CMFAS M5 Chapter 6: Financial Needs Analysis

Financial Needs Analysis (FNA)
A process designed to assist a prospective client in identifying his financial needs and goals so that he can make better informed decisions when deciding on the investment products to purchase that would meet his needs. Generally, this process involves:

1. fact finding;
2. identifying and quantifying client’s needs;
3. product recommendation and presentation; and
4. conducting a review of the client’s needs periodically

An FNA is not a financial plan although it can result in one. It should be construed as a guide for the representatives to use in deciding how best to attain his client’s financial goals in the areas of:

1. Accumulation. Planning to pay for children’s education and other financial objectives (e.g. saving to buy a bigger house.
2. Retirement Planning to provide the additional income needed to supplement CPF, pension plans and existing savings and investments.
3. Protection Planning to ensure that all financial obligations are met under the following circumstances:

• upon death;
• upon disablement;
• upon the contracting of critical illness;
• upon the loss of or damage to property;
• when a personal liability arises.

BENEFITS OF CONDUCTING FNA

• help to discover your client’s needs and advise the most suitable products to buy and how much to buy;
• spend more time on the client’s situation than you do on your product;
• if you sell the client additional products based on his plan, he will be able to see how the products fit into his overall plan;
• the client will be more committed to keeping to his plan as he understands the rationale for his purchases;
• enables you to establish a long-term relationship with your client.

Main Sources Of Money To Meet The Client’s Needs

• Central Provident Fund (CPF)
• Supplementary Retirement Scheme (SRS)
• other savings and investments, e.g. property
• client’s existing Life Insurance policy and Disability Income Insurance policy
• employee benefits provided by client’s employer

1. FACT FINDING

• Before you can perform a proper needs analysis, you must first of all know your client. To do this, you need to gather information from your client which include his:
• Personal Details;
• Employment Details;
• Number of Dependants (this piece of information is required for determining insurance needs);
• Financial Information;
• Monthly Income and Expenditure: committed (or Fixed) Expenditure and manageable (or Variable) Expenditure
• Assets and Liabilities.
• Existing Insurance Policies;
• Objectives:You need to find out your client’s objectives in order to recommend suitable products to meet their needs
• Preferences: Attitudes towards investment risk (risk averter, cautious, balanced, risk seeker;Areas of concern (keep pace with inflation; investment is easy to manage; capital growth; easy access to cash, investment income each year)
• Retirement Needs;
• Savings Goals.

2. IDENTIFYING AND QUANTIFYING CLIENT’S NEEDS

• analyse the data so as to identify and quantify the client’s needs
• pick up weaknesses or potential problems that can negatively affect the client’s ability to achieve his objectives
• do a detailed analysis of your client’s financial needs and tackle each of the needs that you have uncovered especially those that need immediate attention
• help your client to prioritise his needs. This is because the client’s resources are usually limited
• quantify your client’s needs

There are 2 methods of quantifying retirement needs, namely [p.177]

• the replacement ratio method, which computes the amount of funds required based on a certain percentage of the client's last drawn pay, and
• the expense method, which computes the amount of funds required based on the current level of the household expenses projected into the future at the expected inflation rate

For protection needs, you need to determine:

• the sum of the client's total liabilities
• his immediate expenses at the time of death, and
• the amount needed to provide for the dependents for as long as required

There are 2 common methods used for quantifying the amount needed to provide for dependants, namely

• the multiple approach, which computes the amount of funds required to meet a client's needs by multiplying the present value of the stream of the client's current yearly gross income (assumed to be constant until his retirement) by a constant future investment rate
• the needs approach, which calculates the amount needed by taking into account the specific position of the client. It involves estimating the income needed by the dependants to maintain their standard of living and the available funds that the client has to meet his needs. The difference between the two is the shortfall that the client needs to provide for his dependants.

TYPES OF INVESTMENT PRODUCTS TO MEET THE CLIENT’S OBJECTIVES

• Product Recommendations
• Product Suitability
• Client’s Objectives
• Affordability
• Taxation
• Client’s Risk Tolerance
• Prioritisation
• Effect of Inflation and Time Value of Money
• Investment Instruments for Meeting Accumulation Needs
• Investment Products to Meet Retirement Needs
• Investment Products to Meet Protection Needs

Two basic principle under product recommendation [p.178]

• client need - you should only recommend products if your client needs them
• product suitability - you should only recommend products which are the most suitable for your client given his circumstances

Investment Instruments for Meeting Accumulation Needs and the Risk of Losing Capital

• Money Market Securities (e.g. Treasury bills, banker’s acceptance and certificate of deposit, commercial paper, repurchase agreement, bank deposits): Low risk
  
• Fixed Income Securities, i.e. bonds: Moderate
• Equity Investments, i.e. ordinary and preferred shares: High
• Derivative Instruments, e.g. options and futures: High
• Property: High
• Unit Trusts: Moderate to High
• Whole Life Insurance: Low
• Endowment: Low
• Investment-Linked Products: Low to High depending on the underlying assets (i.e. whether the fund consists of bonds or equities, etc.)
• Annuities: Low

Types Of Life And Health Insurance Products For Meeting Protection Needs

• Term: Death as well as total and permanent disability
• Whole Life: Death as well as total and permanent disability
• Endowment Insurance: Death as well as total and permanent disability
• Investment-linked Life Insurance: Death as well as total and permanent disability
• Riders: To provide financial protection in addition to that of the basic policy at a low cost
• Critical Illness Insurance: To provide for a lump sum payment upon contracting one of the covered critical illnesses
• Long Term Care Insurance: To provide a regular income when one is unable to perform a specific number of activities of daily living, e.g. bathing
• Medical Expense Insurance and Managed Health Care Insurance" To provide protection against ill health
• Disability Income Insurance: To provide a monthly income when a person is disabled

General Insurance Products For Meeting Protection Needs

• Fire Insurance: For protection of the house against destruction by fire
• Householder/Houseowner Insurance: To protect the building or contents in the building
• Personal Accident Insurance: For protection against accidental death and disablement
• Personal Liability Insurance: To protect one against third party liability

3. PRESENTING YOUR RECOMMENDATIONS

• ensure that your client understands the products recommended and the reasons for your recommendations
• be able to explain the features and benefits of the recommended products and how these fit into his situation

4. CLIENT REVIEW

• The process of identifying and satisfying client needs does not stop with the implementation of the initial recommendations.
• Client’s personal circumstances are likely to change (e.g. the birth of a child) and new needs may surface.
• Regular review will ensure that your client continues to receive quality service from you and reinforces your relationship with him.
• External developments, such as changes to CPF rules may also indicate the need for a client review.
• The needs of your clients should be a long-term concern and your relationship with your clients, a continuing one.