of client and any dependants; • The effects of smoking and • The number and status of dependants Other information which requires in-depth analysis includes: • Employment history • Health/family history • Family structures • Legal structuresCertified Financial Planner Module 1: Introduction to Financial Planning
  • 28. Analysis of relevant information Financial Details: • Analyze the assets and liabilities: Financial planner must analyze assets & Liabilities situation of client to formulate financial plan. • Sources of Income: A tax return is a good basis to cover all aspects. Note also any employer-provided perquisites. • Expenditure of the client: Using the budget form, try to isolate discretionary from non-discretionary expenses. • The purpose of isolating these expenses is to find out what the basic requirements are.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 29. Developing Appropriate StrategiesCertified Financial Planner Module 1: Introduction to Financial Planning
  • 30. Developing Strategies The following things need to be kept in mind: • Clients Risk Tolerance • Assessment of Option • Research Analysis & Modelling • Draft Financial Plan • Implementation of Plan • Monitor and evaluate soundness of Recommendation • Make recommendations to Accommodate New or Changing CircumstancesCertified Financial Planner Module 1: Introduction to Financial Planning
  • 31. Client’s Risk Tolerance There are three types of clients for whom risk tolerance assessment is particularly difficult. • Clients who have the willingness to take risks, but don’t have the financial ability. • Clients who have the financial ability but don’t have the willingness to take risks. • All other clientsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 32. Client’s Risk Tolerance • Selecting appropriate insurance coverage and determining investment suitability depend on the planner’s ability to assess risk tolerance • Risk tolerance has four distinct aspects. An analysis of client risk tolerance involves an evaluation of four risk concepts: propensity, attitude, capacity and knowledgeCertified Financial Planner Module 1: Introduction to Financial Planning
  • 33. Dimensions of Risk Tolerance • Risk propensity: The clients’ attitude toward risk can be determined by reviewing their real-life decisions in financial situations. • Risk attitude: The clients’ willingness to incur financial risk • Risk capacity: The client’s financial ability to incur risk • Risk knowledge: The client’s understanding of riskCertified Financial Planner Module 1: Introduction to Financial Planning
  • 34. Development of Strategies • Six main strategic : cash flow and budgeting, investment planning, taxation planning, investment planning, risk management & insurance planning and estate planning. • Wide range of alternative strategies available within each area. • Only a comprehensive plan taking into consideration all the strategic areas can help in achieving the client’s goals.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 35. The Strategy Development Process Check that you have Check that you have all the information all the information Secure the client’s Secure the client’s current financial position current financial position Establish the client’s goal Establish the client’s goal and financial concern and financial concern Recommendations to Recommendations to meet clients desired meet clients desired future financial position future financial positionCertified Financial Planner Module 1: Introduction to Financial Planning
  • 36. Drafting the Financial Plan • Using data collected via various sources of data collection, financial planner to draft the financial plan. • The plan should be in a lucid language so client can understand • Financial planning software can be used for this purpose, however, these should not be used in isolation for developing the plan.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 37. Essentials Components of a written financial plan • Executive summary/ financial plan summary • Statement of current situation and financial objectives • Assumptions • Financial planning strategy • Specific recommendations • Projections • Services, fees and commissions • Summary of recommendations • Action to proceed • Authority to proceed/Letter of engagement • DisclosuresCertified Financial Planner Module 1: Introduction to Financial Planning
  • 38. Implementing and Monitoring the financial PlanCertified Financial Planner Module 1: Introduction to Financial Planning
  • 39. Implementing and monitoring the financial plan Implementing the plan: • Implementation of the plan is the next step in the process. • A financial plan is useful to the client only if it is put into action. • Financial planner to assist the Client or manage this process as defined in the Engagement Agreement Monitoring the plan- The Financial Planner and the Client should: • Conduct periodic reviews when: • Changes in personal circumstances • Changing tax laws • Changing life circumstances • Make periodic adjustments or recommendations as necessaryCertified Financial Planner Module 1: Introduction to Financial Planning
  • 40. Financial planning review • The financial planner should establish a client file and a system for periodic review and revision. • The financial planner to monitor performance of investments, changes in tax laws & regulations (the general economic environment) and also evaluate new financial products for possible inclusion. • Financial planner to regularly evaluate the plan with respect to any changes in the client’s situation.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 41. Financial planning review The following issues can be expected at this step: • Have the client or the planner agreed to have the recommendations and the client’s financial progress monitored periodically? • If so, does the planner review and evaluate changing circumstances and make new recommendations based on the changes, as and when it is appropriate?Certified Financial Planner Module 1: Introduction to Financial Planning
  • 42. Need for financial planning review Regular reviews are necessary for : • Changes in personal circumstances- Plans may need to be revised for reasons such as loss of a job, addition of a new family member and so on. • Changes in the external environment- Changes in regulations, economic and market conditions may warrant changes in the financial plans • Product related factors- To find out if the product recommended to the client is still applicable to his needs.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 43. Steps in the financial planning review The review process should take the following steps: • Measuring the performance of the implementation vehicles; • Update information on the client’s personal and financial situation; • Examine the impact of economic, tax or the financial environment on the effectiveness of the plan.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 44. Benchmarking Performance & updation of plans • Setting a performance benchmark helps track progress made towards the goal. The type of benchmarks to be used is important. • These are important indicators for both the client and the financial planner. They trigger off action that may be required • The review process will help in identification of areas which need changes to be made. • Situation may require focus on a particular goal to shift or abandonment of goals. • A new plan should then be presented to the client, incorporating such changes.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 45. To summarize… • Soundness of a comprehensive financial plan is based on how well the individual chosen strategies complement each other. • There are six fundamental strategy areas that should be addressed • The options chosen as recommendations to the client from each of these categories should work together to enhance the clients overall financial position, both now and in the future.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 46. Regulatory Requirements for CFP CertificantsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 47. Certification requirements • Student Member Requirements • The Association of Financial Planners requires certain declarations acceptance as Student Members. • These disclosures are given on registration for the program. • Candidates should fill in the required details. Students from any discipline, including undergraduates can apply for CFP™ certification. • The work experience criterion is not necessary to enroll for the program.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 48. Certification requirements Modules: The CFP™ certification is granted to individuals who have demonstrated technical competency, enabling them to write (to international standards) a comprehensive and detailed financial plan for an individual. The certification covers six India-localized course modules as follows: Module 1: Introduction to Financial Planning Module 2: Risk Management and Insurance Planning Module 3: Retirement Planning and Employee Benefits Module 4: Investment Planning Module 5: Tax Planning and Estate Planning Module 6: Financial Plan ConstructionCertified Financial Planner Module 1: Introduction to Financial Planning
  • 49. Certification requirements CFP™ Certification Requirements: Candidates have a maximum of seven years to complete the certification process. For certification, you are required to meet the following four initial certification requirements (known as the four "Es"). • Education • Examination • Experience • EthicsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 50. Ethical and Professional ConsiderationCertified Financial Planner Module 1: Introduction to Financial Planning
  • 51. Professional Standards • Professional Standards have been adopted by the Financial Planning Standards Board (FPSB), India to provide Code of Ethics and Rules of Professional Conduct to all its Members. • The Standards consists of two parts: Code of Ethics and Rules of Professional Conduct.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 52. The Code of Ethics • The Code of Ethics are statements expressing in general terms the ethical and professional ideals expected of members • The Rules of Professional Conduct are derived from the tenets embodied in the Code of Ethics. As such, the Rules set forth the standards of ethical and professionally responsible conduct expected to be followed in particular situationsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 53. The Code of Ethics • Code of Ethic 1 – Integrity Members shall observe high standards of honesty in conducting their financial planning business and shall offer and provide financial planning services with integrity. • Code of Ethic 2 – Objectivity Members shall disclose to the client any limitation on their ability to provide objective financial planning services. • Code of Ethic 3 – Competence Members shall provide competent financial planning services and maintain the necessary knowledge and skill to continue to do so in those areas in which the Member is engaged. • Code of Ethic 4 – Fairness Members shall provide financial planning services in a manner that is fair and reasonable.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 54. The Code of Ethics • Code of Ethic 5 – Confidentiality Members shall not disclose any confidential client information without the specific consent of the provider of that information unless compelled to by law or as required to fulfill their legal obligations. • Code of Ethic 6 – Professionalism Members shall ensure their conduct does not bring discredit to the financial planning profession. • Code of Ethic 7 – Diligence Members shall act with due skill, care and diligence in providing financial planning services. • Code of Ethic 8 – Compliance Members must maintain knowledge of and comply with the Constitution of the AFP, the AFPs Code of Ethics and Rules of Professional Conduct and all applicable laws, rules and regulations of any government, government agency, regulatory organization, licensing agency or professional association governing the members professional activities.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 55. Rules of professional conduct There are a number of rules of professional conduct that have been set for CFP Candidates. These relate to the following broad categories: • Rules that Relate to the Code of Ethic of Integrity • Rules that Relate to the Code of Ethic of Objectivity • Rules that Relate to the Code of Ethic of Competence • Rules that Relate to the Code of Ethic of Fairness • Rules that Relate to the Code of Ethic of Confidentiality • Rules that Relate to the Code of Ethic of Professionalism • Rules that relate to the Code of Ethic of Diligence • Rules that related to the Code of Ethics of ComplianceCertified Financial Planner Module 1: Introduction to Financial Planning
  • 56. Assessment of Risk & Client BehaviorCertified Financial Planner Module 1: Introduction to Financial Planning
  • 57. Risk Assessment • Risk profiling: A method of determining clients’ attitude to risk • This technique involves asking the client a prescribed series of questions whose answers are designed to produce a value or point on a scale that indicates the client’s risk acceptance. • It is sound practice to discuss the nature of various investment risks with the client so that the data you gather is based on a full client understanding of those risks.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 58. Risk Tolerance • Assessing client risk tolerance is one of the most important and most nebulous, activities for financial planners. • Selecting appropriate insurance coverage & determining investment suitability depend on planner’s ability to assess risk tolerance. However, no definitive standard for evaluating risk tolerance has emerged. • There are three types of clients for whom risk tolerance assessment is particularly difficult. • The first type consists of clients who have the willingness to incur risk, but don’t have the financial ability. • The second type consists of clients who have the financial ability to incur risk but don’t have the willingness. • The third type consists of all other clients.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 59. Risk Propensity • Risk propensity The client’s attitude toward risk can be determined by reviewing the client’s real-life decisions in financial situations. • For example, Clients who carry too little insurance or hold highly risky assets are risk tolerant. • But, Clients often make financial decisions without fully understanding their impact. The client may be underinsured because of simple procrastination or ignorance of the nature of the risks they face. • Sometimes they keep in their portfolios assets that were obtained by inheritance or marriage, and may retain assets for family, sentimental or tax reasons.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 60. Risk Attitude • Risk Attitude: The clients willingness to incur financial risks. • Planners should use a scientifically designed questionnaire that directly addresses risk attitude. • Among the types of questionnaire items used to evaluate attitude are the following:Certified Financial Planner Module 1: Introduction to Financial Planning
  • 61. Risk Attitude • Ranking investment objectives • Allocating a make-believe windfall among various investment options • The level of thrill or anxiety felt after making financial decisions • Selecting the preferred risk/return trade-off from a set of possible alternatives • Specifying the odds that would be required to entice the respondent to accept a bet with a specified amount of gain or loss • Specifying the rate of return that would be required to entice the respondent to accept a bet with a specified set of odds.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 62. Risk Capacity • Risk Capacity: The client’s financial ability to incur risks, starting with the client’s age and family responsibilities. • Considers amount & stability of income relative to fixed & discretionary expenses. • Analysis of the balance sheet- asset allocation and portfolio diversification, risk exposure in the portfolio, and the size and payment structure of the liabilities and other contractual commitments are also done. • Portfolio goals and constraints (including time horizons) and the need for current income, capital preservation and growth are part of the risk capacity evaluation. • An often forgotten aspect of capacity is the adequacy of the client’s insurance coverage, which protect clients from some financial risks, thus allowing them to take other financial risks.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 63. Risk Knowledge • Risk knowledge: The client’s understanding of risk. • It is presumed that, Clients are more likely to make informed financial decisions if they understand the nature of risk and their exposure to it • Further, clients who understand risk are less likely to panic if investments do not perform upto expectations.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 64. Importance of Risk Assessment • The planner can find out if their client’s financial situation allows them to take greater risks. • If their financial situations allow them to take greater risks, they will be more willing to do so. • For clients whose risk capacity is low relative to attitude, planners can point out factors that will improve risk capacity, based on the assessment of risks.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 65. Cash Flow Planning and BudgetingCertified Financial Planner Module 1: Introduction to Financial Planning
  • 66. Cash Flow Planning And Budgeting • Short-term cash flow planning • Cash budgeting • Preparing monthly household budget • Long-term cash flow planningCertified Financial Planner Module 1: Introduction to Financial Planning
  • 67. Cash Flows • Cash flows for an individual client mean his or her income and expenditure. • An efficient management of cash flows is aimed at generating surplus income by budgeting or controlling the client’s income and expenditure. • Personal financial planning consists of three general activities: • Controlling day-to-day financial affairs to enable you to do the things that bring you satisfaction and enjoyment. • Choosing and following a course toward medium and long term financial goals such as buying a house, sending your kids to college, or retiring comfortably. • Building a financial safety net to prevent financial disasters caused by catastrophic illnesses or other personal tragedies.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 68. Top ten features of a successful budget • Put expenses into categories that fit personal situation and spending habits of the client, not somebody else’s. • Project incomes accurately. • Have enough categories to give a meaningful picture of where money goes and where costs can be cut, but don’t make it too expansive. • Include expenses that dont occur on a monthly basis, such as vehicle maintenance, homeowners insurance, personal property taxes, service contracts, etc. • Regularly review categories to determine if more or fewer are needed, review expenses, and brainstorm about ways to trim costs in each category.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 69. Some things to keep in mind while budgeting • Track and record expenditure and spending: Cash disappears quickly and if you dont write down everything you spend it on, youll have a distorted look at your spending. • Align item for savings so you treat a contribution to your savings account just as you would a bill you owe. • Have realistic written goals: Without goals, your budget is just a pair of handcuffs. • Identify spending patterns: This may identify expensed you may not have been aware of when you werent tracking your spendingCertified Financial Planner Module 1: Introduction to Financial Planning
  • 70. Why do people keep cash? • Transaction motive: Cash for day-to-day routine transactions such as buying daily groceries. • Precautionary motive: Keeping cash as a precaution against unforeseen events and emergencies. • Speculative motive: Keeping cash for investing in securities when the right time arises. • Compensation motive: A minimum balance is needed to avail of bank accounts, credit cards, ATM cards, personal loans etc.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 71. MONITORING, EVALUATION AND COMPLIANCE OF BUDGETS: • Budgeting and complying with the budget is important • Budget needs to be evaluated & monitored on a continuous basis to find out variations. • A statement of variances may need to be prepared, which, shows variance from budgeted figures, with reasons thereof and specific measures taken to address them. • These variances may as a result of an error in budgeting the figures due to some wrong assumptions about economic indicators or ignoring some associated expenses with a particular head. • Financial planners should ensure that there is a continuous compliance with the budget estimates to facilitate clients to meet their short-term and long-term financial goals.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 72. Personal Use Asset ManagementCertified Financial Planner Module 1: Introduction to Financial Planning
  • 73. Financing of Personal Assets Following are the main types of personal assets financing instruments: • Home loans • Mortgages • Leases • Refinancing • Hire-purchase • Consumer loans • Credit cardsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 74. Mortgage Loans There are six different types of mortgages: • Simple Mortgage. • Mortgage by conditional sale. • Usufructuary mortgage. • English mortgage. • Mortgage by deposit of title deeds. • Anomalous mortgageCertified Financial Planner Module 1: Introduction to Financial Planning
  • 75. Types of Mortgages Mortgage by Mortgage by Usufructary Usufructary English English Simple Mortgage Simple Mortgage conditional sale conditional sale Mortgage Mortgage Mortgage Mortgage Property stands Property stands absolutely absolutely Possession stands Possession stands transferred to the transferred to the transferred transferred mortgagee with aa mortgagee with Involves Involves to the mortgagee to the mortgagee covenant to repay covenant to repay A mortgage without A mortgage without an ostensible sale an ostensible sale and rents and profits and rents and profits the mortgage the mortgage the transfer of the transfer of to start with to start with from the property from the property money on aacertain money on certain any property. any property. which becomes which becomes can be enjoyed by can be enjoyed by date by the date by the absolute on default absolute on default the mortgagee till the mortgagee till mortgagor, mortgagor, payment of the payment of the when the when the mortgage money mortgage money property will be property will be re-transferred to the re-transferred to the mortgagor. mortgagor.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 76. Types of Mortgages Mortgage by deposit Mortgage by deposit Anomalous Mortgage Anomalous Mortgage of title deeds of title deeds The security for the The security for the A simple mortgage A simple mortgage money is intended money is intended giving an added right to giving an added right to to be created by to be created by take possession in take possession in deposit of the deposit of the case of defaults of case of defaults of title deeds or papers title deeds or papers payment becomes an payment becomes an of the property .. of the property anomalous mortgage. anomalous mortgage.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 77. Lease Financing • Lease financing enables the renting or leasing of assets rather than buying the assets. • Items like cars, consumer durables, computers or a house may be leased. • Generally leases are of two types: • Operating Lease: A short-term lease. The possession of asset returns to the owner or the lessor at the end of the lease term. • Finance Lease: here the lessee has an option to buy the asset at the end of the lease tenure. Generally for a longer period.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 78. Personal Financial Statement AnalysisCertified Financial Planner Module 1: Introduction to Financial Planning
  • 79. Personal Financial Statement Analysis • Analysis of client’s financial condition is necessary to help him/ her • better manage financial resources, • develop effective spending patterns consistent with consumption and investment goals, and • to guard against excessive use of debt. • Sources of information for Personal Financial Statement Analysis • Bank passbook or statements • Return of income filed and Form 16A • Other statements- Other sources of information include bills received, insurance policies, fixed deposit statements and other investments.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 80. Personal Financial Statement Analysis Each of these ratios should provide information that is either predictive or diagnostic about the client’s financial situation. The ratios we will suggest provide information about the following six aspects of the client’s financial situation: • Liquidity • Debt • Risk exposure • Tax burden • Inflation protection • Net worthCertified Financial Planner Module 1: Introduction to Financial Planning
  • 81. Calculation of ratios Basic Liquidity Ratio = Liquid assets/ Monthly expenses Expanded Liquidity Ratio = Liquid Assets and Other Financial Assets / Monthly Expenses Liquid Asset Coverage Ratio = liquid asset / total debt Solvency Ratio = liquid and other financial assets / total debt Current Ratio = liquid assets / non- mortgage debtCertified Financial Planner Module 1: Introduction to Financial Planning
  • 82. Calculation of ratios • Life insurance coverage ratio = net worth + death benefits of principal wage earner / salary of principal wage earner • Effective income tax ratio = income tax liability / total realized increases in net worth • Inflation hedge ratio = equity, tangible and personal assets /net worth • Net cash flow ratio = 1 – Realized Decreases in net worth Realized Increases in net worth • Net worth growth ratio = net increase in net worth / net worth at beginning of the yearCertified Financial Planner Module 1: Introduction to Financial Planning
  • 83. Economic Environment and IndicatorsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 84. Importance of Economic and Business Environment • Significant implications on the financial plans and recommendations. • Recommendations depend on a number of assumptions about the future performance of the economy. • Financial planners should always keep a track of economic environment to make reasonable assumptions. • A thorough understanding of economic environment helps in reviewing the existing financial plans.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 85. ECONOMIC FACTORS: GNP & GDP Gross National This is the value of output of goods and services This is the value of output of goods and services Gross National produced by Indian companies, regardless of whether Product (GNP) Product (GNP) produced by Indian companies, regardless of whether the production is inside or outside the India the production is inside or outside the India Gross Domestic The value of output of goods and services produced The value of output of goods and services produced Gross Domestic in the country, regardless of whether businesses are Product (GDP) Product (GDP) in the country, regardless of whether businesses are owned and operated by Indians or foreigners. owned and operated by Indians or foreigners. - profits on = + profits on Gross National Gross National Gross Domestic Gross Domestic Indian owned foreign owned Product (GNP) Product (GNP) Product (GDP) Product (GDP) businesses businesses outside IndiaCertified Financial Planner Module 1: Introduction to Financial Planning
  • 86. GDP GDP is the measure of total value of final goods and services produced in the domestic economy each year. The following is often used GDP= GDP= C + II + G + C+ +G+ (X- M) (X- M) C = personal consumption spending on goods and services C = personal consumption spending on goods and services I I= Private sector fixed capital expenditure = Private sector fixed capital expenditure G = Government expenditure G = Government expenditure (X-M)= Net of export receipts (X) and import payments (M) (X-M)= Net of export receipts (X) and import payments (M) The relationship highlights actual rupee expenditure for goods and services produced in the economy for measuring GDP. This equation includes all key players involved in the economy – consumers / households, business (private sector) and government. For living standards to rise in India, GDP must grow at a faster rate than the population. This way, there is greater quantity of goods and services per person.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 87. Example: The following information is available for an economy. Consumption (C) = Rs 3000 Private Investment (I) = Rs 500 Government Expenditure (G) = Rs 2000 Exports (E) = Rs 1000 Imports = Rs 1500 Calculate the GDP for the economy? Answer: GDP = 3000 + 500 + 2000 + (1000-1500) = 5500 – 500 = 5000Certified Financial Planner Module 1: Introduction to Financial Planning
  • 88. BUSINESS CYCLES- Phases • The recurrent periods of economic growth and recession are business cycles. • They represents a pattern of business expansion and contraction over a number of years. • The global integration of Indian economy has increased the importance of business cycle for decision-making. • Expansion/ upswing/ recovery: upturn in business activity • Peak/ Boom: over production and buildup of excessive inventory • Downswing/ recession: characterized by a reduction in output and investment • Trough: recession bottoms and production levels offCertified Financial Planner Module 1: Introduction to Financial Planning
  • 89. INFLATION/ DEFLATION • A situation of rising prices. • The most popular measure of inflation in India is change in the Whole Price Index (WPI) over a period of time. • The WPI is an index measure of the wholesale prices of a selected basket of goods and services in the economy. • The WPI is expressed as a percentage with reference to some base year, according to a formula • WPI= (aggregate price for current year/aggregate price for the base year)* 100 • An alternative measure is consumer price Index, which is concerned with the consumer market for goods and services. There is a considerable co-movement between these two indices with the CPI tending to follow the WPI with a lag.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 90. Types of Inflation Result of aasteady increase in aggregate demand Result of steady increase in aggregate demand Demand Pull Inflation Demand Pull Inflation for goods and services when the economy for goods and services when the economy is unable to adequately fill this demand. is unable to adequately fill this demand. Result of aahigher cost factor of production Result of higher cost factor of production Cost Push Inflation Cost Push Inflation being passed along to the consumer being passed along to the consumer in the form of higher prices. in the form of higher prices. Producers exerting aastrong influence on Producers exerting strong influence on Administered Prices Administered Prices the price of the product because the price of the product because of aalack of competition. of lack of competition. Inability to solve the simultaneous problems of Inability to solve the simultaneous problems of Stagflation Stagflation economic stagnation and inflation economic stagnation and inflation through the use of monetary and fiscal policies. through the use of monetary and fiscal policies. This occurs when high rates of inflation This occurs when high rates of inflation and high rates of unemployment happen and high rates of unemployment happen simultaneously. simultaneously.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 91. MONETARY POLICY AND INTEREST RATES & FISCAL POLICY. • Fiscal Policy: controls level of government spending and raises revenue through taxation. • Monetary Policy: controls through regulation of interest rates, the money supply and inflation in the domestic economy. • The Reserve Bank of India (RBI) controls and influences the economy by means of monetary and credit policy. • The Monetary and Credit Policy relate to the attempt to control the money supply and demand-led hence inflation in the economy.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 92. Fiscal policies of the government Fiscal policy deals with spending, borrowing and taxes and has a major influence on raising debt and on interest rates. It is based on revenue and outlays, revenue income from taxation, sale of government assets and borrowings. Goals of fiscal policy goals include: • Maximum employment. • Minimizing the impact of the business cycle. • A growing economy. • Stable or gradually rising pricesCertified Financial Planner Module 1: Introduction to Financial Planning
  • 93. INTEREST RATES / YIELD CURVE Monetary policy of the RBI aims to stabilize the economy through regulation of the money supply. Monetary policy acts upon interest rates and these in turn affect the level of investment undertaken in the economy.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 94. Long-term interest rates are influenced by • Inflationary expectations are added to the real interest rate required to get the interest rate. • Real interest rate required • Term of maturity –longer the maturity, higher the rates as greater risk is associated with long-term than with the short-term investment. • Borrowers’ characteristics- interest rates also depend on the risk profile of the borrowers. Interest rates on secured loan will be less than that of on the unsecured loans.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 95. CRR and SLR • Short term interest rates, are influenced by the bank rate and the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). • CRR is the cash reserve which banks are required to keep with the RBI ; SLR is the proportion of funds that banks need to keep in Government Securities • The CRR is currently 5.5% while the SLR is 25%.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 96. EQUITY INVESTMENT AND REAL RETURN • Equity Stockholders share in profits and control business with their voting rights • Common stockholders may be called the owners of the corporation. • Stockholders also share in losses and are liable to creditors of the corporation but only to the extent of their investment.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 97. Categories of Common Stock Growth Income Cyclical Defensive Blue Chip Stocks Stocks Stocks Stocks Stocks Good Earning Stocks in Stock which One which The least risky Potential and companies fluctuates declines less form of stock. very low yield whose earnings widely over than most in a These are the because the are good, but swings in the general stocks of older, company is are not business cycle. downturn of well- reinvesting the growing much This is the the market. established bulk of its stock of It is usually companies, earnings in companies income stock which have expansion. whose sales proved that and earnings they can earn vary greatly. profits. Besides these, we have speculative stocks - Stocks of new, small firms whose chances for success are not great (mining stocks, etc.). An investor should not place money in these stocks if they cannot afford to lose it during bad times.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 98. Preferred Stock • Preferred stock is a type of stock issued by a corporation that gives some kind of preference to the purchasers. • The preferred stockholder will not only receive a fixed dividend, but will also have the opportunity for capital appreciation. • Types of Preferred Stock Include: Non- Non- Cumulative Cumulative Participating Participating Convertible Convertible Cumulative Cumulative Dividends If no dividends If earnings Can be accumulate from suffice, the exchanged for are paid in prior years. preference common stock or prior years, When the shareholder will other securities company The corporation also share in the same declares is not liable for equally, the company or dividends, those such failure to dividend paid to other in arrears pay dividends common share companies, at receive back holders the option of the dividends stockholderCertified Financial Planner Module 1: Introduction to Financial Planning
  • 99. Financial MathematicsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 100. The Time Value of Money • The Interest Rate • Simple Interest • Compound Interest • Amortizing a Loan • Compounding More Than Once per YearCertified Financial Planner Module 1: Introduction to Financial Planning
  • 101. TIME allows you the opportunity to postpone consumption and earn INTERESTCertified Financial Planner Module 1: Introduction to Financial Planning
  • 102. Types of Interest Simple Interest Interest paid (earned) on only the original amount, or principal, borrowed (lent). Compound Interest Interest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent).Certified Financial Planner Module 1: Introduction to Financial Planning
  • 103. General Future Value Formula FV1 = P0(1+i)1 FV2 = P0(1+i)2 General Future Value Formula: FVn = P0 (1+i)n or FVn = P0 (FVIFi,n) -- See TableCertified Financial Planner Module 1: Introduction to Financial Planning
  • 104. General Present Value Formula PV0 = FV1 / (1+i)1 PV0 = FV2 / (1+i)2 General Present Value Formula: PV0 = FVn / (1+i)n or PV0 = FVn (PVIFi,n) -- See TableCertified Financial Planner Module 1: Introduction to Financial Planning
  • 105. Annuity The future value of an ordinary annuity can be viewed as occurring at the end of the last cash flow period, whereas the future value of an annuity due can be viewed as occurring at the beginning of the last cash flow periodCertified Financial Planner Module 1: Introduction to Financial Planning
  • 106. Steps to Solve Time Value of Money Problems Read problem thoroughly Create a time line Put cash flows and arrows on time line Determine if it is a PV or FV problem Determine if solution involves a single CF, annuity stream(s), or mixed flow Solve the problem Check with financial calculator (optional)Certified Financial Planner Module 1: Introduction to Financial Planning
  • 107. Frequency of Compounding General Formula: FVn = PV0(1 + [i/m])mn n: Number of Years m: Compounding Periods per Yeari: Annual Interest Rate FVn,m: FV at the end of Year n PV0: PV of the Cash Flow todayCertified Financial Planner Module 1: Introduction to Financial Planning
  • 108. Effective Annual Interest Rate Effective Annual Interest Rate The actual rate of interest earned (paid) after adjusting the nominal rate for factors such as the number of compounding periods per year. (1 + [ i / m ] )m - 1Certified Financial Planner Module 1: Introduction to Financial Planning
  • 109. COMPARISON OF INVESTMENT RETURNS NET PRESENT VALUE NPV = Present value of future cash flows NPV = A0 + A1 + A2 + ………….. + An (1+r)0 (1+r)1 (1+r)2 (1+r)n Where, NPV = Net present value At = cash flow occurring at the end of year t (t = 0,1,2, ……, n) r = discount rate n = period of cash flowsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 110. IRR The internal rate of return of a project is the discount rate which makes its net present value equal to zero. It is the discount rate in the equation 0= A0 + A1 + A2 + ………….. + An (1+r)0 (1+r)1 (1+r)2 (1+r)n In the net present value calculation we assume that the discount rate (cost of capital) is known and determine the net present value of the project. In the internal rate of return calculation, we set the net present value equal to zero and determine the discount rate (internal rate of return) which satisfies this condition.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 111. PAY BACK PERIOD • The payback period is the length of time required to recover the initial cash outlay on the project. According to the payback criterion, the shorter the payback period, the more desirable the project. • The accounting rate of return, also called the average rate of return, is defined as Profit after tax/ Book value of investment • The numerator of this ratio is the average annual post tax profit over the life of the investment and the denominator is the average book value of fixed assets committed to the project.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 112. Financial Functions Using Microsoft Excel • FV FV(rate,nper,pmt,pv,type) • Rate is the interest rate per period. • Nper is the total number of payment periods in an annuity. • Pmt is the payment made each period; it cannot change over the life of the annuity. Pmt must be entered as a negative number. • Pv is the present value, or the lump-sum amount that a series of future payments is worth right now. If pv is omitted, it is assumed to be 0 (zero). PV must be entered as a negative number. • Type is the number 0 or 1 and indicates when payments are due. If type is omitted, it is assumed to be 0 which represents at the end of the period. If payments are due at the beginning of the period, type should be 1.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 113. Financial Functions Using Microsoft Excel • PV • PV(rate,nper,pmt,fv,type) • Rate is the interest rate per period. For example, if you obtain an automobile loan at a 10 percent annual interest rate and make monthly payments, your interest rate per month is 10%/12, or 0.83%. You would enter 10%/12, or 0.83%, or 0.0083, into the formula as the rate. • Nper is the total number of payment periods in an annuity. For example, if you get a four-year car loan and make monthly payments, your loan has 4*12 (or 48) periods. You would enter 48 into the formula for nper. • Pmt is the payment made each period and cannot change over the life of the annuity. Pmt must be entered as a negative amount. • Fv is the future value, or a cash balance you want to attain after the last payment is made. Fv must be entered as a negative amount. • Type is the number 0 or 1 and indicates when payments are due. If type is omitted, it is assumed to be 0 which represents at the end of the period. If payments are due at the beginning of the period, type should be 1.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 114. Financial Functions Using Microsoft Excel • NPV NPV(rate,value1:value29),+cash investment • Rate is the rate of discount over the length of one period. • value1: value29 are 1 to 29 periods representing income. • +cash investment represents the cash investment for the project. Example: =NPV(F9,C10:C14),+C9 F9 contains the required rate of return C10:C14 contains the postive cash flow generated by the project each period +C9 contains the cash investment required by the project. The cash investment must be entered as a negative amount.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 115. Financial Functions Using Microsoft Excel • RATE RATE(nper,pmt,pv,fv,type,guess) Nper is the total number of payment periods in an annuity. Pmt is the payment made each period and cannot change over the life of the annuity. Pmt must be entered as a negative amount. Pv is the present value that the future payment is worth now. Pv must be entered as a negative amount.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 116. Financial Functions Using Microsoft Excel Fv is the future value, or a cash balance you want to attain after the last payment is made. If fv is omitted, it is assumed to be 0 (the future value of a loan, for example, is 0). Type is the number 0 or 1 and indicates when payments are due. If type is omitted, it is assumed to be 0 which represents at the end of the period. If payments are due at the beginning of the period, type should be 1. Guess is your guess for what the rate will be. If you omit guess, it is assumed to be 10 percent. If RATE does not converge, try different values for guess. RATE usually converges if guess is between 0 and 1. • NPER • NPER(rate, pmt, pv, fv, type) • Rate is the interest rate per period. • Pmt is the payment made each period; it cannot change over the life of the annuity. Pmt must be entered as a negative amount. • Pv is the present value, or the lump-sum amount that a series of future payments is worth right now. Pv must be entered as a negative amount.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 117. Financial Functions Using Microsoft Excel • Fv is the future value, or a cash balance you want to attain after the last payment is made. • Type is the number 0 or 1 and indicates when payments are due. If type is omitted, it is assumed to be 0 which represents at the end of the period. If payments are due at the beginning of the period, type should be 1. • PMT • PMT(rate,nper,pv,fv,type) • For a more complete description of the arguments in PMT, see PV. • Rate is the interest rate for the loan. • Nper is the total number of payments for the loan. • Pv is the present value, or the total amount that a series of future payments is worth now; also known as the principal. • Fv is the future value, or a cash balance you want to attain after the last payment is made. If fv is omitted, it is assumed to be 0 (zero), that is, the future value of a loan is 0.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 118. IRR • IRR • IRR(values,guess) • Values is an array or a reference to cells that contain numbers for which you want to calculate the internal rate of return. • · Values must contain at least one positive value and one negative value to calculate the internal rate of return. · IRR uses the order of values to interpret the order of cash flows. Be sure to enter your payment and income values in the sequence you want. · If an array or reference argument contains text, logical values, or empty cells, those values are ignored. • Guess is a number that you guess is close to the result of IRR.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 119. Question Sundram expects to pay out the following in the next few years: • End of Year 1 Rs.10,000 • End of Year 2 Rs.15,000 • End of Year 3 Rs.12,000 • End of Year 4 Rs.13,500 • End of Year 5 Rs.11,000 If Sundram wants to cater to these cash flows, how much should he have now, assuming an annual rate of 5%? Ans:53,220.57Certified Financial Planner Module 1: Introduction to Financial Planning
  • 120. Forms of Business OwnershipCertified Financial Planner Module 1: Introduction to Financial Planning
  • 121. Forms of Business Ownership • Sole Proprietorship • Partnership • Limited Liability Companies • Trusts • Foundations • Professional Association • Cooperative SocietiesCertified Financial Planner Module 1: Introduction to Financial Planning
  • 122. Forms of Business Ownership Sole Limited Co-operative Partnership Proprietorship Company Societies General Partnership • Liability of the • Enterprise owned and• Owned by an controlled by the individual. • Owned by 2 or more stockholders are people working in it. partners limited to the• The individual is • Each member has amount invested equal control- 1 man 1 in charge of all • Partners are equally by them. vote. operations. and personally liable • Enjoys advantages • Anyone who fulfills• The personal for debts. qualification criteria of perpetual life property is • The personal property can join. span. attached. is attached. • Profits can be retained in business or• Can be a • In a limited distributed disadvantage if partnership- Partner’s proportionately the owner is liability is limited to • Member should unable to money invested. primarily benefit from continue the business participation • Limited partner not business • Interest on loan/ share involved in decision capital limited in some making specific wayCertified Financial Planner Module 1: Introduction to Financial Planning
  • 123. Forms of Business Ownership Corporations Professional Trade Trusts Associations Associations• Created to hold assets for • Corporations are • Formed to protect • An association of the benefit of certain chartered interests of individuals or persons or entities, • Incorporation professionals they companies in a managed by a trustee on represent. specific business or certificate needs to be behalf of the trust filed. • Virtually every trade/ industry organized• Founded by persons called profession has such to promote common • Subject to laws of the an association. Thrusters, settlers and/ or state in which they interests. donors, who execute a • Most of these are operate • A particular sector registered under The written declaration of • Continuous life span or class of business Societies Registration trust – outlines terms and may face the same • Total worth divided into Act- 1860. conditions of operation problems- to seek shares of stock • There is a solutions for these, • Each share represents registration fee. they may form unit of ownership • The memorandum of themselves into a society will define trade association. the objects of the association. • CII and ASSOCHAM are some examplesCertified Financial Planner Module 1: Introduction to Financial Planning
  • 124. Foundations • Can be formed by 7 or more members associated for any purpose as is described in Section 20 of the Act. • Formed by filing a Memorandum of Association with the registrar of Joint Stock Company • The property belonging to a society registered under this Act, if not vested in trustees, shall be deemed to be vested, in the governing body of such society, and in all civil and criminal proceedings, may be described as the property of the governing body of such society by their proper title.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 125. Franchising • Franchising is something of a halfway house, lying somewhere between entrepreneurship and employment. • It holds many of the attractions of running a small business; at the same time eliminating some of the risks. • For example, the failure rate for both franchisers and franchisees is much lower than for the small business sector as a whole.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 126. Distributorship • Could be for a particular product, such as a make of car. • Sometimes referred to as an agency, but there are differences between these two concepts. • Both parties are legally independent, (as vendor and purchaser) • The purchaser, in exchange for certain exclusive territorial rights, helped by the vendors advertising, promotion and/ or, training of staff, will be expected to hold adequate stock and maintain the premises in a way that reflects well on the vendors product or service.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 127. Ways of taking legal title to propertyCertified Financial Planner Module 1: Introduction to Financial Planning
  • 128. Transfer of Property • A transfer may be by way of sale, exchange, gift, lease, mortgage or actionable claim. • Prior to 1882 no law existed which really governed activities of transfer of properties in India • Since then the law relating to the transfer of properties by is codified in the Transfer of Property Act, 1882.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 129. Transfer of Property Act, 1882 (TOPA) Contains provisions that define: • What is transfer of the property, • Person competent to transfer, • Conditions restraining the transfer, • Transfer for the benefit of unborn person, • Transfer in perpetuity for the benefit of public, • Conditional transfer, etc.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 130. Transfer of Property • Transfer of possession from one person to another. • TOPA contains specific provisions regarding such transfer. • As per the Act, transfer of property means an act by which a living person conveys property to one or more other living persons, or to himself and one or more other living persons. • The Act may be done in the present or for the future • A living person may include an individual, company, association, or body of individuals, whether incorporated or not. • Under the Act, property of any kind may be transferred, unless prohibited by any law for the time being in force.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 131. What cannot be transferred? • The chance of an heir-apparent succeeding to an estate, • The chance of a relation obtaining a legacy on the death of a kinsman, or any other mere possibility of a like nature. • A mere right of re-entry for breach of a condition subsequently cannot be transferred to anyone except the owner of the property affected thereby. • An easement cannot be transferred apart from the dominant heritage. • An interest in property restricted in its enjoyment to the owner personally. • A right to future maintenance, in whatsoever manner arising, secured or determined.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 132. What cannot be transferred? • A mere right to sue cannot be transferred. • A public office cannot be transferred, nor can the salary of a public officer, whether before or after it has become payable. • No transfer can be made: o in so far as it is opposed to the nature of the interest affected thereby, or o for an unlawful object or consideration within the meaning of section 23 of the Indian Contract Act, 1872 (9 of 1872), or o to a person legally disqualified to be transferee. • Stipends allowed to military, naval, air-force and civil pensioners of the government and political pensions cannot be transferred.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 133. What can be transferred? • Nothing in this section shall be deemed to authorize a tenant having an untransferable right of occupancy, the farmer of an estate in respect of which default has been made in paying revenue, or the lessee of an estate, under the management of a Court of Wards, to assign his interest as such tenant, farmer or lessee.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 134. Who is competent to transfer? • Every person competent to contract and entitled to transferable property, or authorized to dispose of transferable property not his own, either wholly or in part, and either absolutely or conditionally, in the circumstances, to the extent and in the manner, allowed and prescribed by any law for the time being in force. • Unless a different intention is expressed or necessarily implied, a transfer of property passes forthwith to the transferee all the interest which the transferor is then capable of passing in the property and in the legal incidents thereof.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 135. Sale of immovable property • Sale is a transfer of ownership in exchange for a price paid, promised, or part-paid and part-promised. • Such transfer in case of tangible immovable property of value of Rs 100 or more can be made only by a registered instrument. • Delivery of tangible immovable property is made when a seller places the buyer, or such person as he directs, in possession of the property. • Thus, delivery of immovable property can be only by handing over actual possession to the buyer or to a person authorized by the buyer.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 136. Lease of immovable property • A lease of immovable property is a transfer of a right to use the property, for a certain time, express or implied, or in perpetuity. • Such transfer of right should be in consideration of a price paid or promised to the transferor by the transferee, who accepts the transfer on such terms. • The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 137. According to the Transfer of Property Act, Transfer of property may take place in the following means Sale Lease Mortgage Transfer of ownership in exchange for a price paid A transfer of a right to or promised or part- paid enjoy property, made for and part- promised. a certain time, express or implied, or in perpetuity, Sale of a tangible in consideration of a price immovable property takes paid or promised, or If the mortgage money place by a registered money, a share of crops, remains unpaid, the title instrument or delivery of service or any other thing to property may pass to tangible, immovable of value, to be rendered the mortgage in certain property taking place periodically, or on kinds of mortgages when the seller places the specified occasions to the buyer or such person as he transferee, who accepts directs, in possession of the transfer on such the property. terms.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 138. According to the Transfer of Property Act, Transfer of property may take place in the following means Exchange Gifting When two persons mutually transfer The transfer of certain existing the ownership of one thing for the moveable or immovable property ownership of another, neither thing made voluntarily and without being money only, the transaction is consideration, by one person, called called an exchange. the donor, to another, called donee. In this transaction, each party has the rights and is subject to the liabilities of a seller as to that he gives and has the rights and is subjected to the liabilities of a seller as to that which he gives and has the rights and is subjected to the liabilities of a buyer as to that which he takes.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 139. Legal Aspects of Financial PlanningCertified Financial Planner Module 1: Introduction to Financial Planning
  • 140. Contract Agreement According to Indian According to Indian According to Section 2(e) According to Section 2(e) Contract Act, 1872 Contract Act, 1872 “Every promise and every set of “Every promise and every set of promises forming the promises forming the “An Agreement “An Agreement consideration for each other "" consideration for each other Enforceable by law” Enforceable by law” Promise According to Section 2(b) According to Section 2(b) "When the person to whom the proposal is made "When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted, becomes aapromise" Proposal when accepted, becomes promise"Certified Financial Planner Module 1: Introduction to Financial Planning
  • 141. Essentials of a valid contract • Essential elements of a valid contract: According to Section 10, “all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void." • The following essential elements must co-exist in order to make a valid contract: • Create legal obligations through offer and acceptance. • Lawful Consideration. • Capacity. • Free Consent. • Lawful agreement.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 142. Types of Contracts On the basis of On the basis of On the basis of On the basis of On the basis of On the basis of Legality Legality formation formation Performance Performance Void Expressed Executed Voidable Implied Executory Unenforceable Tacit Unilateral Illegal BilateralCertified Financial Planner Module 1: Introduction to Financial Planning
  • 143. On the basis of Legality A contract without any legal effect and cannot be enforced in a Void Court of Law. Eg: When the consideration or object of an agreement is unlawful, (Section 23). An agreement which is enforceable by law at the option of Voidable one or more the parties but not at the option of the other(s) Eg. A contract brought about as a result of Coercion, Undue influence A contract that is good in substance, but due to some Unenforceable technical defect, (such as absence in writing, imitation, etc) one of the parties cannot act upon it A contract that the law forbids. All illegal agreements are Illegal void but all void agreements are not necessarily illegal. Eg: A contract to commit a crimeCertified Financial Planner Module 1: Introduction to Financial Planning
  • 144. On the basis of formation Expressed A contract expressed in words, either spoken or written. A contract that is implied by law, even though the parties to the Implied same never intended it. For Eg: A delivers by mistake goods at Bs warehouse instead of at Cs place. Here there is an obligation on the part of B to return the goods to A, though they never intended to enter into a contract A contract that is inferred from the conduct of the parties. Tacit A good example of this is a sale by fall of hammer during an auction sale.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 145. On the basis of performance If consideration for the contract is give or executed, such a Executed contract is called a, “Contract with executed consideration” So called because the reciprocal promises or obligation Executory which serves as consideration is to be performed in future. A one-sided contract in which only one party has Unilateral to perform his promise or obligation to do or forbear. When the obligation or promise in a contract is outstanding Bilateral on the part of both the partiesCertified Financial Planner Module 1: Introduction to Financial Planning
  • 146. Void Contracts VS Voidable contracts Void Contract Voidable contract As per Section 2(g) and (j) a contract A Voidable contract is an agreement which ceases to be enforce­ able by law which is enforceable by law at the option Definition becomes void when it ceases to be of one or more of the parties thereon, enforceable. but not at the opinion of other or others. A void contract is valid when it is made A voidable contract on the other hand is but subsequently becomes unforceable voidable of the option aggrieved party, on certain grounds such as, subsequent and remains valid until rescinded by him. illegality, repudiation of a voidable Contract caused by coercion, undue Nature contract, a contingent contract influence, fraud, misrepresentation are depending upon happening of an voidable uncer­tain event, when occurrence of such event becomes impossible.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 147. Professional Liability • An employer is liable for the negligence of his employee and the employers liability arises when the act so complained of is committed in the course of; and within the scope of employment. • Breach of contractual duties give rise to a cause of action to the client against the professional on in the absence of a contract, a duty of care may arise, where trust or confidence is placed in the person or there is a fiduciary relationship. • Professional risk may entail professional negligence, resulting in financial losses or bodily injuries. • Professional indemnity policies cover the legal liabilities and take care of the risk to the professionals keeping in view the increasing claims, which are being made by clients against the professionalsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 148. Professional Liability • For financial advisors, management consultants, lawyers, chartered accountants, the indemnity clause in such policies states that the indemnity applies to claims arising out of losses and/or damages during the period of insurance first made in writing against the professional insured. • The professional insured is indemnified for any breach of professional duty by reason of any negligent act, error or negligence committed during the period of insurance by the insured, or any employee of the insured firm or the predecessors in the business of the insured firm in respect of whom insurance cover is expressly provided in the insurance schedule of the policy. • The policy excludes claims with respect to any dishonest, fraudulent, criminal or malicious act by the professional or a deliberate non-compliance with technical standards, commonly observed in professional practice laid down by official bodies of such professions, and such other conditionalities.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 149. Professional Liability • Due care and diligence has to be exercised by a professional irrespective of the field of specialisation to ensure that no claims or demands are made for any negligence, omission or deficiency on the part of the professional or its employees. • Any deviation from normal reasonable standards could lead to legal action by the client, which would be prejudicial not only to the personal interest of the professional but would also bring disrepute to the profession which is practiced.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 150. Consumer Protection Act • A statute, enacted to • confer additional consumer rights and • to preserve and guard the existing one under the law. • Creates a hierarchy of redressal agencies & also provides for sanctions to carry out their orders. • One of the aims of the Act is to make the justice quick and smooth for the consumers.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 151. The Justice Delivery Forums, under the Consumer Protection Act • The justice delivery system under the Consumer Protection Act, 1986 consists of a two-tier structure at the state level, which is as follows: • District Forum - (having a pecuniary jurisdiction of Rs. 500,000). Each district of the State is supposed to have a District Forum. • State Commission - (having a pecuniary jurisdiction above Rs. 500,000 with an upper limit of Rs. 2,000,000 lakh and also exercising appellate jurisdiction over orders passed by the respective District Forums in that state). Each state is supposed to have a State Commission. • At the national level, we have the National Commission, at New Delhi which is vested with a pecuniary jurisdiction of above Rs. 2,000,00 and also exercises appellate & revisional jurisdiction over orders passed by the respective State Commissions.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 152. Justice delivery Forums District State National Forum Commission Commission • Has pecuniary • Has pecuniary • Situated at New Delhi Jurisdiction of upto Rs. Jurisdiction above Rs. • Has pecuniary 5,00,000. 5,00,000 and upto Rs. Jurisdiction of above Rs. 20,00,000 and an • Each district is supposed 20,00,000 and appellate appellate jurisdiction to have a District Forum and revisional jurisdiction over orders passed by over the orders passed by District forums under that respective state state. commissions • Each state is supposed to • Each district is supposed have a state commission. to have a District ForumCertified Financial Planner Module 1: Introduction to Financial Planning
  • 153. Torts • The law that is most susceptible to change. • May be defined • as a civil wrong for which the remedy is a common law action for damages and • which is not exclusively the breach of a contract or the breach of a trust or other merely equitable obligation. • Mainly sourced from the common law as opposed to statute law. • Tort may be committed by • a positive act/ by an omission where there is a legal duty to act. • It could be a fault of the defendant, which may require intention e.g. deceit, negligence • Tortuous liability arises from the breach of duty primarily fixed by law, whereas in the case of contract the duties are fixed by the parties themselvesCertified Financial Planner Module 1: Introduction to Financial Planning
  • 154. These classes do not come within the sphere of Tort Criminal Civil Wrong which, creates no right of action, but gives rise to some other form of civil remedy exclusively; are exclusively breaches of contract; are exclusively breaches of trust or of some other merely equitable obligation.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 155. Torts • Tortuous liability can take the shape of: • Trespass • Defamation • Nuisance • Abuse of legal procedure • Negligence • Liability of dangerous premise • Dangerous chattelsCertified Financial Planner Module 1: Introduction to Financial Planning
  • 156. Agency • According to Section 182 of the Contract Act 1872, an agent is a person employed to do any act for another or to represent another in dealings with a third person. • The person for whom such an act is done, or who is represented is called the principal. • The expression agency is used to connote the relation which exists where one person has an authority to create legal relations between a person occupying the position of principal and third parties.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 157. Essentials of Agency • The principal should be competent to contract. • An infant is not competent to create an agency, as he does not have sufficient discretion to choose an agent to act for him. • However an agent need not be competent to contract. • A consideration is not necessary to create an agency. • Generally an agent is remunerated by way of commission for services rendered but no consideration is immediately necessary at the time of appointment.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 158. Creation of Agency The relationship of principal and agent may be created in any of the following ways: • by express appointment; • by the conduct of the parties; • by necessity of the case; or • by subsequent ratification of an act.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 159. Duties of the agent • To carry out the mandate of his principal. • To conduct the business of his principal according to the his direction and to keep himself within the confines of his authority. • To conduct the business of agency with as much skill as is generally possessed by persons engaged in similar business. • To use all reasonable diligence of communicating with his principal and seeking to obtain his instructions if there are difficulties. • To avoid conflict of interest with his principal. • Not to make a secret profit. • To render proper accounts to his principal on demandCertified Financial Planner Module 1: Introduction to Financial Planning
  • 160. Modes of Termination of Agency • By revocation, • Renunciation by agents. • Completion of business. • Principals or agents death. • Principal or agent becoming person of unsound mind. • Insolvency of principal. • Expiry of time.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 161. Negotiable Instruments • An instrument which when transferred by delivery or by endorsement and delivery, passes to the transferee a good title to payment according to its tenor and irrespective of the title of the transferor, provided he is bona fide holder for value without notice of any defect attaching to the instrument or in the title of the transferor. • In the present day context, negotiable instruments are now merely instruments of credit, readily convertible into money and easily passable from one hand to another.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 162. Negotiable Instruments Act 1881 • A codification of the Common Law or Law of Merchant. • Defines negotiable instruments as promissory notes, bills of exchange or cheques payable either to order or to bearer. • It is essential that either promise or order, must be unconditional, amount mentioned must be certain and incapable of variation • Further, the person to whom money is promised must be indicated to provide for certainty.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 163. Types of Negotiable Instruments • Promissory note- An instrument in writing (except a currency note) signed by the maker, containing an unconditional undertaking to pay a certain sum of money only to a certain person or his order or to the bearer. • Bill of Exchange- An instrument in writing signed by the maker, but it is an unconditional order addressed to a third person to pay a certain sum of money only to a certain person or his order or bearer. • Cheque- A special form of bill of exchange drawn on a specified banker and always payable on demand. • Generally, where an instrument is construed either as a promissory note or as a bill of exchange, the holder has the option of treating it as either and the instrument shall be treated accordingly.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 164. Rules regarding Negotiable Instruments • If amounts are different in word and in figure then amount in word is to be taken. • Where no time is specified it is payable on demand. The expression at sight and on presentment means on demand. • The expression after sight means after presentation for sight, in case of a promissory note. • In a bill of exchange, after acceptance or noting or non-acceptance or protest for non­-acceptance • Every person cable of contracting may become a party to a negotiable instrument and is bound in the same way as in other contracts. • One of the distinctive characteristics of negotiable instruments is that the date due under it may be assigned over to a third party by what is called negotiation. Such negotiation takes place in two ways: • If the instrument is payable to bearer - it is negotiable by delivery thereof. • If it is payable by order - negotiation can take place only by endorsement of the holder and delivery by him.Certified Financial Planner Module 1: Introduction to Financial Planning
  • 165. Fiduciary Relationship • A confidential relationship necessary to bring this doctrine into operation extends to certain ties. • Such cases under the Indian Contract Act, 1872 are generally dealt with as part of the doctrine of "undue influence". • When the relation between 2 persons is such that one of them is in a position to influence the decisions of the other, to his own benefit and advantage at the expense of the person trusting him, the relation existing between them is of a "fiduciary character".Certified Financial Planner Module 1: Introduction to Financial Planning
  • 166. Investor Protection Equity Share Investments Fixed Deposits (FD) • Securities and Exchange Board of India (SEBI) •Company’s (amendment) Act 2000- many is the governing body provisions for investor protection for investor protection. safety of FD’s • Extensive Guidelines for disclosure and investor protection •Separate limits for company deposits as multiples of their net worth • In case of violations SEBI may: •Strict disclosure requirements in any Direct the concerned person not to advertisement soliciting deposits- details such access capital market for a particular as: period •Names of promoters, directors, associate Direct the concerned stock exchange companies not to list or permit trading •Management Structure Directing the concerned stock exchange to forfeit the security deposit made by •Financial Condition, paid up capital, the issuer company existing deposits and so on. Any other direction which SEBI may •Section 58AA inserted- protection to small deem fit and proper in the depositors circumstances of the case. •Any default in repayment or interest payment made by the company has to be informed to the company law board •Punishment for failure to comply- fine of Rs. 500 per day of default or 3 years imprisonmentCertified Financial Planner Module 1: Introduction to Financial Planning
  • 167. Thank YouCertified Financial Planner Module 1: Introduction to Financial Planning