Financial Planning is not investment advisory

There are terms which are used synonymously – but they actually mean two different things. You might have heard of many. Sales & Marketing is one such pair. They are often used interchangeably. Sales is the art of persuading a client to buy a product or service. Whereas, Marketing is the sum-total of all activities from product conception, branding, retailing, communications and beyond, whose overall purpose is to ensure product sales. But these two areas are entirely different. There is another funny indian-ism which I have heard – I’m going to the bazaar for marketing! ( which is their way of saying that they are going to the market to buy stuff ).

A similar confusion surrounds Financial Planning & Investment Advisory. Financial Planning refers to drawing up a blueprint to achieve the goals one may have, through appropriate use of the finances at one’s disposal. Investment advisory however generally refers to understanding client requirements and advising appropriate products to invest in.

An Investment Advisor ( as per Investment Advisors Act 1940 of US SEC ) is a person or a group that makes investment recommendations or conducts securities analysis for a fee. This clearly establishes the limited nature of engagement in case of an investment advisor as compared to a Financial Planner.

A Financial Planner is like an Architect, in the sense that an FP draws up a blueprint of what needs to be done on various fronts like liquidity & cash management, goals feasibility & planning, Risk management, Long-term cashflow planning, estate planning… Investment advice comes at the end in a financial plan, after all aspects have been analysed. It is a by-product of comprehensive analysis of one’s situation. In that sense, the investment advice will simply flow out of the analysis done. For instance, if the risk assessment shows that Rs.1 Crore of insurance is required, then that will automatically come in the recommendation.
Also, unlike in the case of an investment advisor, a financial planner will also look at past investments and offer advice on these, to dovetail with their overall plan. In a nutshell, a Financial Planner looks at one’s finances holistically, in the light of all the goals/ finances overtime.

However, since almost everyone in the Financial Services space – from an insurance agent to a MF distributor to a stock broker – all use the term Financial Planning in a way that is convenient to them, there is lot of confusion in the minds of the public at large. A chemist cannot call himself a Doctor. Similarly, an agent/ distributor should not be allowed to call himself a Financial Planner. Such legislation is the need of the hour. However, SEBI through it’s Concept Paper on regulation of Investment Advisors is proposing to call an Investment Advisor anyone who is offering Financial Advice, Financial Planning Services or any action that would influence an investment decision. This is extremely curious as financial advice, financial planning & something that influences an investment decision are three different things and cannot be clubbed under the single head of Investment Advice. Financial Planning is not Investment Advisory, though it is a small part of the overall plan. An Investment Advisor indicates a far more limited role than what a Financial Planner performs. More confusion will result if this concept paper sees the light of the day.

Again, many use the appellation “Financial Planner” just because they have completed a Financial Planning course but continue to be an insurance agent. This again confuses the normal investor as they see a person who is an agent use the tag - Financial Planner.

The need of the hour is hence for the investing public to know, who is a Financial Planner, who is an agent and who is a Investment Advisor. Only then they would know as to whom to contact for what. Simply calling a whole lot of people investment advisors would only confuse issues for the public and result in them approaching the wrong kind of advisors, which is precisely what SEBI may want to avoid.
A simple rule applies as always for you – Keep your eyes and ears open. Understand what a particular person can do for you irrespective of what they call themselves. Check out past work they have done; talk to a few references; check whether they have appropriate qualifications, standing & experience in the field. Finally find out what they are charging and evaluate for yourself if that offers a good value proposition or not.

There is just no alternative for keeping one’s one’s eyes open and ears to the ground. A healthy dose of common sense additionally helps!