Financial Planning

Module Number: II

Investment Planning – Good Practices

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Syllabus
• Difference between different types of financial service and advice - independent,
restricted, execution only;
• The remuneration methods,
• Structured recommendations using a combination of new and existing financial products
appropriate to the client.
• Features of financial services products.
• Ethical issues in the sales performance of financial advisers and financial products.
• Money Laundering, how to avoid it in execution of Investment planning.

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AIM:
To equip students with the detailed understanding of the concepts, methods and techniques of
financial planning for designing and implementing an individual client's financial plan.

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Course Objectives:

• Discuss the meaning, meaning, concept and need of financial planning.

• Deliberate on the modes and methods of investment planning and understanding the process
of client assessment
• Explain various investment products and its categorisation.
• Enumerate the importance of savings and investments and discuss various products under
savings and investments
• Elaborate on various financial planning strategies and its implementation with respect to
client assessment and needs.

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Course Outcomes :
• State the meaning, concept and need of financial planning.
• Describe the modes and methods of investment planning and understanding the process of
client assessment.
• Categories and classify various investment products.
• Discuss the importance of Saving and investments and list various products under savings
and investments.
• Illustrate financial planning strategies and its implementation with respect to client
assessment and needs.

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Table of Content:
Sr. No Topics
1 What is financial service and advice?

2 Difference between different types of financial service and advice - independent, restricted,
execution only;

3 Structured recommendations using a combination of new and existing financial products

appropriate to the client.

4 Features of financial services products.

5 Ethical issues in the sales performance of financial advisers and financial products.

6 Money Laundering, how to avoid it in execution of Investment planning.

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Table of Content:

Sr. No Topics
7 Self Assessment Questions
8 Activity
9 Reading Assignments and Interactive brain storming
10 Document links
11 Video links
12 E-books/e-resources
13 References

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What is financial service and advice?

• Financial services consists of two output – Financial products and financial services.
Financial services includes, the process involved in acquiring the financial products. It is
not a ‘financial good’ in itself. The process that leads to one acquiring the ownership and
benefits of a financial good is termed as financial service.

• Financial advisory services are expertise based services, provided by professionals in

the area of planning finances and financial management for an individual as well as a
corporate client. These services help you in getting the best return out of your investment.

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Difference between different types of financial service and advice -

independent, restricted, execution only

• Independent financial service and advice:

• It is the part and parcel of independent financial service and advise to thoroughly understand the
clients needs , collect information objectively and then recommend the right mix of investment
options to meet the client’s goal and also matching the clients risk taking ability.

• An independents financial service and advice should lead to customized investment

recommendation.

• This requires the professional to do a through market research and be well informed on all the latest
developments in the market.
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Difference between different types of financial service and advice -

independent, restricted, execution only
Restricted financial service and advice:

• Under restricted financial service and advice, the professional has limited products to recommend.

• This generally leads to less investment options and may not exactly match the client’s goal or may
not be the right mix of risk and return for the client.

• Generally the market research and information on the latest development is restricted in this
approach of advising.

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Difference between different types of financial service and advice -

independent, restricted, execution only
Execution only financial service and advice:

• This services is a client specific instruction led service.

• Under this services, the advisor simply follows the instruction of the client and does not provide
the expert advice

• In some specific cases this may be more suitable for the clients who are well read and informed
about investment and may need financial advisory services only as execution services.

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The Remuneration Methods

• Commission-and-fee clients
(younger generation)
• Fee-only (High income and
financially knowledgeable
• Commission-only clients (by older
clients with financial knowledge)

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The Remuneration Methods

• Commission-and-fee clients (younger generation):
• Fee-only (High income and financially knowledgeable
• Commission-only clients (by older clients with financial knowledge):

1. Commission-only Remuneration Model: (by older clients with financial knowledge):

Commission is paid to the financial advisor, if the client is buying any of the financial
products adviced by the planner.
• This is also termed as Product-sale-commission. These charges are generally hidden
charges, included in the product itself. (Products like insurance, mutual funds etc)
• Some times it may lead to misselling.

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The Remuneration Methods

2. Asset Based Remuneration Model:

• A percentage of value of assets managed by financial advisor/planner is charged as
remuneration for the services.
• Bigger the portfolio, higher is the remuneration earned by the financial advisor/planner.

3. Performance Based Remuneration Model (Commission-and-fee clients ):

• This remuneration is a combination of fixed and variable component.
• The financial advisor is paid a certain fixed fee percentage plus an extra on achieving higher
returns.
• For Example:
1% basic charges on the assets managed + 20% share in profit over and above 10% returns.
• Only in the case of higher returns beyond an agreed level, a percentage will be shared again
with the financial planner.
• This model encourages the a financial planner to take the extra risk , which may not be
needed at times.
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The Remuneration Methods

4. Flat Fee or Fixed Fee or Fee Only Based Remuneration Model:
• Under this method of remuneration, the financial advisor or planner generally charges a fixed
amount as fees.
• The basis for fixed charges could either be for an assignment or for an hourly service based.
• Generally in a fee based services, as the planner is not charging anything on sale of products, they
end up giving a very comprehensive assessment.

5. Cost of Fee-only Financial Planners in India

• One Time Fee: For the complete project, a financial planner will charge around Rs.25,000 –
Rs.35,000, as a one-time fee.
• Monthly Subscription Fee: Along with the initial upfront payment of somewhere around Rs.7000-
Rs.10,000, then there will be the monthly subscription fee of Rs.1000 – Rs.1500, approximately, to
be paid each month.

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Structured recommendations using a combination of new and existing financial

products appropriate to the client.
• A financial planner needs to be well versed with all the existing and new financial products ,
with its basic and advanced features, pros and cons to create a structured recommendation for
the client.
• Once the financial goals and the current status of the client is established, the advisor/planner
need to design the structured financial plan for the client.
• It involves creating a structure recommendation , i.e., creating the right balance of products , that
helps the client manage the risk of the investment and meet the goals.
• Structure recommendations shall help a client, to close the high risk investment without losses
and reinvest in an alternate product will similar or a moderate risk based on the needs of the
clients.
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Structured recommendations using a combination of new and existing financial

products appropriate to the client.

Structured Products
• Structured products are pre-packaged investments. that generally include assets that are linked to
interest income plus one or more derivative product.
• These products generally take traditional securities like an investment-grade bond and then replace
its payment features with non-traditional payoffs.
• Structured products can be principal-guaranteed that issue returns on the maturity date.
• The risks associated with structured products can be fairly complex—they may not be insured by the
FDIC and they tend to lack liquidity.

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Features of financial services products

Savings and investment products
Direct Equity Investments
Protection products
Mutual Funds

National Pension Scheme

Insurance Fixed Deposits
Market
Products:
linked Public Provident fund
Life,
Insurance
Health and Real Estate investment
Products
Property
Gold Investments

Government Bonds
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Features of financial services products.

Insurance Products:

• The financial planner/advisor shall be able to recommend the right mix of protection products to cover
any risk that the client or his/her family is possible to face with respect to life, health and disability.

• The insurance coverage shall be recommended based on the risk factors, dependents and family
members, the nature of job and the relevant risk, the present health conditions and the financial
capability of the client.

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Features of financial services products.

Insurance Products:

• Term Plan - It covers death benefit and is available only for a specified period of duration

• Endowment Plan - Endowment insurance plans covers death benefits along with maturity and
bonus benefits. A part of the insurance amount goes for death benefit and the remaining as
investment for covering all the other bonus and benefits.

• Unit Linked Insurance Plans or ULIPs - These insurance products are linked with market
investment and thus carry a higher risk due to market volatility. A portion of sum covers the death
benefit and the rest is invested in mutual funds to fetch the returns.

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Features of financial services products

• Whole Life Insurance - This insurance covers the risk for whole life irrespectively like specific
term . The maximum duration of the life covered is restricted to a tenure of 100 years.

• Child’s Plan - These insurance plans take care of the financial needs of a child at various stages.
Some of it also covers the benefit of the parent’s death.

• Money-Back - This survival benefit based insurance products provides returns at regular intervals
to the insured.

• Retirement Plan - This policy helps the insured to cover for his retirement days. It helps in
building the retirement corpus and the same could be availed as lump-sum or as monthly
installment system.

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Features of financial services products.

• Individual Health Insurance - When the coverage is of an individual health or the policy holder.

• Family Floater Insurance - A family health insurance generally covering a family of four such as
husband, wife and two children. This helps in avoiding separate health insurance for each member
of the family.

• Critical Illness Cover - This covers some of the pre-stated critical or terminal illness that requires
huge sum of money for treatment.

• Senior Citizen Health Insurance - This policy is specially designed for older generation , people
from the age of 60 and above

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Features of financial services products.

• Group Health Insurance - Group health insurance is offered to employees of an organisation. They
are specifically designed in such a way that older beneficiaries can be removed, and fresh
beneficiaries can be added, as per the company’s employee retention capability.

• Maternity Health Insurance - It covers all the medical expenses of all the stages of pregnancy and
delivery namely pre-natal, post-natal and delivery stages. It covers both the mother and the child.

• Personal Accident Insurance - All accident related injuries, disability and personal losses as
individual’s death is covered under this policy.

• Preventive Healthcare Plan - Such policies cover the cost of treatment concerned with preventing a
severe disease or condition.

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Features of financial services products.

Types of Property Insurance in India

• Home Insurance - Covers the cost of damages and the financial liabilities due to pre- states
incidences both natural and human disasters such fires, burglaries, storms, earthquakes, explosions
and other events.

• Shop Insurance - Covers the financial risk of the loss of property due to natural disasters.

• Office Insurance - Covers the financial risk of the loss to office building and the equipment's.

• Building Insurance - If you own a complete building, opting for home insurance may not be
sufficient. Instead, you can purchase building insurance to cover the entire premises.

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Features of financial services products.

Savings and Investment Products:

• Direct Equity Investments: Direct equity investment is advised for clients who have some basic
understanding of functioning of stock markets. Equity investments are good choice clients aiming
for medium and long term returns. It is high risk, high return product. Generally in the long run,
equity investments are known to provide higher returns, including the inflation coverage.

• Mutual Funds: Mutual funds are managed by professionals, thus as a client one need not have
prior knowledge of stock market performance. Mutual funds are lucrative investment options as
there are many products available, catering to various client needs. One can go for lump sum
investment or an SIP (Systematic investment plan , that starts with Rs 100 investment per month.

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Features of financial services products.

Savings and Investment Products:

• National Pension System: It is a retirement based financial system, helping client secure the
retirement days. It includes the mix of varied investment options and is regulated by Pension Fund
Regulatory and Development Authority (PFRDA). The minimum amount as annual contribution
required is Rs 1000.

• Fixed Deposits: Fixed deposits are the safest options provided by banks and NBFCs with a fixed
and assured returns every year. These are not very lucrative for clients with high growth
expectations, but it some portion of portfolio contribution in the fixed deposits takes care of safe
and assured returns coving the inflation too. The returns generally range from 6-8% per annum.

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Features of financial services products.

Savings and Investment Products:

• Public Provident Fund: PPF is one more long term investment options helping one secure for later
stages of life. It is an additional contribution provided by an individual. It comes with a longer lock-in
period of 15 years and an average return, in the range of 7-8%pa.

• Real Estate investments: Real estate investment requires a lot of planning as investment corpus
required is generally high and is one of the less liquid investments for the clients. But it generally
gives a multiple fold returns if invested at the right time and right price.

• Gold Investments: Every Indian household buys and invests in gold. Gold ornaments are the most
frequent form of investments. Apart from ornaments, gold bars, Gold ETFs are also popular options
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Features of financial services products.

Savings and Investment Products:

• Government Bonds : Investment in government bonds assures returns with safety as they are
backed by the government. Government time and again comes with multiple investment options of
bonds with varied features to attract the investors. One of the latest and popular bond investment is
RBI taxable bonds. The Central Bank with effect from July 1, 2020 has launched Floating Rate
Savings Bond, 2020 (Taxable).

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Ethical issues in the sales performance of financial advisers and financial products.

• The below listed aspects needs to be verified to determine, whether financial planner/advisor has
displayed ethical or unethical behaviour.

• Various regulatory authority has provided guidelines regarding code of conduct for investment
advisors/financial planners or in such role.

• Has the advisor managed to create Chinese walls between the advisory and the product function?
That is the primary ethical issue to be addressed.

• Is the product the best option available for the specific need of the customer or has the advisor
pushed products just for the sake of higher commissions.

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Ethical issues in the sales performance of financial advisers and financial products.

• Is there any personal bias involved in recommending the financial / investment products and does it
truly meet the client risk profile and needs.

• Is the advisor involved in any kind of give monetary or non-monetary inducements with clients
either in direct or indirect form to the to show higher sales.

• Has due diligence and care being administered with the customer’s money as they do with their
own money?

• What is the escalation matrix for the advisor if there are real ethical issues that come up in the
course of business?

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Ethical issues in the sales performance of financial advisers and financial products.

Principles of Ethics:

• Integrity: This profession required the planner/advisor to show integrity in behaviour by being
object and harmless while suggesting the investment options to the clients.

• Objectivity: It requires the professional to evaluate the pros and cons of each investment options
and match it with the clients assessed needs. The product that best meet the needs only shall be
recommended and with the there shall be transparency in dealing with the client’s financial affairs.

• Competence: The profession is expected to keep himself/herself updated with the required
knowledge and skills to avoid any kind of errors and failures.

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Ethical issues in the sales performance of financial advisers and financial products.

Principles of Ethics:

• Fairness: fairness shall be maintained with dignity, transparency while handling clients financial
deals.

• Confidentiality: non disclosure of client’s specific information to any third parties shall be the
most required behaviour of a financial planner/advisor.

• Professionalism: The Professional shall follow all the guidelines necessary for objectively carrying
out the duties as a certified professional.

• Diligence: The financial planner should apply him / her self with due skill, care, and diligence.

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Money Laundering, how to avoid it in execution of Investment planning.

Money Laundering: Money laundering is the illegal financial system created to convert large
amount of money earned from illegal activities to convert into legal sources of income.

• It is a process of showing the illegal sources of generating money as legal source of income.

• The process of money laundering: Under money laundering, a large sum of money is divided into
small sums and deposited in multiple accounts with no interrelations.

• It is considered as serious financial crime in India. These funds are generally used by terrorist,
mafias etc. for damaging the country.

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Money Laundering, how to avoid it in execution of Investment planning.

Money
Laundering
Process

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Money Laundering, how to avoid it in execution of Investment planning.

Avoiding Money Laundering Using Investment Planning:

For Financial Planner:
• Know your customer.
• Record management and software filtering.
• Detailed report on clients source of income and confirmation on the source.
For Client:
• Selecting the right financial planner/advisor with Qualification, certification.
• Verifying the organisation.
• Being alert and attentive on the investments options and processes suggested by the advisor.
• Reviewing the process and professionalism of the advisor time and again.
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Summary
• Financial planning is the process of estimating the financial requirements, wherein, costs are
optimized and wealth is increased. o Financial planning helps in analysing and optimally
utilizing funds.
• Financial planning helps in outlining the events or activities of fund requirements.
• The major areas of financial planning are financial position, insurance, tax planning,
investment and accumulation goals, retirement planning and estate planning.
• With the growth of financial products and services, the career opportunities for financial
planners are on the rise.

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Summary

• A financial planner is an individual who is qualified and trained by a recognised financial

institution to undertake the task of preparing a financial plan for an individual or an
organisation.
• A financial planner generally follows a well-defined structure of steps to be able to perform
financial planning effectively.
• These steps of the financial planning process provide a roadmap, which every financial
planner executes to ensure an efficient financial plan.

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Self Assessment Question

1. Investment is the ___________________

a. net additions made to the nations capital stocks
b. persons commitment to buy a flat or house
c. employment of funds on assets to earn returns
d. employment of funds on goods and services that are used in production process

Answer: c

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Self Assessment Question

2. Which of the following is a financial asset?

a. Bonds

b. Machine

c. Real Estate

d. Gold

Answer: Options a

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Self Assessment Question

3. Which of the following is a protection product

a. Bonds

b. Direct Equity

c. Mutual funds

d. Insurance

Answer: Options d

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Self Assessment Question

4. Health insurance is a part of which of the following categories
a. Saving Product
b. Investment Product
c. Protection –investment product
d. Growth Product

Answer: Options c

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Self Assessment Question

5. Which of the following is a part of qualities of ethical behaviour of a financial advisor?
a. Integrity
b. Fairness
c. Confidentiality
d. All of the above

Answer: Options d

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Self Assessment Question

6. Skills of financial planner include:
a. Analytical skills
b. Communication skills
c. Technical skills
d. All of the above

Answer: Options d

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Self Assessment Question

7. Money Laundering means
a. Converting illegal money to legal money
b. Converting legal money to illegal money
c. Is not related to money at all
d. Is a approved financial transaction

Answer: Options a

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Self Assessment Question

8. Which of the following would be considered a risk-free investment?
a. Equity in a house.
b. Gold.
c. High-grade corporate bonds.
d. Treasury bills.
Answer: Options b

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Self Assessment Question

9. The largest single institutional owner of common stocks is________

a. mutual funds.

b. insurance companies.

c. pension funds.

d. commercial banks.
Answer: Options a

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Activity

• Review the article.

• Top 10 Best Investment Plans in India 2021 - That
Give High Returns (bajajfinserv.in)

Offline/ Online
Activity
(30 min)

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Activity

• Create a mix of protection plan for an individul client

with the following details:
• Annual Income: 6 lakhs p.a
• Marital Status: singe
• Age: 27 years
Offline/ Online • Liability : Personal loan with EMI of Rs.15000 p.m
Activity • Monthly expenses: 15,000 Rs
(30 min)

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Activity

• Prepare a one page infographic presentation on

Money laundering in India
Offline/ Online
Activity
(30 min)

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Document Links

Topic URL Notes

https://www.fpsb.org/wp-
The Remuneration content/uploads/2016/01/150115_rpt_FPSBRemuneration_
Reference document for the topic
Methods/Models FINAL.pdf

https://www.baxterconsultinggroup.com/lifestages-and-
Clients need at different
financial-advice Reference document for the topic
stages of life

Best Investment options 2021: Top 10 investment options

Reference document for the topic
Investment Products in India (indiatimes.com)

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Video Links

Topic URL Notes

(829) How does money laundering work? - Delena D.

Money Laundering Spann – YouTube NA

Ethical Dilemmas: Six Tips To Help Financial Advisors Avoid

Ethical Issues of
Them| Investor's Business Daily (investors.com) NA
Financial advisors

Role of a financial
(829) Role of a Financial Advisor - YouTube NA
advisor

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E- Book Link

E-book name Chapter Page No. Notes URL

https://rbi.org.in/Financial
Financial Planning by For the full
All Na Education/content/I%20C
Swapna Mirashi course
an%20Do_RBI.pdf

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References

Book References:
1. Introduction to Financial Planning (4th Edition 2017) – Indian Institute of Banking & Finance
2. Pandit, Amar The Only Financial Planning Book that You Will Ever Need, Network 18 Publications
Ltd (CNBC TV 18), B.Com.(Hons) CBCS Department of Commerce, University of Delhi 44
3. Sinha. Madhu, Financial Planning: A Ready Reckoner July 2017 Mc Graw Hill
Web References:
1. https://www.cisi.org/cisiweb2/get-into-finance/what
2. https://www.bdo.global/en-gb/blogs/financial-services-blog/search
results?searchtext=financial+services+and+advisory&searchmode= allwords
3. Ethical Issues in Financial Planning | Chris Nöthling (wordpress.com)
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