Wealth Management: A Holistic Personal Financial Management Tool

“Oh, I don’t know how I am going to manage funds for the higher studies of my child.”

“How much I need to retire comfortably with no burden on my children?”

“What I will do for my living in case I lose my job?”

These may be some concerns which we commonly face, apart from numerous more, unique in its nature according to our surroundings, family requirements, trends and traditions.

If we analyze the financial cycle of an individual, we come to know that the financial requirement of an individual starts from the birth and doesn’t end till death, but on death also there are financial implications. We can call it the Financial Life Cycle. The graph for the same comes to be something like this:

The Financial Life Cycle can be defined as below:

1. Childhood: In this period an individual is net consumer. The types of expenses are fooding, healthcare, education, clothing, toys and other entertainment etc.
2. Youth: In western societies in this period usually the youth starts earning pocket money or they try to finance their out of pocket expenses and in some cases also fund their education. In eastern societies the youth are usually dependent on their parents only for their daily needs and education.
3. Entering Job or Profession: At this age the young people start earning, but usually we can see that lack of financial education and financial management skills, most of the early earners couldn’t save and invest for future needs.
4. Formation of Family: At this stage if the couple is not conversant with financial management, most of the income is expended for the daily needs and entertainment with little left to fund the upcoming financial requirements that is going to arise with the coming of new member in the family as son or daughter.
5. Career Development: This is the stage at which the family comes to the reality of financial needs and gets concerned for the financial security of the family.
6. Retirement: At this stage the individual again becomes the consumer of wealth and usually the earning drops substantially. The healthcare expenses usually are too high.

Keeping in mind the above scenario, it is quite necessary for an individual to have financial education to comfortably plan the Financial Life Cycle or can get the advice of competent Wealth Manager.

Let’s get an overview of Wealth Management.

Wealth management is about managing the wealth or surplus funds to achieve a financial goal. Wealth is defined as Net Assets i.e. Total Assets less Total Liabilities.

Aspects of Wealth Management

• Debt/ Cash Flow Planning: to enable efficient and optimum use of credit for the business
• Investment Planning and Management: to maintain wealth and ensure adequate returns
• Insurance Planning for Business Protection: (e.g. fire, theft, marine etc.) and personal protection (death, disability, critical illness and household)
• Tax Planning: to minimize the impact of unnecessary cash outflows by minimizing tax payable by tax planning
• Retirement Planning: for employees to ensure retention of key personnel for business continuity
• Retirement and Succession Planning: to ensure that the business can continue to operate smoothly when the business owner leaves the business
• Estate Planning: to ensure efficient wealth transfer to successor/ beneficiaries

Usually the purpose of earning and building wealth is to lead the life of leisure and able to do things that one loves to do rather than to worry about the living expenses, but in the marathon of earning money the people has lost the meaning for which they are generating wealth and get addicted to pile up more and more without view of the utility of the excess they are generating. The assessment of one’s wealth according to their financial life goals give them opportunity to achieve financial freedom. (Financial Freedom refers to the financial state of an individual where one does not need to work compulsively to achieve their targeted financial needs.)

How the Wealth Management Works?

Wealth Management involves the application to the personal arena of principles and methodologies that have long been used in business planning. The Wealth Planning process consists of the following sex steps:

1. Identify and Clarify the Current Situation.
2. Identify Goals and Objectives of the Client.
3. Analyze Financial Issues and Opportunities
4. Developing the Wealth Management Plan
5. Implementation of the Wealth management Plan
6. Monitor and Review

A comprehensive personal wealth plan, just like a business plan, addresses four main areas:

1. Where does the client want to be? This includes clarification and specification of the client’s goals and objectives, in order of priority.
2. Where is the client now? The strengths and weaknesses of the client’s current financial position are analyzed.
3. How is the client going to get there? This step involves identification of alternative options available to the client and the development of a coordinated strategy to implement the favored alternative.
4. Monitoring Program: A schedule of regular reviews of the client’s progress, goals and strategies as appropriate to the circumstances.

Here is a sample of Personal Financial Goals Worksheet to assess the financial requirement of a family.

Wealth Management more of art than science as the requirement, temperament and risk profile of each individual is different, so one size fits all method does not apply here. One of the facets of wealth management is Risk Profiling. Technically speaking, risk means that there could be a number of different possible outcomes associated with a particular action or activity and we do not know beforehand which one will occur. In everyday terms, people often think of risk as being the prospect of an undesirable outcome, such as making a financial loss. Another way of putting that could be the chance of not meeting goals or objectives. Some individuals are more able to tolerate financial risk than others. Researchers have argued that investment risk tolerance can be broken down into two parts:

1. Ability to take risk (or “Risk Capacity”)

This relates to individual’s financial circumstances and their investment goals. Generally speaking, an individual with a higher level of wealth and income (relative to any liabilities one have) and a longer investment term will be able to take more risk, giving then a higher risk capacity.

• Willingness to take risk (or “Risk Attitude”)

Risk attitude has more to do with the individual’s psychology than with their financial circumstances. Some people find the prospect of volatility in their investments and the chance of losses distressing to think about. Others are more relaxed about those issues. To sum up, Wealth Management is an art of managing personal finance by identifying the goals of an individual and planning to fulfill the financial life cycle needs through the management of current and prospective future earnings and the available resources to help an individual financially comfortable life within one’s risk appetite.