29 July, 2011

How to determine the proper fee for a financial plan?

Let me start with a question… What would you say if you are offered a car for Rs.4 Lakhs? You would obviously want to know which car it is, whether it is new/ used, what are the features etc. and then you would use your judgement to conclude if the car is indeed worth the buy. What you have done just now is to evaluate the value embedded in the offer and then find out if indeed the asking price is at least equal to or higher than the value offered, in which case you will buy the car. Else, you will not.

In fact, this is precisely what we do before any decision.

If you get a novel at Rs.99/- it is seen as good value and you would buy it. If the same novel is Rs.750/-, you probably won’t buy. A movie ticket in a multiplex at Rs.100/-is seen as a value proposition, whereas you may not want to pay the same amount for a ticket in your neighbourhood theatre.

McDonalds is doing brisk business with their burgers priced at Rs.25/- and is seen as a value for money offering, whereas the vada pav which is also a burger, is available at Rs.7 at roadside stalls and at Rs.10 at Jumboking. All of them are seen as good value for money by different people and hence they all have a loyal clientele.

The thing to understand from this is the value proposition. For anyone, the cost alone is never the main or the only criteria. The value proposition comes from the entire set of benefits offered, not just price. Now, that is easy if there is a frame of reference. You could determine that Okra at Rs.30 a kilogram today is cheap, because it had been selling between Rs.40 – 60 a kilogram, for the past several months. A multiplex ticket at Rs.100 is seen as pretty good value, as it normally costs between Rs.175 to Rs.250 per ticket. Saw that?

Financial Planning is a new area. There is nothing to benchmark this with. So, how does one figure what is the right fee to pay?

Look at what you want. You probably want to hire a financial planner to get a blueprint for your life ahead and want to know as to how to achieve your goals. For creating a tailormade financial plan, our experience is that it takes 25-30 manhours, in all. Taking an average of Rs.500/-per hour for hiring the services of a qualified financial planner like a CFP(CM) certificant, the fee comes to Rs.12,500/- to Rs.15,000/-. But the per hour rate can be higher or lower depending on the process followed, experience & expertise of the planner etc. That’s about how planners arrive at their fee.

Now, is that value for money? For that you need to find out what benefits would derive by engaging them. The financial plan will give you clarity, direction & pathway to achieve your goals. That is important as you will know where you are, where you need to go and how to get there. The financial planner will also suggest if past investments and insurances are good to keep or are damaged goods and needs a rejig.

A good financial planner will also help a great deal in cash management – matching the right instrument for the end-use & tenure. We have found that the amount of extra money we could make for our clients by judicious investments, would more than pay our fees! Add to that, the fact that the Financial Planner would be the touchstone on anything to do with your finances – ensuring that you will not blunder while allocating between asset classes or the choice of products… you will also not be sweet talked into some card-castle-of-a-product, which makes sense only to the company & their agent.

You got the drift… there are various advantages you could derive from a financial planner. Find out from the planner, about the various services you can get. Find out how much money the planner can save/ make for you. Add to that the fact that you will have a clear blueprint which ensures peace of mind as you have an expert to guide you on finances all through the year.

The planner would also stanch leakages by stopping / reallocating resources into appropriate products, which improves returns and relevance. Find out how comprehensive the plan is… for the financial plan from different planners could be really different. Do a quick check about the integrity & dependability of the planner. Ask for references, if you feel the need for it.

Fees differ based on the experience & expertise of the planner, reputation, their processes, services offered, people strength ( is it a single person or is it a team ) etc. Now, after understanding the value offered, you can decide if the fee is appropriate. Now you can decide whose offering is good for you.

Authored by Suresh Sadagopan : Published in The Economic Times on 28/7/2011

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