FINANCIAL PLANNING is a relatively new profession.  It represents the first broad-scope service profession to emerge in recent years.  Its development can be traced back to  1969, when a small group of financial services professionals met at a hotel near Chicago’s O’Hare Airport to discuss the inadequacy they saw in the state of financial services at that time.  They voiced their frustrations and searched for ways to introduce a new degree of client orientation and professionalism into a field that was neither well known nor well defined.

The planning pioneers who founded this profession led a movement to provide clients with better and more targeted service.  They looked forward to the time when comprehensive financial planning would become an accepted and integrated means for providing service and product delivery to consumers.  In doing so they revolutionized their business, creating a new way for individuals to manage their personal finances.  The pioneer’s approach was to focus on the client’s needs and objectives by putting their client’s interests first and foremost above personal gain.

The efforts toward targeted client service led to the development of two principal types of financial plans, segmented and comprehensive.  Segmented plans enable practitioners to review one aspect of a client’s life, such as insurance, investments, or retirement.  Comprehensive plans provide a more detailed and complete approach by factoring in all of the financial concerns affecting the client’s life, such as cash flow, education, insurance, investments, income tax, retirement, and estate issues.  These revolutionary changes in approach paved the way for a new profession: Financial Planning.

The next step for these innovators was to educate the public about their new service profession.  They wanted to show the public how they differed from their predecessors and why it would be worthwhile to use their services.  To counteract negative perceptions, a number of financial services professionals began pursuing a different way of helping their clients.  They strove expressly to adopt a logical and consistent format in providing good financial advice not just in one specialized are, but in every aspect of client’s financial lives.  Furthermore, they wanted their clients to know that they were trained specialists in their area of practice.

WHO ARE TODAY’S FINANCIAL PLANNERS?

FINANCIAL PLANNERS have come from a variety of fields and hold many licenses and designations.  As noted previously, many today are midcareer professionals who have retired from their first field, have grown bored with it, or wanted to branch out into something new that involves helping others.  For example, many are CPAs with twenty or more years of experience who have found that their clients specifically ask for such services; if they fail to provide financial planning, they run the risk of losing clients to other CPAs who do.

Similarly, many representatives, brokers, and related employees at major brokerage firms and insurance companies find it difficult to compete solely by selling products; financial planning offers a more flexible and comprehensive approach to satisfying their client’s needs.  Likewise, bankers more and more are finding that they cannot effectively compete in the service marketplace without taking an overall view of financial planning for their clientele.  The banks have finally recognized that financial planning in its own right can be a very profitable revenue center.

So what does this all mean?  For many financial services professionals, the days of pushing a product-centered transaction with little or no concern for client needs and objectives are gone.  That approach is being replaced by the services offered by more sophisticated and better-trained financial planners who want to understand their clients in order to make the most appropriate choices for them.

Although the history is largely U.S. experience, the world has seen the evolution from product pushing to solutions provision… thus evolving from Agents to Planners.  Asia has seen changes, and the changes are happening in a much faster pace.  Singapore has been the most successful in its evolution to Financial Planners with strict implementations of standards and procedures.  Thailand, Indonesia, Malaysia and other ASEAN countries are also on its way in developing substantial numbers of professional financial planners.

For many years now, it has been my quest to take part in the evolution of the financial planning practice in the Philippines. In 2005, I help found the Registered Financial Planner Institute of the Philippines which will hopefully result to the evolution of Filipino Financial Planners but the evolution to professional financial planners goes beyond the RFP.

Today, there are a lot of advisors claiming to be Financial Planners and while some are true-blue ones, many are still in name rather than in deed. However, I am very hopeful with the rate the financial planners are evolving and soon, this profession will be one of the most respected in the Philippines as well.

Question: What are the right criteria for choosing a good life insurance?—Jeremy Jessley Tan (@jeremyjessley) via Twitter

Answer: After discussing how much coverage you should have and talking about the different kinds of life insurance policies in parts 1 & 2 of this column, I will now close this series by discussing how you should choose your plan and provider.

Deciding on a type of plan should be consistent with your objective. If the only purpose of considering life insurance is protection, then a term policy is something you should consider. Further, if you just want to maximize insurance coverage and reduce cost, then a term policy is most prudent. Just make sure that you don’t mind paying premiums that will not be recovered unless a death claim is filed.

If you would like some savings to go with your insurance coverage at the same time, you may opt to get a permanent plan instead of a term policy. Some people would want some recovery of the premiums they are paying when the time comes they feel they don’t need any coverage anymore.

A traditional plan like a whole life insurance will have cash values that will accumulate over the years, typically with a guaranteed cash value and a nonguaranteed portion via dividends. Unfortunately, the returns of traditional insurance policies are very low, comparable to a time deposit rate. Accumulations in traditional plans are also on a long-term basis and will take you many years to break even.

A variable universal plan (or investment link), on the other hand, will provide better accumulation of funds as they are market-driven instruments. The downside of this product is that it does not offer any guarantees beyond death benefits. Still, it is expected to outperform traditional life insurance products over a long period of time, making it more popular nowadays.

Assess your need thoroughly—Would you want to combine your insurance coverage with savings and investment or would you want to do it separately? You can buy term and invest the difference—or you can buy a variable universal life policy that will do that for you.

If you want insurance coverage with guaranteed savings and are willing to accept low returns, then a traditional life policy is for you. If you want better returns but with volatility, then go for a variable universal life. If you just want the plain vanilla insurance, go with a term plan. There is no such thing as a ‘best’ life insurance product—it really depends on your need or affordability.

As to insurance companies, I’d recommend that you consider life insurance companies among the top 10 in the country because they are usually more stable and are highly reputable. I posted a ranking of the top life insurance companies of 2011 here.

The Insurance Commission monitors the operations of all insurance companies and has strict standards, particularly on solvency. Most life insurance companies are well capitalized and it is comforting to know that no life insurance company in the Philippines has ever folded up. It might also be a good idea to ask around about experiences of others with regard to after-sales servicing and claims paying reputation of different insurers.

For me and many others, customer service is a very important criterion—especially since a life insurance coverage is long term in nature.

You may want to get proposals from three life insurance companies of the same product and look at the benefits they offer. I notice premiums of some companies are substantially higher than others so it will be a good idea to be thorough when you are reviewing. Compare benefits and riders, add on those that you need and remove those that you think are unnecessary. When you are considering a variable universal life policy, check out the management fees—some charges are much higher than others.

Finally, I urge you to also be selective in dealing with your insurance advisor. I will go with an advisor who knows his products thoroughly, can answer most of your inquiries, can conduct a good needs analysis and will put your interest first before his sale. Unfortunately, quite a few insurance advisors have issues like misrepresentation or, worse, nonremittance of premiums. It is important that you deal with a professional and it is easy to spot one by observing the way he conducts his business.

Whether you buy from an insurance agent or from a bank (via bancassurance), make sure you get a policy that you need, you can afford, from a company that is reputable and from an advisor that you trust. Tip: If you notice that the advisor is so much in a hurry to close a sale and is more concerned about meeting his sales quota than your welfare, you might want to look for another advisor.

My prayer is that more Filipinos will be like you. More Filipinos have to be covered considering the benefits of life insurance.

This post appeared in the Inquirer.

I’m starting a series of blogs about questions in the mind of many of my readers. I will try to answer all the questions in short form and post it in this blog site.

The first question was asked by Ray Cuta via Facebook:

Question:  What are your top 10 personal finance book?

Hi Ray.

A few months ago, I wrote about the top books I recommend in my Inquirer column but it’s not 10 books. Let me put those books I recommended in the column plus others to make it 10. Personal Finance books are really helpful but not all are really sound. The following books are those that I personally like:

1)      Total Money Make Over by Dave Ramsey – I love this book as it is a no nonsense book on helping us get on the right track. It is instructional and very sound financial advices.

2)      Financial Peace by Dave Ramsey – Yes I am a Dave Ramsey fan and for a good reason. This book lays the foundation of achieving real financial security – very basic and yet very real.

3)      Pwede Na! The Complete Pinoy Guide to Personal Finance by Efren Cruz – This for me is the best personal finance book written by a Filipino. Very concise and yet full of information. What makes me like this book a lot is that it is written in the Filipino context.

4)      Pwede Na! The Complete Pinoy Guide to Retirement & Estate Planning by Efren Cruz – the follow-up book when you are ready to grow your money and plan your estate. I also like this book because it is factual, concise and written in the Filipino context.

5)      Millionaire Next Door — by Thomas J. Stanley and William D. Danko. This is an iconic book that discusses the behavior of Millionaire in the USA. It is not only insightful, it will actually shatter many of our misconception on wealth and wealth accumulation. I particularly like this book because it is based on solid research. This is a good financial behavior book that may help you make a paradigm shift.

6)      Automatic Millionaire by David Bach — this book by a best-selling author gives you an overly simplistic view on achieving wealth and yet it is effective in its message that in eating an elephant, we need to do it one bite at a time. Simple, practical and sensible. If you think you can never be wealthy, read this!

7)      Money Matters by Larry Burkett — Financial counselling is the most effective route toward achieving financial security but many do not have access to good financial counsellors or advisors. Money Matters is a form of counselling book and I like the question-and-answer format. The questions are very practical and real, not superfluous or ambivalent. The answers of Mr. Burkett are successful in providing advice in an emphatic way; yet, you will find that his answers have sound financial grounding.

8)      Till Debt Do Us Part by Chinkee Tan — another book written by a local author that I highly recommend. Chinkee’s book deals with an issue that plagues many Filipinos and yet one that is hardly discussed openly. The author successfully convinces the reader that debt is not a good thing and yet it gives us hope that being truly debt-free is within the reach of the average Pinoy. I like the practical steps in finding a solution to the debt trap written specifically for the Pinoy psyche. Chinkee has written many best-selling books but Till Debt Do Us Part remains to be my favorite.

9)      The Richest Man in Babylon by George Samuel Clason – A former boss of mine gave me this book in 1994 and probably the first finance book I ever read. I did not read it immediately as I am not fond of fiction but boss insists I read this one. The writing style was great but the message of the book was even greater. It’s all about doing the right things and very fundamental in nature.  This book is full of financial wisdom.

10)   The Bible – Yes, the written word of God is also an awesome finance book. Did you know that the offers 500 verses on prayer, less than 500 verses on faith, but more than 2,000 verses on money and possessions. 16 of the 38 parables were concerned with how to handle money and possessions and Jesus talked a great deal about money. The wisdom you will get from reading the word of the Lord will not only make you a better believer, it will also make you a better steward. Pick up the Bible and experience it for yourself.

There are many more books you can read and I’m sure there are those that will be your personal favourites. Just remember when reading a book – pick up the good things and discard that bad ones as no book is perfect; except the Bible.

Happy reading!

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