Certified Financial Planner Advisor Workbook - EnrichWise

263 Pages·2011·3.38 MB·English

CERTIFIED PERSONAL FINANCIAL ADVISOR
FINANCIAL ADVISOR’S
WORKBOOK
NatioNal iNstitute of
securities Markets
an educational initiative By seBi
This Workbook has been jointly developed by the National Institute of
Securities Markets (NISM) and Financial Planning Corporation (India)
Pvt. Ltd (FPCIL) to assist candidates in preparing for the non-mandated
Certified Personal Financial Advisor (CPFA) Examination.
Workbook Version: January 2011
Published by:
National Institute of Securities Markets
© National Institute of Securities Markets, 2010
Plot 82, Sector 17, Vashi
Navi Mumbai – 400 705, India
Financial Planning Corporation (India) Pvt. Ltd
© Financial Planning Corporation (India) Pvt. Ltd (FPCIL), 2010
702, Leela Business Park, Andheri Kurla Road, Andheri East
Mumbai - 400 059, India
All rights reserved. Reproduction of this publication in any form without
prior permission of the publishers is strictly prohibited.
Disclaimer

The contents of this publication do not necessarily constitute or imply its
endorsement, recommendation, or favoring by the National Institute of Se-
curities Markets (NISM) or Financial Planning Corporation (India) Pvt. Ltd
(FPCIL). This publication is meant for general reading and educational pur-
pose only. It is not meant to serve as guide for investment. The views and
opinions and statements of authors or publishers expressed herein do not
constitute a personal recommendation or suggestion for any specific need
of an Individual. It shall not be used for advertising or product endorsement
purposes.

The statements/explanations/concepts are of general nature and may not
have taken into account the particular objective/ move/ aim/ need/ circum-
stances of individual user/ reader/ organization/ institute. Thus NISM and
FPCIL do not assume any responsibility for any wrong move or action taken
based on the information available in this publication.

Therefore, before acting on or following the steps suggested on any theme
or before following any recommendation given in this publication user/
reader should consider/seek professional advice.
The publication contains information, statements, opinions, statistics and
materials that have been obtained from sources believed to be reliable and
the publishers of this title have made best efforts to avoid any errors. As
such, publishers of this material offer no guarantee and warranty of any
kind to the readers/users of the information contained in this publication.

Since the work and research is still going on in all these knowledge streams,
NISM and FPCIL do not warrant the totality and absolute accuracy, adequa-
cy or completeness of this information and material and expressly disclaim
any liability for errors or omissions in this information and material herein.
NISM and FPCIL do not accept any legal liability what so ever based on any
information contained herein.
All rates, taxes and regulations applicable for various financial products dis-
cussed in this workbook are current as of 01.11.2010. For updates on rates,
taxes and regulations kindly refer to relevant site/s of agencies regulating
and/or offering specific financial product/s.
While the Certified Personal Financial Advisor (CPFA) Certification will be
largely based on material in this workbook, NISM and FPCIL do not guaran-
tee that all questions in the examination will be from material
covered herein.
Acknowledgement
This Workbook has been jointly developed by NISM and FPCIL for Certi-
fied Personal Financial Advisor (CPFA) Examination. NISM and FPCIL
gratefully acknowledge the contribution by the authors.
This Textbook has been developed with contributions from:
Arnav Pandya, CFPCM
ACA, Chief Coach,
FinCare Consulting
Arvind Rao, CFPCM
ACA, Chief Planner,
Dreamz Infinite Financial Planners
Dr. D. Sundararajan, CFPCM
Financial Planner,
Trendy Investments
Dr. K. K. Goel, CFPCM
Director,
Unique Health & Wealth Consultants Pvt. Ltd.
Jagdish Bhat, CFPCM
AIII, Principal Officer,
Ambit Insurance Broking & Advisory Pvt. Ltd
Lovaii Navlakhi, CFPCM
MD,
International Money Matters Pvt. Ltd.
Priya Rao, CFPCM
Financial Planner,
Investment Yogi
Shilpa Jain, CFPCM
Owner,
F1Fx Facilitate Learning
Shweta Jain, CFPCM
Business Head – Fin. Education,
International Money Matters Pvt. Ltd.
Sumeet Vaid, CFPCM
MD,
Freedom Financial Planners

Amit Trivedi
Owner,
Karmayog Knowledge Academy
NatioNal iNstitute of
securities Markets
an educational initiative By seBi
In pursuance of the announcement made by the Finance Minister in his
Budget Speech in February 2005, Securities and Exchange Board of India
(SEBI) has established the National Institute of Securities Markets (NISM)
in Mumbai.
SEBI, by establishing NISM, has articulated the desire expressed by the In-
dian Government to promote securities market education and research.
Towards accomplishing the desire of Government of India and vision of
SEBI, NISM has launched an effort to deliver financial and securities educa-
tion at various levels and across various segments in India and abroad. To
implement its objectives, NISM has established six distinct schools to cater
the educational needs of various constituencies such as investor, issuers,
intermediaries, regulatory staff, policy makers, academia and future profes-
sionals of securities markets.
NISM brings out various publications on securities markets with a view to
enhance knowledge levels of participants in the securities industry.
Financial Planning Corporation (India) Pvt. Ltd (FPCIL) was established by Fi-
nancial Planning Standards Board India (FPSB India) along with BNP Paribas
SA, SBI, and Tata AIG Life Insurance Co. Ltd, essentially to undertake educa-
tion activities in the Financial Planning segment.
Globally, many leading financial service institutions are coming together to
establish Financial Planning as a profession, and setting up standards in the
discipline. FPSB India has been set up to achieve the same. The key objec-
tive for FPSB India to promote FPCIL has been to augment and enhance the
scalability and quality of Financial Planning education across the financial
advisory spectrum.
FPCIL shall continue various initiatives including knowledge workshops,
seminars, and publications.
FPCIL aims to create new horizons based on collective and shared vision
along with all the stakeholders. It shall aim to create new benchmarks for
quality and performance in meeting its goals.
About the Certified Personal Financial Advisor
The examination seeks to create a common minimum knowledge bench-
mark for all persons involved in financial advisory including:
• Individual Financial Advisors
• Employees of organizations engaged in financial advisory services
• Employees of Asset Management Companies, Banks, Wealth Manage-
ment companies especially persons engaged in financial advisory
The certification aims to enhance the quality of financial advisory and re-
lated services in the financial services industry. This examination is volun-
tary in nature.
Examination Objectives
On successful completion of the examination, the candidate should:
• Know the basics of financial advisory, steps in the advisory process, mak-
ing and implementation of financial plan
• Understand how to evaluate different products, their suitability and how
the recommendation of the same can impact investment risks, returns
and strategies in a personal finance environment for investors and pro-
spective investors in the market.
• Get oriented to the Income tax, Wealth tax and legalities of Estate plan-
ning in personal finance, and regulatory aspects underlying advisory.
• Get acquainted with financial planning as an approach to investing,
insurance, retirement planning and an aid for advisors to develop long
term relationships with their clients.
Assessment Structure
The examination consists of 60 questions each of 1 mark and 20 questions
each of 2 marks, and should be completed in 2 hours. The questions will
be of multiple choice type, each question having a set of four alternative
choices. The passing score on the examination is 60%. There shall be no
negative marking.
How to register and take the examination
For further information and Registration process for the examination please
visit www.nism.ac.in
This examination is not a mandated examination under SEBI Regulations. It
is purely voluntary in nature.
Table of Contents
Unit 1: Concept of Financial Planning 1
Unit 2: Managing Investment Risk 29
Unit 3: Measuring Investment Returns 45
Unit 4: Investment Vehicles 70
Unit 5: Investment Strategies 99
Unit 6: Insurance Planning 120
Unit 7: Retirement Planning 145
Unit 8: Tax and Estate Planning 178
Unit 9: Need for Regulation 227
Unit 1: Concept of Financial Planning
Learning Goals
1.1 What is Financial Planning?
1.2 Need for Financial Advisory Services
1.3 Scope of Financial Advisory Services
1.4 Financial Planning Delivery Process
1.5 Understanding Client’s Situation and Goals
1.6 Client’s Investment Risk Profile
1.7 Analyzing Client Needs
1.8 Recommending Investment Strategy
1.9 Implementing the Advice with Right Products
1.10 Monitoring & Reviewing Periodically
1
Introduction
Everybody earns money with an objective to fulfil one or many of one’s
life goals. People use money for purposes as simple as funding their daily
household expenses to buying exotic luxuries for a better life. Money can
be saved, accumulated and grown to fund various financial goals of a per-
son; such as education, marriage, house purchase, retirement and even
passing on as legacy to the next generation. So money earned is either used
to fund some of the immediate expenses or some goal in distant future.
There are three ways of earning money: first, you earn a salary by rendering
service to your employer; second, you earn a profit from your own busi-
ness; and third, you invest and manage the surplus money and let it grow
or give you an income.
When money earned is to fund one of the future goals, it needs to be in-
vested in an optimum way to give maximum returns taking into considera-
tion the individual’s risk profile and time horizon of the goal and the taxa-
tion aspects related to personal finance.
In earlier days, managing money was not so difficult- high interest rates, as-
sured return schemes, government sponsored retirement benefits, few fi-
nancial products, a strong joint family system, a modest lifestyle and cost of
living - all made it simple for a common man to manage his money without
any external expertise. The economic and the personal finance landscape
have changed drastically since the early 90’s as the Indian Economy opened
up and financial sector reforms were undertaken.
Considerable percentage of Urban India now has a higher household in-
come and disposable income. Interest rates on debt instruments have
fallen from as high as 12% in the 90’s to 7% - 8% today whereas inflation
is also in the same range. The number of products and their complexity
has increased considerably with no surety of returns. The manufacturers
of financial products are generating a plethora of information on personal
finance issues which need analysis from the viewpoint of risk, liquidity and
appropriateness apart from comparison within and across classes of such
products. The cost of living and aspirations have gone up putting pressure
on income, which has to generate the best return under the given circum-
stances. People have scarcity of time in managing their hard earned money.
Moreover, the increasing complexity of financial products makes it impera-
tive for an individual to seek experts’ opinion in managing one’s finances in
a disciplined manner.
2
This is where Financial Planning as an approach to managing personal
finances helps an individual to fulfil life’s numerous goals with available
resources. A qualified and professional financial advisor using the Fi-
nancial Planning approach to offer solutions, products and services in a
holistic manner to his/her clients can make a difference to their lives as
well as earning an advisory fees for himself/herself.
This book will introduce the concept of Financial Planning and how to
use it in Financial Advisory profession so that one can offer need-based
solutions and products to his/her clients. This book will facilitate the
transition from a product salesman into a trusted financial advisor.
1.1 What is Financial Planning?
A very commonly used definition of Financial Planning is “Financial Plan-
ning is the process of meeting one’s life goals through the proper man-
agement of personal finances.”
It’s best to understand the above definition by breaking it up into three
parts;
Financial Planning is a Process: Worldwide professional financial
advisors follow a standard six-step process to deliver Financial Planning
services consisting of:

1. Establishing and defining client relationship
2. Gathering client data, including goals
3. Analyzing and evaluating current situation and needs
4. Developing and presenting recommendations
5. Implementing the recommendations
6. Monitoring and reviewing the Financial Plan
Meeting one’s Life Goals: Individuals and families have many goals
in life to fulfil for which they will have to save, accumulate and grow
their money. The most common life goals are:
1. Children’s future including education and marriage
2. Buying a house
3. Comfortable Retirement
Other goals may include going on regular or one time vacations, pur-
chasing a car/vehicle, corpus for starting own business and being debt-
free (home loan, car loan), etc.
3