6.1 Personal Financial Planning: Definition, Features, Five Areas and the Six Steps
Key Takeaways
Part 2 of Schedule 2 of the CMSA defines financial planning as analysing another person's financial circumstances and providing a plan to meet their financial needs and objectives, including any investment plan in securities, whether or not a fee is charged.
Personal financial planning is a process, not a product; it is comprehensive, seeks maximum utility, recognises the individual and acknowledges the cycles of life.
The five areas of financial planning are cash management, risk management and insurance planning, investment planning, tax planning, and retirement and estate planning.
The six steps of financial planning start with establishing and defining the client-planner relationship and end with monitoring the recommendations.
Managing cash is an area of financial planning, not one of the six steps, which is a distinction FIMM's practice question tests.
What Financial Planning Means
In some countries people use a financial planner as routinely as an accountant or lawyer, and personal financial planning is a profession in its own right.
Statutory definition: Part 2 of Schedule 2 of the CMSA defines financial planning as analysing the financial circumstances of another person and providing a plan to meet that person's financial needs and objectives, including any investment plan in securities, whether or not a fee is charged.
In everyday terms, financial planning is meeting life goals within a time frame by managing present and future finances: buying a home, saving for children's education, retiring comfortably. The planner takes a "big picture" view and may advise on budgeting, saving more, tax, wealth creation and preservation, rearranging investments, risk management and retirement.
Malaysian UTS and PRS Consultants already assess clients' finances and objectives to find suitable schemes. The study guide sees this investment analysis as complementing the growth of the financial planning profession, as unit trusts did in other countries.
Why Plan?
An effective personal financial plan helps to:
- give a roadmap for medium- and long-term objectives;
- improve or maintain present and future lifestyle;
- protect assets from uncertainty such as market volatility and inflation; and
- ensure adequate income when needed, for example after retirement.
Five Features of Personal Financial Planning
| Feature | Meaning |
|---|---|
| It is a process | A service, not a product, built on listening, consultation and interactive assessment |
| It is comprehensive | All of the client's needs are explored and explained |
| It seeks maximum utility | "Utility" means usefulness: concrete results that satisfy the client |
| It recognises the individual | Plans are customised; two clients are unlikely to get identical plans |
| It acknowledges the cycles of life | Not a static document; updated regularly as needs change, with the portfolio reviewed |
The Five Areas of Financial Planning
| Area | What it covers |
|---|---|
| Cash management (budgeting) | Comparing income with spending, separating essential and non-essential spending, and deciding how much to save |
| Risk management and insurance planning | Identifying sources and extent of financial, physical and personal loss, and strategies to manage exposure |
| Investment planning | Deciding how to invest current assets and future savings for short- and long-term goals, given finances and risk tolerance; goals get a monetary value and time frame. In Malaysia, plans most often target retirement, children's education and wealth accumulation |
| Tax planning | Strategies to reduce, time or shift current or future income tax, consistent with overall goals |
| Retirement and estate planning | A plan for savings, investments and passive income in retirement; estate planning to preserve, manage and distribute assets during life and after death, including if the client becomes incapacitated |
The Six Steps of Financial Planning
Step 1: Establish and define the client-planner relationship
- Explain the services to be provided.
- Define each party's responsibilities.
- Explain fees in full and who pays them.
- Agree the duration of the relationship and how decisions will be made.
Step 2: Understand the client and gather data, including goals
- Work with the client to define personal and financial goals and time frames.
- Obtain information such as income, spending, cash flow, assets, liabilities and obligations; risk profile, appetite and tolerance; existing insurance, investments and estate plans.
Step 3: Analyse and evaluate the client's financial status
Assess whether the client can meet the goals and identify surpluses or shortfalls. If spending exceeds income, cash flow analysis helps cut non-essential spending.
Step 4: Develop and present recommendations and/or alternatives
Formulate strategies and recommendations, explain them so the client can decide, listen to concerns, and revise where needed.
Step 5: Implement the recommendations
Agree how they will be carried out. The planner may implement them or help the client, coordinating with other professionals such as lawyers and stockbrokers.
Step 6: Monitor the recommendations
Agree who monitors progress. If it is the planner, report regularly at agreed intervals, reviewing the client's situation and adjusting for life changes.
Exam Trap: Areas vs Steps
FIMM's practice question lists four items and asks which are steps: establishing the relationship, understanding the client and gathering data, and analysing financial status are steps; "manage cash" is an area, not a step.
Applying It
Puan Rina, 38, wants to buy a bigger home in five years and fund two children's university education. Using the six steps, a planner would agree the scope and fees (step 1), collect her income, expenses, EPF and insurance details and her risk tolerance (step 2), find a monthly surplus of RM1,200 but no emergency fund (step 3), recommend an emergency fund first, then regular investing in education-focused funds and a down-payment savings plan (step 4), help her open the accounts and set up standing instructions (step 5), and review annually or when her circumstances change (step 6).
Which of the following is one of the six steps in financial planning rather than one of the areas of financial planning?
Cash management
Tax planning
Risk management and insurance planning
Analysing and evaluating the client's financial status
Under Part 2 of Schedule 2 of the CMSA, which activity is financial planning?
Holding a client's securities in safe custody and collecting the dividends and interest on them
Selling a single unit trust fund that a client has already chosen, in return for a sales commission
Managing a portfolio of securities for a client on a discretionary basis for an annual management fee
Analysing a person's finances and providing a plan to meet their objectives, with or without a fee
Which feature of personal financial planning means the plan must be updated regularly as the client's needs and views change?
It seeks maximum utility
It acknowledges the cycles of life
It is comprehensive
It is a product
Sections you finish are checked off in the contents.