27 July, 2015

Do I need Financial Planning?

Most people face this dilemma – do I need a financial planner?. Lot of them tend to think that they do not make enough money to hire the services of a financial planner. People have this impression that financial planning is for the rich & well endowed. The other opinion that is widely prevalent is that financial planners are wildly expensive and hence are not affordable.
Though these are widely held opinions almost bordering on being articles of faith through constant reinforcement, we need to examine how much of these are true.
A much abused term
Image courtesy of Stuart Miles at FreeDigitalPhotos.net

There are myths & misconceptions surrounding financial planning. Many people today claim to do financial planning – insurance agents, distributors, banks – everyone!  So people have got this idea that if someone suggests a product that is suited for their goal, it is financial planning! That is at best proper need-satisfaction selling – a simplistic matching of needs to a product.
The problem with this is that any product can be twisted enough to make it appear suitable for a goal. For instance, a multitude of endowment plans maturing every year in retirement, is touted to be retirement planning! This is what lots of insurance agents have done.
Also Read: Saving alone is not enough; link it to your financial goals

The snag here is that the product is inefficient in that, the returns are low and the product has been somehow used to mimic a regular return product. In comparison to the premiums, the final payouts that come to the policy holder are low, when it could have been a lot better if more thought were given to retirement planning & how to achieve that goal optimally.
This is the problem with agents & distributors. They will coax & twist the product they have in their armory to suit any and every goal one may have.
To a person with a hammer, everything looks like a nail!
That brings us to the important question…
What is Financial Planning ?

Financial Planning is a process where the client goals are kept in focus & a blueprint is created after taking into account their current financial situations & various factors impacting them so that the salient goals are achieved in the time frames needed. This calls for analysis of the client situation, evaluation of alternatives, strategies needed to achieve desired outcomes and finally coming up with appropriate recommendations to put the plan in action.
In the financial planning process, products come at the end as recommendation – as a byproduct of all the planning & deliberations. Along with it will also be recommendations about what to do about loans, properties, liquidity & contingency to be maintained, risk mitigation through appropriate insurances and risk tolerance based asset allocation suggestions of where to invest. The focus here will be on efficient management of resources at the client’s disposal and optimize it based on the client’s specific needs. That means choosing the right vehicles for the right purposes, ensuring tax efficient investments, meshing the investments with the overall requirements on risk-return, tenure etc.
Financial planning is hence an ongoing engagement which starts with a plan and continues to engage clients & offers appropriate advice going forward.

Who is a financial planner/ advisor?

Customers have a problem in understanding who is a financial planner/ advisor. Most who just sell products hold out as planners and advisors which confuse customers.

There is a huge confusion in their minds as to who is an advisor and what to expect from them.

We have just seen what is financial planning. A person who provides that kind of service is a true financial planner. Some advisors may not get into this level of detail and may look at the person’s situation and offer advice after broadly understanding their needs. Customers may need to understand what they want and accordingly engage with an advisor/ planner.

What should I pay?

The fee to be paid will also vary accordingly. Overall, Financial Planners/ Advisors will help in ensuring that wrong decisions are not taken by the client and the decisions taken are aligned with the goals and future needs.  Also, they would help in optimizing the tax savings and money management itself. Mostly the fees to the planner/ advisor would be justified by the savings and efficiencies that one can derive from all these. And most importantly, there will be a blueprint to follow and there should be clarity & peace of mind.
Typically the fees will be a factor of the experience/ expertise of the planner, the amount of work that is involved, the depth of their plan / advice, their setup and their reputation. Still, one needs to take the call on who the planner will be. It will depend on what one is looking for.  Fee alone cannot be the criterion.

You go to the best surgeon for an operation – not the cheapest one. The same holds for financial advice.

Is Financial Planning the preserve of the rich?

Financial Planning is needed by everyone. It is more needed by those who are moderately endowed than the rich – for the margin of error in the latter is much smaller. Hence, financial planning is needed more by those on a tight leash than those who are rolling in money.

Whether one wants to do it oneself or would like to hire the services of a professional financial planner is left to their evaluation of their personal needs and what would suit them.

Rich need very different products…

This is a myth perpetrated by those in financial services to be able to distinguish themselves from other product sellers and at the same time sell products that are costly, though they offer no real differentiation. This is used to massage the egos of the rich by offering products that are suitable for “Wealthy” or HNIs only.
Most Portfolio Management Services ( PMS ) products are simply MF schemes in another form. Some are somewhat different, but the final payoff after all expenses & fees is not anything which other products cannot offer. Then there are structured products which offer a reward structure based on the happening of a future event or reaching or not reaching a target. They are simply speculative & are of not much real value to the investor. Looking at it another way, the same can very easily be achieved by a combination of simple equity & debt products, at lower expense.
The latest is Venture Capital ( VC ) funding options put before the rich. How many people understand the skyhigh risks in VC funding is an open question.
IA Regulations to regulate Advisors

To ensure good quality advice, Securities & Exchange Board of India ( SEBI ) has come out with an Investment Adviser Regulation 2013, where anyone professing to offer advice in the financial area should be registered with them.

IA Regulation enforces a higher level of standards, compliance, education & certification norms and avoidance of conflict of interest. Those registered as Investment Advisers ( RIA ) need to derive income only in the form of fees from their clients and not in the form of commissions/ incentives from product distribution. Hence RIAs are fee-only advisers, who also accept a fiduciary responsibility.

Fiduciaries are those who put their client’s interest above everything else, including their own. That is the guarantee to the customer that their interest will be served when they approach an adviser. Distributors follow the suitability standard.

Also look at –  
 http://goo.gl/fsgDEA to know about Fiduciary responsibilities.

So are all Advisers/ Planners registered as RIAs?

No. There are very few who have registered. The number across India after over two and half years is less than 300 !

So, most who profess to offer advice are not interested in submitting themselves to scrutiny and the compliances that this regulation calls for. Most do not want to be fee-only advisers. They want to distribute products and incidentally want to offer advice as well. This brings in conflict of interest, which is what the regulation seeks to avoid.
Hence, it is in the best interest of customers to seek out those who are RIAs for getting advice. After the advice, one can go to a distributor and purchase the products.

Is it necessary to always go to a financial planner/ adviser?

If one has the necessary knowledge, interest, skills & the time to understand one’s requirements and evaluate options, an advisor may not be necessary. There are people like this who can do it themselves. But they are not the majority.

For most people, it would be advisable that they approach a financial planner to seek correct advice. This is just like going to a lawyer, doctor or an architect to get appropriate advice in their area. When choosing an adviser exercise caution. See whether the adviser/ planner is a RIA with SEBI, their credentials, experience etc.

Half the battle is won, if you choose the right advisor. With someone posing a one, you’re sunk.

To know more about choosing the right advisor for you also go through this -   

In summary

Clarify for yourself what you need & then go about planning. Whether you choose a planner for the purpose or you do it yourself, it’s a matter of choice and requirement. But planning for the future, needs to be done anyway. That’s something you cannot do without!

The article was published in Linkedin on 25th July’15
Also Read-  Financial Planning simplified!

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