There are multiple ways in which we can classify the elements of such a plan. We start with having a conversation with the individual to get data on five elements—the financial goals; the regular and one-off earnings; the regular and periodic expenses; the investments, with details of rates of return, if fixed, and maturity dates; and finally, the liabilities or commitments which do not form part of the regular expenses.
Once we analyse and work on these, other elements emerge that need to be taken care of. The questions that arise are: What is the element of risk and how to prevent that? Is there adequate health, life and critical illness cover? What are the best options to get or upgrade them? What does the cash flow look like in the next few months, following quarters and a few years? This last one will help identify liquidity risks, if any. What is the allocation of assets—not only between equity and fixed income, but also between physical and financial assets, and across geographies and currencies? What is the ideal asset allocation based on the risk profile of the customer? What needs to be done to correct the asset allocation, and when? What will be the tax implications of such a move? Are the assets in the right instruments? Are they competing well across their peer groups? What is the mechanism of setting up a regular review to ensure that these questions are addressed on an ongoing basis?
A holistic financial plan will also look at life post-retirement, as well as how to deal with the transfer of assets post-life. Is there a better way to hold the assets so that the transfer is seamless and with minimal of paperwork and hassles? As families become more global and assets get spread across geographies, all the issues of risk, investment, and transfer will arise for each of these locations and will need to be addressed by a 360-degree planning exercise.
Finally, financial planning is also not static. Changes may need to be made to the plan based on higher or lower earnings, a windfall or an unexpected outflow, and market fluctuations and regulatory changes such as increase or reduction in tax rates. Also, financial planning is, typically, for the family and not just an individual.
The question to ask here is whether the non-active members will be able to manage the myriad options with the same alacrity as the active member—this might result in changes from the ad-hoc investment style to a more disciplined approach of planning.
The author is the MD & CEO of International Money Matters.