As we know, financial planning provides a comprehensive evaluation of an investor’s current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans.
A good financial plan can alert an investor to changes that must be made to ensure a smooth transition through life’s financial phases, such as reduced spending or changing asset allocation. Financial plans should also be fluid enough for occasional modifications when circumstances demand so.
Here is a brief review on do’s and don’ts of financial planning.
Do’s
Do diversify: Diversification helps in reducing overall risk of investment return by mixing multiple stocks, mutual funds, etc into a portfolio. If you do not diversify, you buy stock in only Company A. If a firm-specific risk negatively impacts Company A, such as its factory burning down, then you will have a major loss.
Do discuss tax implications: Discussing tax issue and its implication on investor’s returns is a must. Tax consideration plays an important role in determining appropriate investment for clients.
Do discuss performance relative to benchmark: Always discuss investment performance relative to its benchmark. Investors care about absolute returns but they also care about how their investments are performing relative to their benchmark.
Do disclose all kinds of risk: Most investors don’t read offer documents, so they expect their advisor to explain to them the drawback of the investment. In fact, it’s a duty of an advisor to disclose and discuss all the associated risk with the investor.
Do check overall goals and objectives: It’s important to know the client’s short and long term goals. Knowing it at time of planning is not enough. It should be revised at least once annually with necessary changes being made in the plan.
Do educate investors: Investor make wide array of financial decision through their lifetime. Providing knowledge of finance will help take sound financial decisions. Knowledge given to client should not be restricted to only providing product information. Clients should be shared with basic knowledge of tax planning, budgeting, etc.
Do ensure you have complete information: Financial planner should posses immense knowledge of the financial products, its tax implications, risk associated with the product, market outlooks, etc. Knowledge is the key to gain client’s trust on your advice.
Do provide alternatives: Provide investors alternatives with different risk-return exposure to choose from.
Do built trust with your client: Advisor-investor relationship success depends on trust. Clients work with a professional whom they trust. Building trust is an ongoing process. Here are a few ways to build your trust with client
- Create realistic client expectation.
- Explain your plan and strategy.
- Discuss investment pitfalls.
- Avoid potential conflict of interest.
Don’ts
Don’t make sudden moves: As we know, long term perspective to investment is better in terms of capital protection for your client as there is more time for the investment to recover its losses. Investments should not be sold or purchased on short-term views. It is suggested that advisor should stick to a financial plan.
Don’t follow the herd: Recommending your client what the rest of the world is doing without proper documentation shows lack of information and incompetence in performing an advisor’s role.
Don’t get in touch with clients only when you have something to sell or when things are good. Meet clients for a fifteen minute review once a quarter. Give clients a quick update and ask if their broad objectives remain the same.
Don’t gloss over fees and loads and sales charges: Any service provided is not free is something your client also knows. So don’t feel embarrassed to talk about fees for your service. Come clean to your client about all additional charges.
source: cafemutual.com