A STUDY OF PERSONAL FINANCIAL PLANNING PRACTISED BY ACCOUNTANTS IN KUCHING

Transcription

1 A STUDY OF PERSONAL FINANCIAL PLANNING PRACTISED BY ACCOUNTANTS IN KUCHING BUREAU OF RESEARCH AND CONSULTANCY UNIVERSITI TEKNOLOGI MARA SHAH ALAM, SELANGOR MALAYSIA PREPARED BY: DR. FATIMAH BUJANG KUEH CHIOK CHOO CHONG FEN NEE SEPTEMBER 2003

2 Date: 30 th September, 2003 Project File No: UiTMKS(UPP.5/2/26/SKK) The Head Bureau of Research and Consultancy (BRC) Universiti Teknologi MARA Shah Alam Dear Professor FINAL RESEARCH REPORT "A STUDY OF PERSONAL FINANCIAL PLANNING PRACTISED BY ACCOUNTANTS IN KUCHING" With reference to the above, enclosed are three copies of the Final Research Report entitled "A STUDY OF PERSONAL FINANCIAL PLANNING PRACTISED BY ACCOUNTANTS IN KUCHING" by three researchers from UiTM Cawangan Sarawak, Kota Samarahan. Thank you. Yours faithfully Prof. Madya Dr. Fatimah Bujang Leader Research Project ii

3 RESEARCH GROUP DR FATIMAH BUJANG Project Leader KUEH CHIOK CHOO Team Member CHONG FEN NEE Team Member iii

4 ACKNOWLEDGEMENT We would like to convey our sincere appreciation and thanks to those who had assisted directly and indirectly in the successful completion of this research project. Among them are: Associate Prof. Dr. Abdul Rahman Deen Pengarah UiTM Cawangan Sarawak, Puan Amrizah Hj. Kamaluddin, Coordinator of Unit Research and Consultancy, UiTM Cawangan Sarawak, Malaysian Institute of Accountant, Kuching, All the registered accountants who had kindly participated and provided the information required for the completion of this study And last but not least, Our colleagues, friends and families who had contributed in one way or another to this study. iv

5 CONTENTS Title Page Letter of Submission Research Group Acknowledgement Table of Contents List of Tables List of Charts Abstract TABLE OF CONTENTS PAGE ii Hi iv v - viii ix x-xii xiii CHAPTER 1 - INTRODUCTION 1.0 Background of the Study Problem Statement 2 Objectives 3 Significance of the Study Methodology Scope of the study and sampling Data Collection Processing of Data Limitation of Study Report Organisation Definition of Terms and Concepts Used 9 CHAPTER 2 - REVIEW OF LITERATURE 2.0 Financial Planning Process Importance of Financial Planning Studies and Surveys done on Financial Planning Financial Planning and the Rich Common Mistakes Made in Financial Planning Financial Planning and Age Awareness and Attitudes towards Financial Planning. 24 v

6 2.2.5 Retirement Age Children's Education and Provision of Funds Savings Habits Financial Planning Literacy 26 CHAPTER 3 - PROFILES OF RESPONDENTS 3.1 Age Race Gender Marital Status Number of Children Below 18 years old Current Employment Highest Education Attained Educational Institution Membership Working Experience Average Monthly Income 33 CHAPTER 4 - PERSONAL FINANCIAL GOALS 4.1 Short-Term Financial Goals Medium-Term Financial Goals Long-Term Financial Goals Summary and Discussions of Major Findings Ranking of Short, Medium and Long-Term Financial Goals 41 Importance of Short, Medium and Long-Term Financial Goals by Age Groups 44 CHAPTER 5 - RISK ANALYSIS 5.1 Risk Appetite 49 vi

7 CHAPTER 6 - PRACTICE OF PERSONAL FINANCIAL PLANNING 6.1 Self Evaluation - Cash Flow Statements and Net Worth statements Debt Management Credit Cards Priority Expenditures Insurance Planning 64 CHAPTER 7 - PERSONAL FINANCIAL PLANNING PRACTICE ON EDUCATION, RETIREMENT PLANNING AND REAL ESTATE DISTRIBUTION 7.1 Education Planning Respondents Educational Plan Educational Funds Options Best time to start an Education Plan Retirement Planning Best Age To Start Retirement Plan Retirement Plan By Age Groups Will Or Real Estate Distribution Real Estate Plan Reasons for not having a will 79 Preferred Age to have a will written 80 CHAPTER 8 - PERSONAL FINANCIAL PLANNING DECISIONS 8.1 Sources of Advice on Personal Financial Planning Major Decision Maker on Household Financial Matters The Effect of Personal Financial Planning on Wealth Accumulation Sources of Information regarding Personal Financial Planning 84 vii

8 8.5 Main Focus in Personal Financial Planning Definition of Personal Financial Planning 87 CHAPTER 9 - CONCLUSION AND RECOMMENDATIONS 9.0 Concluding Remarks Recommendation Risk Attitude Self Assessment Protection Education, Retirement and Real Estate Distribution Planning Personal Financial Planning Decision 91 REFERENCES 92 APPENDIX A viii

9 LIST OF TABLES PAGE Table : Major Findings on the importance of Short-term Financial Goals Table : Major Findings on the importance of Medium-term Financial Goals 42 Table : Major Findings on the importance of Long-term Financial Goals Table : Most Important Short-term Financial Goals by Age Groups 45 Table : Most Important Medium-term Financial Goals by Age Groups 46 Table : Most Important Long-term Financial Goals by Age Groups 47 Table 5.1.1: Respondents' investment preferences 55 Table 6.3.1: Gender and types of Policies Held 66 Table 6.3.2: Marital Status and Insurance Held 68 Table : Percentage of Respondents With or Without Education Fund 70 Table : Best Time to Start an Education Plan 72 Table : Types of Retirement Plans Chosen 75 Table : Most Popular Retirement Plan Other Than EPF/Pension Against Age Groups 76 Table 7.3.1: Will/Real Estate Plan 78 Table : Reasons for Not Having a Will 79 Table : Age Preferred to Have a Will Written 80 Table 8.4.1: Sources of Information Regarding Personal Financial Planning 84 Table 8.4.2: Sources Of Information Regarding Personal Financial Planning Against Age Groups 85 ix

10 LIST OF CHARTS PAGE Chart 3.1: Respondents' Age 27 Chart 3.2: Race 28 Chart 3.3: Gender 28 Chart 3.4: Marital Status 29 Chart 3.5: Number of Kids Below 18 years 29 Chart 3.6: Current Employment 30 Chart 3.7: Education Attained 31 Chart 3.9: Membership 31 Chart 3.10: Working Experience 32 Chart 3.11: Average Monthly Income 33 Chart 4.1.1: Short-term Financial Goals - Minimize Tax Burden 35 Chart 4.1.2: Short-term Financial Goals - Reduce Debt 35 Chart 4.1.3: Short-term Financial Goals - Start Emergency Buffer 36 Chart 4.1.4: Short-term Financial Goals - Invest in Stock Market 36 Chart 4.2.1: Medium-term Financial Goals - Buy Cars, House and Other Items Chart 4.2.2: Medium-term Financial Goals - Protect Against Risk of Life, Property And Personal Liability 37 Chart 4.2.3: Medium-term Financial Goals - Increase Insurance Coverage 38 Chart 4.2.4: Medium-term Financial Goals - Expand own business 38 Chart 4.3.1: Long-term Financial Goals - Education Fund for Children 39 Chart 4.3.2: Long-term Financial Goals - Retirement Fund 39

11 Chart 4.3.3: Long-term Financial Goals - Distribution of Estate to Heirs 40 Chart 5.1.1: The Importance of Luck In Investing 50 Chart 5.1.2: Respondents' Reaction if Share Price Rise 40% 51 Chart 5.1.3: Respondents' Risk Attitude 52 Chart 5.1.4: Respondents' Reaction of Losing Investment 52 Chart 5.1.5: Respondents' Response on Margin Trading 53 Chart 5.1.6: Risk Attitude and Age 54 Chart 5.1.8: Levels of Risk Tolerance 56 Chart 6.1.1: The Availability of Net Worth Statement 59 Chart 6.1.2: The Availability of Cash flow Statement 59 Chart 6.1.3: Frequency on Review of Cash flow Statement 60 Chart 6.2.1: Number of Credit Card held by Respondents 61 Chart 6.2.2: Number of Credit Cards held according to Gender 62 Chart 6.2.3: Priority on Application of Credit Cards 63 Chart : The Priority of Expenditure 64 Chart 6.3.1: Life Insurance Policy held by Respondents 65 Chart : Respondents' Educational Plan 70 Chart : Educational Funds Options 71 Chart : Best age to start Retirement Plan 75 Chart : Reasons for not having a Will 79 Chart 8.1.1: Sources of Advice on Financial Planning 82 Chart 8.2.1: Major Decision Maker on Household Financial Matters 82 xi

12 Chart 8.3.1: Effect of Personal Financial Planning on Wealth Accumulation 83 Chart 8.5.1: Main Focus in Personal Financial Planning 86 Chart 8.6.1: Definition of Personal Financial Planning 87 xii

13 ABSTRACT The purpose of this study was to gauge the practice of personal financial planning amongst accountants in Kuching. A big majority of the accountants set their financial goals based on short, medium and long-term goals and prioritized them accordingly. 43% of the accountants' households indicated that the husbands were the primary financial advisors. For each aspect of personal financial planning, the ranking of importance were as follows: retirement planning, debt management, education planning, purchase or renovation of house, emergency buffer, insurance and lastly vacation. It was also found that accountants in Kuching were generally very cautious and extremely risk adverse in their personal financial planning practices. xiii

14 CHAPTER 1: INTRODUCTION 1.0 BACKGROUND OF THE STUDY It is surprising how many of us actually take pains to plan for our holidays, wedding, but in terms of our long-term financial well being, we rarely give a thought about planning for it. Why? Is it due to laziness, ignorance or other factors that we do not plan for such an important decision of our life that has an impact on our finances, health, wealth and anything that requires money? In the financial industry today, we could have in one way or another being approached by people selling financial products calling themselves financial planners. They are actually sales personnel selling insurance, unit trusts or banking products. With the rapid development of financial market under the Financial Master plan, and also development of Financial Planning in Malaysia, there will be more certified financial planners in the market. At present, there are no guidelines and regulations on Independent Financial Advisors (IFA). There is no regulation from Bank Negara Malaysia or Securities Commission to regulate those people providing holistic financial planning advice. Professional or trade associations like the Financial Planning Association of Malaysia (FPAM) and International Association of Registered Financial Consultants (IARFC) close the gap by ensuring that the so- called financial planners are adequately trained and certified. In Malaysia, financial planning is 30 years behind the United States but it is clearly taking root from being a buzzword to a full-fledged profession. There are 1

15 currently some 900 individuals with the various financial planning qualifications in Malaysia. Demand for the industry is yet to really take off. According to Malaysia's Securities Commission, it took the financial planners in the United States 10 years to change the perception of the general public towards financial planning. Working individuals would do some form of financial planning. Some disciplined working individuals would work hard, spend less than they earn and invest some money. Others would live by the day and month characterized by hand-to-mouth living, where a week's delay in the monthly paycheck would be catastrophic! Whether you fall into the first or second category, there is a need for financial planning in order to optimize and align your cash flows and future goals. Even for those who have already achieved their goals, some financial planning as a result of a dynamic and fast changing environment still require in order to adjust and close the gaps. 1.1 PROBLEM STATEMENT In the United States, the importance of financial planning was spurred by the September 11th incident. The message of uncertainty in life has reached a lot of Americans. The recent outbreak of Severe Acute Respiratory Syndrome and the Iraq War had also driven home the same message to us. Are we prepared if we succumb to the virus? Will our family have sufficient funds? Who is going to take care of our children's education? If we are financially prepared, have we prepared a will to ensure that the wealth will be distributed according to our 2

16 wishes? If the family is quarantined, do you have an emergency reserve? There are a lot of unanswered questions. If we are unable to answer these questions, it implies that we either do not have any personal financial planning or have omitted certain process in the planning. Literature has revealed that a lot of people out there are financially illiterate. In a Consumer Survey done in the United States in 2002, it was found that only 28% of those between ages years had written a financial plan, 37% of ages years had financial plans and 52% of those between ages had one. (FPAM, 2002) In Malaysia a 2002 survey by University Malaya and Citibank Malaysia Bhd found that only about 50% out of their 600 respondents from the Klang Valley understood financial planning. No statistics are available to indicate whether Malaysians really practise or to what extent they practise Personal Financial Planning. Do they use the services of Financial Planners or do they use a Do-It-Yourself way? It appears that the immediate issue is low literacy on the subject and therefore Financial Planning Association Malaysia has a big task ahead of them in educating the public on the subject. 1.2 OBJECTIVES This study was conceptualized to achieve the following aims: i. To find out whether accountants in Kuching set short, medium and long-term financial goals. And if they do, how do they prioritise them? ii. To establish who the primary financial advisor is in the households,

17 iii. To find out the level of importance placed by the respondents on every aspect of personal financial planning wealth creation, wealth protection, wealth distribution, education planning and retirement planning, iv. To ascertain whether accountants in Kuching are generally risk averse or risk takers. 1.3 SIGNIFICANCE OF THE STUDY This is one of the first few studies of its kind in Malaysia. Therefore the information and data generated could prove to be useful for future researchers. Secondly, accountants will be more aware of the importance of financial planning after this survey because practicing financial planning helps them to achieve their personal goals and be financially independent. Thirdly, the results of the study, hopefully, will be useful to financial planners. Financial planners from the various industries such as insurance, unit trust and financial institutions can develop specific strategies to target this particular segment of individuals in the society. Lastly, this study may be a source of information to undergraduates and graduating students who have interests in pursuing a career as a financial planner. 4

18 1.4 METHODOLOGY OF STUDY Scope of the Study and Sampling Financial Planning is fast becoming a full-fledged profession in Malaysia. Can one choose to 'do it yourself' in financial planning or does one refer to the professional financial planner? Do professionals like the accountants practise 'do it yourself' personal financial planning? In the eyes of the public, accountants are more knowledgeable in matters related to finance. However, do they put their knowledge into practice? Literature has indicated that professionals are the people who know the least about their own financial position/standing and to a certain extent, the holistic picture on personal finances. As there is no known study on the practice of financial planning amongst professionals, this research is therefore conceptualized to use accountants, who are professionals, as the target group. The respondents of this study comprised of registered accountants who are serving in both the public and private sectors. Respondents are quite widely spread coming from the government sector, statutory bodies, private and public listed companies. Malaysian Institute of Accountants (MIA) Kuching Branch has about 500 registered members. We used this number as our sampling frame. Respondents were selected on a random basis. Out of 400 sets of questionnaires handed out, a total of 213 accountants responded to our questionnaire. 5

19 1.4.2 Data Collection A Questionnaire (Appendix A) was developed to elicit relevant data for analysis. Part A of the questionnaire contains profiles of respondents that were subsequently used to analyze together with other variables in parts B and C of the questionnaires. Part B of the questionnaire is on 'Personal Financial Goals'. The information from this section helped us to find out the level of importance placed by the respondents on each aspect of financial planning with regard to their short, medium and long term goals to be achieved. Part C of the questionnaire is 'Practice of Personal Financial Planning'. In this section, we hope to establish how the accountants in Kuching practiced personal financial planning and their risk appetite with regard to practice of financial planning. In this section, we also establish the primary financial advisor in the accountants' households. A preliminary pilot test was conducted in which 10 sets of questionnaire were distributed to respondents in the field. The responses were used to further improve on our questionnaire so that it could elicit the information needed for our study. Following the pilot test, our team kicked off the fieldwork in November The fieldwork took 4 months to complete. A total of 213 responses were received which accounted for 42% of our respondents. 6

20 1.4.3 Processing of Data SPSS software was used to process and interpret the data collected. Both descriptive and inferential statistics were used to analyse the data collected. Frequency and cross tabulation were used in analysing the data. 1.5 LIMITATION OF STUDY In order to elicit frank and honest responses, respondents were assured of their anonymity. However, it is not certain whether the responses given were unbiased and reliable. Out of the total number of 500 accountants in our sampling frame, a number of them are either working outstation/overseas or not residing in Kuching. There is only one respondent in the age group of 55 years and above. As a result, the analysis and the findings relating to this age group are not conclusive. In addition, there is limited literature review on practice of personal financial planning in the Malaysian setting. As a result, it is difficult to identify a benchmark for comparison purposes. 7

21 1.6 REPORT ORGANISATION This report is organized into nine chapters. Following the introductory chapter is the chapter on theoretical framework and literature review. The contents under literature review include financial planning process, increasing importance of Financial Planning, Financial Planning Goals, and lastly, Past studies and Surveys Done on Financial Planning. An analysis of the profiles of the respondents is presented in Chapter 3. Chapter 4 highlights the findings on the practice by accountants in terms of setting personal financial goals and their prioritization of the goals. Chapter 5 covers the findings on the risk tolerance and attitudes of accountants in Kuching. Chapter 6 provides the analysis and findings on the practice of financial planning, whether accountants have cash flow and net worth statements, debt planning, insurance planning, investment planning. Chapter 7 highlights the remaining areas on the practice aspect with regard to education planning, retirement planning and real estate planning. Chapter 8 covers the findings on the financial planning decisions of accountants and their households. Lastly, conclusions and recommendations are presented in Chapter 9. 8

22 1.7 DEFINITION OF TERMS AND CONCEPTS USED Accountants - professionals registered with the Malaysian Institute of Accountant, Kuching branch. Education Planning - savings to finance children's education for college/university. Financial Planning - is a professional service to individuals, their families and their businesses, to provide impartial assistance in analysing and organising personal financial affairs in order to achieve financial and lifestyle goals. Life goals can include buying a house, savings for children's education and savings for retirement. Financial Planner a person who uses the Financial Planning process to help individuals work out a plan to meet their life goals. Practice - action not ideas Primary Financial Advisor key person deciding on financial matters for the household. Retirement Planning - savings to ensure that the individual can live with continued wealth despite not having an income. 9

23 Risk Adverse - conservative in one's approach to investment, avoid taking risks. Risk Taker - willingness to take risks commensurate with returns, aggressive in their investment approach. Wealth Creation - wealth accumulation e.g. savings, investments with the purpose of children's education and retirement purpose Wealth Protection - buying insurance to protect assets, disability and liability Wealth Distribution - writing a will by appointing a guardian for one's children in the event both parents die. 10

24 CHAPTER 2: REVIEW OF LITERATURE 2.0 FINANCIAL PLANNING PROCESS Financial planning is basically a process of organising one's income, expenditure, investment, insurance, savings and other money related issues in order to achieve one's life goals. These goals can be short, medium and long term. It focuses planning in four major aspects wealth creation, wealth accumulation, wealth protection and wealth distribution. It is the process of achieving financial independence through reviewing one's financial needs. Basically the financial planning process is a structured approach to planning one's financial needs. It is like a journey. Before one starts the journey, one must know where one is now and where one wants to go. Then one will plan the route and start the journey. The 5-step-trip of personal financial planning involves taking stock of one's current financial resources, setting one's financial goals, developing financial plans, implementing the financial plans, and reviewing financial progress (Fong W.M. & Koh S. K.2001). Five steps are involved in the process of Financial Planning: Step 1. Taking Stock of Current Net Worth Knowing the financial resources one has enables one to do two things: i) to set goals that are realistic ii) to use as a benchmark to assess one's financial progress. Taking stock of current net worth, one needs to refer to one's personal balance sheet and income and expenditure statement. Personal balance sheet records 11