A STUDY OF PERSONAL FINANCIAL PLANNING PRACTISED BY ACCOUNTANTS IN KUCHING

BUREAU OF RESEARCH AND CONSULTANCY UNIVERSITI TEKNOLOGI MARA 40450 SHAH ALAM, SELANGOR

MALAYSIA

PREPARED BY: DR. FATIMAH BUJANG

KUEH CHIOK CHOO CHONG FEN NEE

SEPTEMBER 2003

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Date: 30th September, 2003 Project File No: 600 - UiTMKS(UPP.5/2/26/SKK)

The Head Bureau of Research and Consultancy (BRC) Universiti Teknologi MARA 40450 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

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RESEARCH GROUP

DR FATIMAH BUJANG Project Leader

KUEH CHIOK CHOO Team Member

CHONG FEN NEE Team Member

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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.

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TABLE OF CONTENTS CONTENTS PAGE

Title Page Letter of Submission ii Research Group Hi Acknowledgement iv Table of Contents v - viii List of Tables ix List of Charts x-xii Abstract xiii

CHAPTER 1 - INTRODUCTION

1.0 Background of the Study 1

1.1 Problem Statement 2

Objectives 3

Significance of the Study 4

1.2 Methodology

1.4.1 Scope of the study and sampling 5

1.4.2 Data Collection 6

1.4.3 Processing of Data 7

1.5 Limitation of Study 7

1.6 Report Organisation 8

1.7 Definition of Terms and Concepts Used 9

CHAPTER 2 - REVIEW OF LITERATURE

2.0 Financial Planning Process 11

2.1 Importance of Financial Planning 20

2.2 Studies and Surveys done on Financial Planning

2.2.1 Financial Planning and the Rich 22

2.2.2 Common Mistakes Made in Financial Planning 22

2.2.3 Financial Planning and Age 23

2.2.4 Awareness and Attitudes towards Financial Planning. 24

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2.2.5 Retirement Age 25

2.2.6 Children's Education and Provision of Funds 25

2.2.7 Savings Habits 25

2.2.8 Financial Planning Literacy 26

CHAPTER 3 - PROFILES OF RESPONDENTS

3.1 Age 27

3.2 Race 27

3.3 Gender 28

3.4 Marital Status 29

3.5 Number of Children Below 18 years old 29

3.6 Current Employment 30

3.7 Highest Education Attained 30

3.8 Educational Institution 31

3.9 Membership 32

3.10 Working Experience 32

3.11 Average Monthly Income 33

CHAPTER 4 - PERSONAL FINANCIAL GOALS

4.1 Short-Term Financial Goals 34

4.2 Medium-Term Financial Goals 37

4.3 Long-Term Financial Goals 39

4.4 Summary and Discussions of Major Findings

4.4.1 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

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CHAPTER 6 - PRACTICE OF PERSONAL FINANCIAL PLANNING

6.1 Self Evaluation - Cash Flow Statements and Net Worth statements 58

6.2 Debt Management 60

6.2.1 Credit Cards 61

6.2.2 Priority Expenditures 64

6.3 Insurance Planning 64

CHAPTER 7 - PERSONAL FINANCIAL PLANNING PRACTICE ON EDUCATION, RETIREMENT PLANNING AND REAL ESTATE DISTRIBUTION

7.1 Education Planning 69

7.1.1 Respondents Educational Plan 70

7.1.2 Educational Funds Options 71

7.1.3 Best time to start an Education Plan 72

7.2 Retirement Planning 73

7.2.1 Best Age To Start Retirement Plan 74

7.2.2 Retirement Plan By Age Groups 76

7.3 Will Or Real Estate Distribution 77

7.3.1 Real Estate Plan 77

7.3.2 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 81

8.2 Major Decision Maker on Household Financial Matters 82

8.3 The Effect of Personal Financial Planning on Wealth Accumulation 83

8.4 Sources of Information regarding Personal Financial Planning 84

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8.5 Main Focus in Personal Financial Planning 86

8.6 Definition of Personal Financial Planning 87

CHAPTER 9 - CONCLUSION AND RECOMMENDATIONS

9.0 Concluding Remarks 89

9.1 Recommendation

9.1.1 Risk Attitude 90

9.1.2 Self Assessment 90

9.1.3 Protection 90

9.1.4 Education, Retirement and Real Estate Distribution Planning 91

9.1.5 Personal Financial Planning Decision 91

REFERENCES 92

APPENDIX A

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LIST OF TABLES PAGE

Table 4.4.1.1: Major Findings on the importance of Short-term Financial Goals... 41

Table 4.4.1.2: Major Findings on the importance of Medium-term Financial

Goals 42

Table 4.4.1.3: Major Findings on the importance of Long-term Financial Goals... 43

Table 4.4.2.1: Most Important Short-term Financial Goals by Age Groups 45

Table 4.4.2.2: Most Important Medium-term Financial Goals by Age Groups 46

Table 4.4.2.3: 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 7.1.1.1: Percentage of Respondents With or Without Education Fund 70

Table 7.1.3.1: Best Time to Start an Education Plan 72

Table 7.2.1.1: Types of Retirement Plans Chosen 75

Table 7.2.2.1: Most Popular Retirement Plan Other Than EPF/Pension Against

Age Groups 76

Table 7.3.1: Will/Real Estate Plan 78

Table 7.3.2.1: Reasons for Not Having a Will 79

Table 7.3.3.1: 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

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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.... 37

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

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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 6.2.2.1: The Priority of Expenditure 64

Chart 6.3.1: Life Insurance Policy held by Respondents 65

Chart 7.1.1.1: Respondents' Educational Plan 70

Chart 7.1.2.1: Educational Funds Options 71

Chart 7.2.1.1: Best age to start Retirement Plan 75

Chart 7.3.2.1: 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

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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

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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.

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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

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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

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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 20 - 39 years had written a financial plan, 37% of ages 40 -

54 years had financial plans and 52% of those between ages 55 - 69 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,

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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.

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1.4 METHODOLOGY OF STUDY

1.4.1 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.

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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 2002.

The fieldwork took 4 months to complete. A total of 213 responses were received

which accounted for 42% of our respondents.

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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.

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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.

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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.

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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.

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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

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