Financial Planning - A Tool to Add Punch to Legal Advice

In the field of legal practice, lawyers do not provide comprehensive financial planning services. The first part of this article will describe the different types of comprehensive financial planning, whilst the second part will demonstrate how the use of financial planning knowledge will help enhance the legal advice given by lawyers to their clients and inevitably increase the profile and competitiveness of a practice.

Since 1998, when the Financial Planning Association of Singapore ('FPAS') was set up, the promotion of comprehensive financial planning has intensified in Singapore, particularly in the financial services industry. Financial institutions realise that providing comprehensive financial planning services to their clients will add value and help foster better and more loyal client relationships. To achieve this, financial institutions recognise that they must have in place a team of professionally-trained Certified Financial Planners ('CFPs').

To be a CFP, one must enrol on the CFP Programme, pass the six-module examinations set by FPAS and obtain three years of relevant work experience.

All these developments beget the question of what exactly is comprehensive financial planning? This article proposes to address the following issues:

What are the various aspects of comprehensive financial planning?
How can financial planning advice augment the lawyer's legal practice?

Various Aspects of Comprehensive Financial Planning

Comprehensive financial planning is a process to derive and implement an integrated and co-ordinated plan aimed at achieving a person's overall financial objectives and thus preserve and/or enhance his financial well-being. Some of the key facets of comprehensive financial planning are as follows:

risk management;
tax and estate planning;
retirement planning;
educational funding planning; and
investment planning.

Risk management

In life, a person faces various types of risk exposures. If he were to drive to work, he runs the risk of meeting with an accident. If he decides to take an MRT to work, he runs the risk of a train collision. If he decides to stay at home, he might trip and injure himself while taking a bath.

Normally, risks can be classified as speculative risks or pure risks.

A speculative risk is a risk exposure where the outcome of its occurrence can result in a loss, a gain or the maintenance of status quo for the person; an example of such a risk is where a person invests $10,000 in a particular share. If the share price goes up, he stands to gain a small windfall. If the price heads south, a loss will occur; while if the price moves in a certain manner, he may break even.

A pure risk is a risk exposure where the outcome can either be a loss or the maintenance of status quo; an example of such a risk is the risk of property damage arising from a fire. If there is a fire outbreak, the property will be damaged resulting in a loss. If no fire breaks out, no loss is sustained, but the owner does not enjoy any extra gain either; other examples of pure risks are income loss due to death, disability or illness of a person or the cost arising from hospitalisation due to an accident.

The process of risk management seeks to minimise, where possible, the consequences of pure risks. Some of the techniques which can be used are:

Risk avoidance where the activity that may result in loss is avoided altogether; eg a parent may bar his son from mountain biking to eliminate the risk of sustaining injuries arising from such activities.
Risk reduction where although the activity is undertaken, measures are taken to minimise the frequency or severity of loss; eg in the case of mountain biking, the parent may allow his son to enjoy such activities provided he wears a safety helmet and safety pads.
Risk transfer where the risk is transferred to third parties who are normally insurance companies; eg a person may take up a life insurance policy so that in the event of his death, the insurance proceeds can be used by his immediate family for financial sustenance. He may also take up medical and health policies to cover the medical costs arising from the treatment of major illnesses. In such cases, the risks are transferred to the insurance company.
Risk retention where the consequences of the risk is absorbed by the person personally; eg most companies do not take up policies to cover their employees' outpatient treatment, preferring to indemnify their employees against such costs from the petty cash account.

In risk management, the financial planner helps the client to derive and implement a plan that can minimise the consequences of pure risk exposures at minimum cost.

Tax and estate planning

While tax evasion is illegal and punishable under the law, it is lawful to minimise one's tax obligations if done legally. The financial planner will normally work in hand with a tax adviser to help the client derive and implement a tax plan that will minimise the tax outlay of the client.

In estate planning, the financial planner helps the client to develop and implement an estate plan that will enhance and preserve the client's assets during his lifetime, minimise his estate duty liabilities upon his death and ensure that the estate is managed and distributed to beneficiaries in accordance with the client's wishes. Such recommendations may involve the drawing of wills and trust instruments. Nominated executors and guardians will have to be thoroughly briefed and conveyances may have to be effected to achieve the desired objectives.

Retirement planning

Singapore currently faces a problem of an aging population. In 1999, there were approximately 235,000 persons aged 65 and above, which was about 7% of the population. By the year 2030, it has been projected that the numbers will increase to approximately 796,000 or 19% of the population. The future increase in the elderly population will pose questions such as:

How will their medical needs be taken care of?
How can they remain useful and productive?
How will their financial needs be met?

One of the government's answers to these questions is to increase public awareness of financial planning and to encourage Singaporeans to obtain proper financial planning advice so that their retirement needs will be taken care of during their golden years.

The financial planner assists his clients by deriving and implementing a suitable retirement plan to realise their retirement objectives. He helps the clients calculate their retirement funding needs and comes up with a savings and investment plan for them.

Educational funding planning

Education is a matter that is very close to the Singaporean parent's heart. Every parent wants his or her children to have the best education possible, particularly, tertiary education. Unless a child is extremely gifted, tertiary education normally starts when a child reaches 18 (in the case of a girl) or 21 (ie after national service in the case of a boy). If during his/her early years, funds are not set aside to meet the future cost of tertiary education, his/her parents may not have the financial resources when the need arises. Parents should, therefore, start an educational funding plan as early as possible.

Educational funding should be systematic, logical and based on sensible assumptions. Some factors which have to be considered are:

When will the studies commence and for what length of time?
Which university would the child be enrolled in and what are its current tuition fees?
What are the living expenses of the country in which the university is located?
What course is the child likely to pursue?
What is the projected inflation rate of the cost of education, bearing in mind that different countries have different rates?
What is the projected rate of return that an investment plan is supposed to generate?
What standard of living is the child expected to maintain during the course of his studies?

Investment planning

Investment planning is an essential facet of the financial planning process. Without a proper investment plan, the client is unlikely to reach the target set in funding his/her retirement and educational needs.

In investment planning, some of the important factors that need to be considered are as follows:

What is the person's risk profile - how averse is he to investment risk? This will help determine proper asset allocation and selection of investment vehicles. A more conservative investor should opt for an asset allocation that takes into account his aversion to high investment risk taking.
What is his time horizon - how much time does the person have to achieve his financial objectives? If the time horizon is long, investments having a higher risk and potential returns may be resorted to to produce a better yield.
What are the person's financial objectives? To accomplish anything, it is necessary to set targets. This is especially so in the realm of investments.

Augmenting Legal Practice with Financial Planning Advice

In the area of legal practice, financial planning can play a useful role in helping the lawyer give more holistic and complete legal advice to his clients. This is particularly so in areas that impinge on the personal financial affairs of the client. Apart from knowing the technicalities of the law, an understanding by the lawyer of the financial aspects of a legal problem can help address the more fundamental needs of the client. Some examples can be found in the areas of:

family law;
wills and estate matters; and
bankruptcy matters.

Family law

Financial planning is particularly useful in the area of family law practice. Under most divorce matters, maintenance and division of matrimonial property are important matters that have to be addressed by the courts.

The courts, in deciding on maintenance issues, will have to look into the financial needs of the family and how the spouse should contribute, particularly in meeting the financial needs of the children. In many cases, however, the party that needs the support may not be knowledgeable enough to determine exactly what his/her needs or the dependants' needs should be. More often than not, they end up giving estimates which may not be accurate. Should there subsequently be a shortfall, a further application to the court may be necessary to seek redress. This often results in additional legal costs and time spent. However, if the lawyer is armed with relevant financial planning knowledge, he can advise his clients and guide them in a manner where accurate computation of maintenance needs can be derived. Sometimes a party may agree to pay a lump sum to the other spouse as provision of maintenance, then the financial needs of that spouse throughout her entire life would be a relevant consideration. In such cases, financial planning advice will be useful in determining the global amount.

An important factor for the courts to consider in deciding on maintenance is what amounts the payer can afford. The courts in making a decision will, among other things, need to balance the interest of all parties concerned. The application of the financial planning process will enable the payer to determine his own personal needs and, if they are properly derived, the courts will be better persuaded to accept his position and submissions when allocating maintenance.

Wills and estate matters

Financial planning can be very useful to the lawyer in estate matters, such as the drafting of wills. Under most circumstances, a lawyer normally takes instructions from the client and drafts a will in accordance with such instructions. The lawyer is mainly concerned with ensuring that the will is technically and legally valid and in accordance with the instructions. However, the lawyer is often unable to advise as to whether the instructions are suitable to the client's real needs. Armed with estate planning knowledge, the lawyer can add further value to his legal advice by addressing these concerns, some of which are:

How can the will and other legal instruments, like trust and insurance policies, be utilised so as to minimise the estate duty in the event of death?
How should the estate be distributed to the desired beneficiaries? For example, if a client is afraid that the beneficiary may fritter away the assets, the lawyer may give advise on the suitability of using instruments like trust and annuities.
What sort of powers should be allocated to the executor? For example, if the client's main asset is his business, the lawyer could advise the client about extending the executor's authority and allowing him to continue the business before selling it at a desired price, thus preventing the business assets from being forcefully sold at unattractive prices.
Who should be appointed as the children's guardian in the event of death of both parents?
How should the estate be managed by the executor in the event of the testator's death and pending distribution?

In using financial planning knowledge to advise the client, not only can the lawyer advise on whether the instructions of the client is legal, but also whether these instructions can achieve the client's needs and desires.

Bankruptcy matters

In bankruptcy matters, a client will be faced with severe financial and maybe legal constraints should he be adjudicated a bankrupt. The lawyer can assist the client in the legalities of the bankruptcy and if he has financial planning knowledge, such knowledge can be used to help the client assess the financial impact of the bankruptcy on him and his family so that he can make the most suitable decision under the circumstances.

Conclusion

As illustrated in this article, the financial planning knowledge acquired by the lawyer will help enhance the advice given to his client and provide the client with a more complete and comprehensive service. As Singaporeans are increasingly more sophisticated and knowledgeable, they have come to expect from their professional advisers a higher level of service. By augmenting their legal advice with financial planning knowledge, such expectations will be better met. This multi-disciplinary approach will help raise the profile of the lawyer and likely lead to increased business for his practice.

Lim Chung Wei
Financial Perspectives Pte Ltd