The groundwork for the financial planning process
The first step in the financial planning process is to conduct an in depth financial needs analysis with your client. This process determines your client’s current financial position and risk profile, as well as his / her short and long-term financial objectives. You should cover plenty of ground during the “getting to know you” meeting as you unpack every aspect of your client’s current and future risk and savings needs. Once the legwork is done you will present the client with an optimal solution that ensures all the “gaps” so frequently referred to by financial services organisations are taken care of. You want to make sure that in addition to the short-term protections afforded by personal lines insurance and medical aid cover, your client is also making adequate provision for retirement, enjoys sensible levels of life, critical illness and disability cover, and has the benefit of income protection!
The first hitch in the financial planning process usually occurs when you present this “all encompassing” financial solution to your client. Average Joe’s budget cannot always stretch to accommodate all of the financial products you propose – no matter how sensible they are. There are many ways to address the “gap” between the cost of optimum risk and savings cover and your client’s financial capacity… Ultimately you and your client have to reach a compromise whereby he reallocates certain of his monthly expenditures in favour of savings, while you streamline and prioritise the covers initially proposed. Is there anything you can do to soften the “shock” of your initial proposal before presenting it?
Introducing the financial vulnerability index
One way is to consider affordability during the planning stage – and another is to stay current with the general economic circumstances that might affect your clients. A good financial planner should know what’s happening in the general economy with regards employment, consumer and producer price inflation and other “consumer confidence” issues. One such measure is the relatively new Consumer Financial Vulnerability Index (CFVI).
The CFVI is produced by MBD Credit Solutions in partnership with Unisa’s Bureau of Market Research (BMR), and in association with FinMark Trust. According to Charl van der Walt, chief executive of MDB, the index promotes an understanding of consumer perceptions and feelings across four broad financial categories: income, expenditure, savings and the ability to service debt. The CFVI reflects your average clients’ income & savings versus expenditure & debt position and offers an overview of their financial perception at a given point in time. What does the Q2 2011 CFVI reveal about local consumers?
The overall financial vulnerability measure topped 4.46 points for the three months ending June 2011 versus the 4.39 reported in Q1 this year. (The higher the index number the more financially insecure consumers feel). Professors Carel van Aardt and Bernadene de Clercq were on hand to explain the survey findings at a function in Johannesburg, held 13 October 2011. They said the increase in the financial vulnerability index could be linked to a number of macroeconomic measures, not least of which is the country’s slower than expected post-recession economic growth and declining business confidence (as reflected in the FNB/BER Business Confidence index).
Drilling down to components of the index
Consumers perceive their personal financial situation against the backdrop of South Africa’s economic reality. Their fear of further economic shocks – on the back of US and European debt concerns – outweigh the benefit of low inflation and improvements in their ability to service debt. But there’s much more to be learned from the latest survey, because each sub-set of the index can be further unpacked and analysed.
The measure of income vulnerability worsened in the second quarter too, from 4.16 points (Q1 2011) to 4.52 points. This measure is particularly volatile as it links back to the overall level of employment in the economy. Prof Van Aardt notes that the link between growth in the domestic economy and employment is rapidly uncoupling as large employers “dump labour in favour of capital”. In 1990 our economy converted each 1% of GDP growth into a 0.7% growth in employment, while the same GDP growth today results in just 0.2% jobs growth! To make matters worse we are sitting on an explosive youth unemployment situation. Latest statistics – depending on the source – point to between 52% and 76% of people aged 16 to 24 being out of work. High unemployment will inevitably skew measures such as the CFVI due to the large influence of social grants on income. “As employment stagnates, social grant income becomes a better measure of financial vulnerability than the salaried employee,” observes Van Aardt.
South Africa is extremely dependent on household consumption expenditure for GDP growth – so the expenditure vulnerability measure is of particular importance. Although slightly improved, this measure hides a number of uncomfortable truths. “The trend confirms that the poor are consistently more expenditure constrained, while the affluent are less challenged,” he says. This discrepancy is confirmed by the country’s “skewed” Gini coefficient.
Tough times ahead...
The debt servicing vulnerability measure improved slightly from 4.30 points to 4.12 points in the latest survey. Even so, most consumers are still struggling to service their debt, with an alarming 47% of active credit customers more than 90-days in arrears or blacklisted! How can we improve the CFVI in the future? The bottom line is that irresponsible financial behaviour must be identified and addressed… And financial planners can help by creating sound financial plans, assisting clients in reducing unnecessary expenditures, reducing debt and bolstering savings. Government will have to “toe the line” too, by creating an economic environment conducive to employment.
Editor’s thoughts: The great thing about financial planning is that you share many of your client’s real world challenges… If you are struggling due to recession – then your client is likely struggling too. Is it good practice to modify a financial plan to take economic realities into account? Please add your comment below, or send it to gareth@fanews.co.za
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