Analysing & Evaluating a Client's Financial Status
Concept
Analysis turns raw fact-find data into a diagnosis — the client's current financial health and the gaps between where they are and where they want to be. This diagnosis drives the recommendation: you measure first, then prescribe. The core tools are cash flow, net worth, needs-based gap analysis and a handful of financial ratios.
Key rules & facts
- Cash flow statement: income vs expenses over a period → a surplus (money to save/invest) or a deficit (must be fixed before any investing).
- Net worth statement: assets − liabilities at a point in time; a positive and growing net worth signals progress.
- Protection gap: total needs on death/disability/critical illness (dependants' living costs, outstanding debts, final expenses, goals like children's education) minus existing cover plus liquid assets — quantified by needs-based analysis.
- Retirement gap: projected retirement income (CPF LIFE, savings, investments) vs the income the client will actually need in retirement.
- Priority order: build an emergency fund and close the protection gap before committing to discretionary/growth investing.
Key data — core ratios
| Ratio | Formula | Typical benchmark |
|---|---|---|
| Liquidity ratio | Liquid assets ÷ monthly expenses | ~3–6 months of expenses (verify) |
| Savings ratio | Savings ÷ gross income | Higher is better (verify: ~10%+ often cited) |
| Debt-servicing ratio | Total monthly debt repayments ÷ gross monthly income | Lower is better (verify: ≤ ~35%) |
| Debt-to-asset ratio | Total liabilities ÷ total assets | Lower is better (verify) |
| Net worth | Total assets − total liabilities | Positive and growing |
Cash flow vs net worth (don't confuse them)
| Cash flow | Net worth | |
|---|---|---|
| Measures | Flow over a period | Stock at a point in time |
| Formula | Income − expenses | Assets − liabilities |
| Good result | Surplus | Positive/growing |
| Tells you | Can the client save? | Has the client accumulated wealth? |
Worked example
A client has $18,000 in liquid savings and monthly expenses of $3,000. Liquidity ratio = 18,000 ÷ 3,000 = 6 months — comfortably within the ~3–6 month guideline (verify), so an emergency fund is in place and the adviser can move on to protection and investment needs.
Exam angle
Given figures, compute or interpret a ratio, identify a protection or retirement gap, or decide which need comes first.
⚠ The trap
Confusing net worth (assets − liabilities) with cash flow (income − expenses); or recommending investments while an emergency fund or protection gap is still unaddressed.
Takeaway
Diagnose before you prescribe — measure cash flow, net worth and the protection/retirement gaps, and fix liquidity and protection before growth.
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