Lecture 1

Overview of Basic Concepts of Financial

Planning
&
Wealth Management

1 Adapted version- Copyright © 2009 by McGraw-Hill Education (Asia)

Learning Objectives
 Define Personal Financial Planning, Wealth
Management, and Total Life Planning.
 Identify different planning areas.
 Understand the services and compensation of a
financial planner or wealth manager.
 Understand the required knowledge and skills of a
financial planner or wealth manager.
 Describe the value of and requirements for CFP®
qualification. (optional)
 Describe professional & ethical responsibility of
financial planner or wealth manager. (optional)
2
Personal Financial Planning (PFP) Definition
 PFP is a comprehensive process that evaluates all
aspects of a client’s financial needs.
 Such needs include :
 Consumption
 Income & Wealth
 Insurance
 Investment
 Retirement
 Tax & Estate Planning
 It is done in an integrated 6-step process.
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 (1) Establishing client-
planner relationship

(2) Gathering client

(6) Monitoring the
data & determining
plan.
goals

Six-Step
Process

(5) Implementing the (3) Analyzing client’s

plan financial status

(4) Developing
& presenting
financial plan
Objectives of PFP
Definition of Wealth Management (WM)
 WM is financial planning with greater
emphasis on investment management (e.g.
forming investment portfolios) and estate
planning.

 WM is often used for High Net-Worth

(HNW) clients.

 How to define HNW clients ?

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Objectives of WM
What is Total Life Planning (TLP) ?

 TLP aims to achieve an optimal balance in

the :
 Physical
 Psychological, and
 Financial well-being of clients
 Thus, Financial Planners & Wealth
Managers must go beyond mere financial
aspects into lifestyle of clients in terms of
their total needs in life.
Areas of Personal Financial Planning
1. Consumption Planning (aka Cash
Flow Management)
 deals with clients’ cash inflows
and outflows and consumption
behavior.

2. Tax Planning
 explores clients’ tax liabilities and
obligations. (e.g. the clients may
be subject to global taxation)
 Areas of PF Planning
3. Insurance Planning (aka Risk
Management)
 analyzes clients’ insurance needs,
including life and other insurance
(e.g. ??)

4. Investment Planning
 to meet clients’ short, medium, and long-
term investment goals. (Risk-Return
preference)
Areas of PF Planning
5. Retirement Planning
 deals with clients’ retirement needs.

6. Estate Planning
 deals with clients’ inheritance, estate
management & philanthropic needs.
Services offered by Financial Planners (FP)
 FPs may operate as a generalist or
specialist.
 Generic areas of financial planning include
insurance, investment, retirement planning.
 FPs cannot survive by providing fee-based
advisory services only.
 They need to generate additional income
through commission from selling products.

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Services offered by Wealth Managers (WM)
 WMs are employed by financial institutions.
 Wealth management services :
 Traditional View :
 Portfolio management with emphasis on
investment management rather than other
financial needs.
 Contemporary View :
 Provision of additional services on
consumption, tax planning, insurance,
estate planning and goal-oriented
investment advice. 13
Remuneration of Financial Planners

USA
Fee-
based

Remuneration depends
on type of services
EUROPE
Fee-based ASIA
less Fee-based
common non-existent

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Remuneration of Financial Planners
 For countries that are immature in FP
services, fee-based services are less popular.
 Actual fees vary a great deal. For the
middle-income or mass-affluent clients,
hourly fee may be around US$100 per
hour.
 Most firms charge a flat fee (fixed) to form
a financial plan, depending on the specific
situations of the clients.
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 Remuneration of Financial Planners
 Mass-Affluent Clients ?
 Clients with investable assets of US$80,000 -
120,000 for the North American markets.
 Fees : a few thousand US$
 High Net-Worth Clients ?
 Clients with investable assets exceeding US$1
million.
 Fees : US$10,000 or more
 On top of the fees, FP may also charge
transaction fees and management fees for
implementing the investment plan. 16
 Knowledge & Skills of FPs & WMs
 All-Round knowledge.
 Relating to client’s needs : financial,
psychological & physical well-being; financial
analyses; macroeconomic & microeconomic
knowledge and analysis. (Continuous
professional development is necessary)
 Communication and interpersonal skills.
 Ethical practice (about public acceptance and
trust)
 Four “E” for CFP® certification :
 Education; Examination;
 Experience; Ethics 17
Ingredients for Successful Financial Planning

Strong interpersonal
skills

Strong
Strong financial reputation
Professional &
planning knowledge
ethical
behavior

Establishing trusting
relationships with clients

Successful financial planning

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Ethics
What is ethics ?
• It is the understanding of what is
 good or right
 bad or wrong
 a set of principles of conduct governing
behaviors; or
 a system of moral standards or values
Example : Code of Ethics and Professional
Responsibility for CFP (Certified Financial
Planner)
http://www.ifphk.org/ee/code-of-ethics-and-prof
essional-responsibility
Ethics & Professional Responsibilities
Professional Code of Ethics
• A set of written statements of standard
expected from the professionals.
Professionals : Who ?
• Doctors, Solicitors, Accountants, FPs etc.
• Example : Doctor’s professional code says : “A
doctor must practice his profession
uninfluenced by motives of profit.”
• What are the main codes for other finance
professionals such as : CFAs, FRMs ?
Components of Professional Code of Ethics
 Fiduciary Duty of Professionals
• Fiduciary duty ?
 A legal relationship of “confidence or
trust” between two or more parties.
 The fiduciary (called agent) is an entity
(e.g. bank, FP) who acts on behalf of
another (called Principal). (e.g. the
client)
 Example : Money entrusted by a client
to his bank for investment management.
Attributes of Fiduciary Duty

• INTEGRITY
– The ability to make independent judgment &
to avoid conflict of interest.
– It includes honesty & uprightness.

• OBJECTIVITY
– The ability to provide objective, reasonable &
prudent judgment.
– It requires intellectual honesty and
impartiality.
Attributes of Fiduciary Duty
• COMPETENCE
– The possession of special knowledge &
skills, and the ability to exercise them in
the interest of the principal.

• FAIRNESS
– The ability to refrain from taking undue
advantage of others.
– Calls for disclosure of conflict of interest.
 Attributes of Fiduciary Duty
• CONFIDENTIALITY
– Protection of client’s privacy.
– Keep client’s information confidential.

• PROFESSIONALISM
– Maintain the public image of the profession.

• DILIGENCE
– Provide service in a prompt & thorough
manner.
Test Yourself
The rule that FP shall not solicit clients
through false or misleading communication
or advertisement is related to which
principle of the Professional Code of Ethics ?
A.Integrity
B. Fairness
C.Professionalism
D.Diligence
 End of Lecture 1

The next few slides are optional.

 Value of the CFP ® and CFA® qualifications
CFP®

28 Copyright © 2009 by McGraw-Hill Education (Asia)

Overview of the CFPCM and CFA® qualifications

CFP® and CFA®: Overview

Target Market:
Regular clients: CFP®
CFP® and CERTIFIED FINANCIAL High net-worth clients:
PLANNERTM are certification marks owned
by the Certified Financial Planner Board of
CFP® + CFA®
Standards, Inc. USA. For more details, please
refer to the websites: www.fpsb.org

What Qualifications
should a Successful
Personal Financial
Services Professional
Obtain?
CFP®
Over 125,000
CFPCM certificants worldwide and
20 full members (and 3 associate
members) countries in the Financial
Planning Standards Board

CFA® and Chartered Financial Analyst ® are

registered trademarks owned by the CFA
CFA®
Institute). For more details, please refer to the Over 85,000 CFA
website: www.cfainstitute.org charterholders in over 133
countries.
29
FPs & Other Professionals
 Insurance Agents (IA)
 IA provide personal selling services of various
insurance products.
 Professional IA usually hold chartered life
underwriter (CLU) designation.
 FPs can only identify insurance needs &
provide insurance advice but cannot sell
insurance products to clients unless they are
also licensed IAs.

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FPs & Other Professionals
Accountants
 Accounting and tax affairs are administered by
certified public accountants (CPAs).
 If FPs do not hold CPA license, they may not be
as good as professional accountants in providing
tax planning advice.

Estate Planning Professionals

 Attorneys & CPAs are experts in estate
planning matters such as preparing legal
documents (e.g. wills) and setting up trusts. 31
FPs & Other Professionals
 “Other Professionals” can only provide
services in their specialized area of professions.
 whereas FPs should have expertise covering
more than one area.
 FPs can give their clients a “big picture” of
their financial condition & give appropriate
recommendations for their clients.

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