Is Financial planning only for the rich?

I don’t have money, what planning can I do? This is a common refrain I get to hear. These same people often tell me that financial planning is for the rich, the fat cats. Let us examine.

A person has low or no savings :  Every single individual has goals and aspirations irrespective of whether they have money in the bank or, are living from paycheck to paycheck.  How are they going to meet their goals? Not by continually saying that they don’t have money. They may require help, if they have been here long. They don’t have money probably because they accord more priority to living well today, than saving for tomorrow.  Then, there is frustration awaiting them in future. Correcting this is critical, as only that will result in putting aside something to meet the goals.

No margin for errors :  People with comparatively low incomes do not have a margin for error. If they get their investments/ insurance wrong, it would have a significant negative effect on them. A wrong  insurance policy, especially can bog one down for years, sucking up liquidity & locking them in an unsuitable product.  Also, traditional insurance products offer typically between 4-7% tax-free returns. ULIP returns can vary. But, in case of ULIPs, since the premium is going into the same funds or set of funds, there is a concentration risk. Any error on investments/ insurance made especially by a low income earner, would be far more detrimental as compared to another, who is a high income earner.

The rich get richer due to better investments :  The well-endowed choose their investments well. They get their asset allocation right. They invest in a manner that they earn better returns on their funds. For instance, even funds that may be needed anytime can be kept in a liquid fund, instead of in the Savings Bank account.   Liquid fund offers better gross returns and better tax treatment, leading to better post-tax returns. Similarly, FDs may not be the best product in fixed income. A better product would be a FMP or a debt fund, in terms of post-tax returns.  The rich have advisors who would take care of this. Others have to get it right themselves or take professional help. Quite some money can be earned if invested in the right avenues.

Can you achieve this goal?   Almost everyone, irrespective of their income level, have this question. Will I be able to buy a home in 3 years? Will I be able to educate my son/ daughter till post-graduation? Will I have sufficient money when I retire? Proceeding with life without knowing this is dangerous, for you know not, where it is leading you.  But to understand this you may require to do your math. Hence, this is needed irrespective of income level. Whether you are going to do it yourself or you will be taking professional help is the question.

Prioritisation of goals & right sizing them :   Ideally, we all want to achieve all goals. Sometimes, that may not be possible. We will need to prioritise and keep goals that are really important and scale down or eliminate other goals.  For example, it may be that education of children & retirement funding goals are possible, but not buying a bigger home. This, we will come to know, if we do the calculations. Getting this right is important so that the client knows fully well, what he is saving for and has no unrealistic expectations. Some of the goals may not be dropped, but will have to be scaled down, or pushed back.  To what extent these have to be done, needs to be seen.

Implementation & Management :  Once decisions have been taken about what needs to be done, they need to be done. Financial Planning is only the beginning. Only if it is implemented, it would yield results. Lots of people do not implement or end up implementing partially. This produces less than desirable results. After implementation, people forget all about it.  Periodic reviews are not done. Sometimes, the proceeds of past investments themselves are not claimed. Reinvestment of the proceeds is not done in reasonable time. And for everything, they just rely on what their friends/ colleagues tell them.  All these would mean that one would get poorer results than what could have been.

It is important to take finances seriously. If one is unable to do it, one should engage someone who can do it for them. It is a fallacy to think that professional financial planning services can be afforded by the rich. If one were to total up all the potential losses and the cost of wrong decisions, the fee would be paid for. Plus, one gets the assurance & peaceof mind that a well-crafted plan brings in.

It is nothing to do with being rich or poor. It all boils down to how seriously one takes one’s own future.

Author : Suresh Sadagopan, Ladder7 Financial Advisories ; Published in Moneycontrol. com on 9/8/2012

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!

Article by Suresh Sadagopan, Ladder7 Financial Advisories

Tenets for Financial Solvency & Wellness

Who would not want a comfortable life? We all aspire for it. But some of us are able to make things happen. Others, inspite of being good income earners, falter along the way and end up with sub-optimal results. Such people often wonder about those “others” who have almost magically stolen a march over them, even though they stood no chance to start with.

Parth was one such person. His good friend Amar, who was not exactly a high flier, had ended up with an enviable corpus at the portals of retirement. Parth just did not get it. Amar did not seem to have done anything spectacular and yet this ugly duckling had transformed into a swan.

Parth wanted to know the secret and Amar was willing to oblige. Amar shared with Parth,

  five tenets he followed for financial solvency and wellness. Here they are –

Invest first, then spend – Amar had been doing this almost from the start of his career. He had always earmarked a portion of his income for investment. Initially since the income was low, it was 10%. Later on, he had increased it to 15% and then 20%. He had accelerated to 30, then 35 and eventually 40%. He did not leave this investment to chance. He put that money aside first and only then spent the rest. That way there was no guilt feeling when he spent and there was no compromise about his future.

Discipline in investments – While putting aside some money every month is important, it needs to be invested in appropriate vehicles diligently. The easiest way is to invest every month, as soon as the salary came in. Amar used to do precisely that. He had setup Systematic Investment Plans ( SIPs) with MFs and was also investing in Recurring deposits ( RDs ). This way he did not get to see that money and was “not even aware that this money was there”. This money which he had started off with a modest Rs.1,000/-pm at the start of the career, ended with Rs.48,000/-pm, in the last year of his contribution.

Also, he had earmarked some of the investments for really long-term goals like retirement. He had invested in PPF & EPF for that and did not once dip into this kitty. For his other goals, he had invested in various instruments, which he had used for those goals. He always was willing to invest for the long-term. Amar had even some investments in equity, some of which were positively good for him. He had held on some shares for over 25 years in which he had received bonus and rights shares and the number of shares had multiplied like rabbits.  The dividends from these shares themselves had become significant source of income for him.

Don’t chase fads – Every once in a while, there are pet assets, which catch the fancy of the public. At one time, it was teak plantations & goat farms, at other times, it was farm land and of late - Gold. Amar was in fact quite vocal about this. He was telling Parth about the need to invest across asset classes and believe in their power to deliver results. Each asset class will perform at some point. One needs to wait for it. The temptation would be great to cash out from one asset class and put everything in another. Lots of people have cashed out from equity and put their money into gold. In 2007, people were transferring all their assets to equity. Some even borrowed to invest in equity! A proper asset allocation, periodic review and rebalancing & tweaking the asset allocation itself, to reflect the changes in one’s situation, are necessary.

Keeping expenses in check – Amar had one golden rule. Keep your lifestyle a couple of notches below what you can afford. His favourite rule was if you can afford a Honda City, stay with i20. This way, one will be able to comfortably afford it and the running expenses as well as other expenses would not pose problems. He had been practising this in all facets of life. Most people do precisely the opposite. They buy a 3BHK home, when all they can comfortably afford is a 1 BHK home. These things that put pressure on one’s finances and compromises the future.

Keeping a budget and recording his expenses was the other important activity, which Amar practised to keep his expenses in check. Estimating the expenses correctly is the first step. For that, one needs to record the actual expenses incurred for a few months to get a hang of the pattern. Making the family members to adhere to the expense budget, is an important step in keeping the expenses in check. Amar used to reward them if they used to stick to their budgets. For his wife, he used to buy some jewellery and for his children, it used to be a trip to an amusement park.

Liquidity & contingency – Amar always used to keep sufficient liquidity. He used to maintain about two months expenses in his bank account for liquidity. Another two months liquidity was parked in liquid funds for getting somewhat better returns. He also used to maintain a contingency fund of Rs.2.5 Lakhs to take care of any unforeseen emergency.

Also, he had sufficient medical cover for the family, which is very important today. Without it, one’s savings can get depleted and expose one to an uncertain financial future. This can put various goals that one has planned for, in jeopardy. Since Amar had realised this early on, his family was adequately covered and he never had to pay for the medical emergencies in his family. This he had parked in bank FDs.

On hearing Amar spout such wisdom, Parth was floored. Parth ruefully thought that it might have been so useful had he asked the same questions two decades back. Now Amar had raced past Parth, inspite of Parth’s higher earnings and is looking forward to a peaceful and contented retirement. Parth had adopted a fancy lifestyle, overstretched himself in his home and his children’s education and is now looking to work for another five years. Two very different outcomes, just due to the way they handled their money.

The simple principles adopted by Amar had proved to be a major factor in his being financially solvent and achieve all his goals without compromises. 

Article by Suresh Sadagopan, Ladder7 Financial Advisories; Published in Business Standard on 5/7/2012

Clear Expectations lead to longer lasting relationships

Believe it or not – we are constantly trying to sell, convince or persuade people to agree with our way of thinking. This is irrespective of what we do in life.

A mother needs to coax and persuade her children to brush their teeth well, eat healthy food, study their lessons properly and keep good company.  A teacher needs to instill the love of the subject in the students and needs to impress upon them the need to study their lessons regularly and do well in their examinations. A supervisor needs their subordinates to trust them, make them do the work they are entrusted with and carry the mandate of the department/unit forward.

We are all in the business of persuasion, all the time. In our case, financial planners, have lots of work to do before a client completely trusts us. Getting the clients to trust us is the foundation of a long-term relationship.

After being in the business for a while, new clients may come from referrals and therefore have preconceived opinions and expectations about us.

There is a lot of work that goes into building solid foundational relationships with clients that eventually flourish.

Setting CLEAR Expectations

The first step in building a relationship is identifying the client’s expectations, validating the expectations if they are right or correcting them if they are wrong. This is a very important step if you are trying to achieve long-lasting relationships. Lots of times, clients may come in with unrealistic expectations of what a planner may do for them.  For instance, I have found that some clients come in thinking that we will be able to grow their current income by 2-3%. This is one expectation I have had to do away with.

While setting expectations, it is important for the client to understand what they will get out of the engagement with their financial planner. This is a very important step as it will become touchstone against which the future performance will be measured. It is a very good idea to specify in writing what the client should and should not expect from the relationship.

Once the expectations are set, the engagement will run much more smoothly.

Professionalism in ALL Interactions

There are going to be some expectations which are essential for a financial planner to fulfill. We cannot wriggle out of these and still have a satisfying client relationship.

For example, almost all clients want their financial planner to have a deep knowledge in the planning area, as well as appropriate experience to handle the relationship. They want their planner to be a professional. The planner should exude professionalism in every interaction – from the communications being sent, promptness in responses, returning calls etc. As their consultants, we need to inspire confidence, as clients share their aspirations, fears and secrets with us. One expectation we can be sure of is that clients expect us to be deeply interested in their well-being.

Clients NEED to Trust You

After setting the expectations and fulfilling all the things that clients take for granted, the planner needs to build trust.

Simply delivering on the expectations that were set in the beginning of the relationship is at the heart of building a trusting relationship. This might seem simple but it is not. These expectations need to be met relentlessly, week-after-week, month-after-month, for years, which is difficult to maintain.

There can be upheavals in the client’s life, in the market or economic conditions, changes in income/ expenses or other aspects of finances. The financial planner who is continuously by the client’s side, through it all, is the one who will have the client for life.

Trust builds over time and there is no alternative to building this trust other than being there for the client consistently.

Existing Clients Give Referrals for FREE

It is this trusting relationship that ensures longevity of the relationship and also results in referrals. For financial planners, both of these are critical. Existing clients are the bedrock for a practice. New client acquisition is best done in our business through referrals. There is no cost associated with these two. Anyone who has ever spent time acquiring new clients would know the large amount of time, effort and money involved in that process.

While a good first impression will help with acquiring new client, it is the continuous client engagement and relentless pursuit of professional duties that is going to ensure that the client sticks around. However, the planner’s persuasive skills will be on full display throughout the engagement with the client. At various points, the client will have to be coaxed into giving up unrealistic goals, pointless investments or unwanted expenses. At other points, clients will have to be guided down the path of fiscal prudence, regular investments and reasonable targets.

The persuasive skills of the planner will especially be tested when the markets sky-dive or when there is a huge run-up in an asset class. For example, when there is a market crash, clients will want to exit, whatever the costs and in the latter they have to be held with a leash to save them from themselves! Keeping the client on the straight and narrow path is a full time challenge for financial planners like us. Done well, it turns out to be a rewarding career option!

Article by Suresh Sadagopan ; Published in financialplanet.org