A steady income to the family, even after you are gone!

Insurance is for providing security. In life insurance, this fundamental fact had all but been forgotten. But recently, term insurance has got a lease of life. This inspite of the fact that most insurance agents are not very keen to sell term insurance as the premium is low, medical requirements are high, chance of rejection or extra premium is real etc. However, financial planners, bloggers & media has been spearheading the virtues of opting for pure insurance policies. Hence, in the past few years, things have changed dramatically.

Online term insurance has become mainstream & opting for term insurance itself, has become fairly commonplace. Sensing this opportunity, many insurance companies have come out with variants of term insurance policies, which enrich the landscape of pure term plans.

Joint life term policies - Recently, Joint term life policies for both the spouses under one plan, have been introduced by a few insurance companies. The logic here is that if both of them are working, they can go for one insurance policy for both. Taking the policy together does not confer any special benefit. The premium goes down by just a small amount and is not really a factor.

The life insurance requirement can change over time. For instance, the spouse may stop working and she may no longer require any life insurance. Had she taken a separate product, she could just have stopped paying the premium and terminate the product. But in a joint product, it cannot be done as the other spouse, the husband, would still require the cover. Hence, in this scenario, the cover will have to be retained & unnecessary premiums need to be paid.

Also, in the unfortunate even of separation, this policy cannot be separated. Infact, one may have to close this policy completely and take up new policies, which is probably not the best option.

This product hence works emotionally and does not have real merit.

Term plans with benefits distributed overtime -  There are other variations of term insurances, which can be useful. Usually term insurance offers to pay the Sum Assured in the event of a claim. In case of term insurance policies, the amount involved can be quite significant – like, say, Rs.1 Crore. If the sum available from the policy is deployed prudently, it could be useful in meeting the goals, as well as for providing for ongoing expenses. But, in some situations, the claim proceeds may not be prudently deployed. Or it may be frittered away in wasteful expenditure or reckless investments which can result in hardship for the family, going forward.

Now, there are policies which in the event of death of the policy holder, would offer a certain amount of money ( say 10% of the Sum Assured ) as a lumpsum amount upfront & the balance in monthly installments over 10 or 15 years. This could be invaluable for families. Let’s see why.

In many families the male member tends to manage the finances. If he were to pass away, there would be a vacuum. In this vacuum, many people tend to step in and try to assist the family. However, the advice offered about finances may not always be sound and the financial wellbeing of the family can deteriorate significantly. This is a possibility.

In such a scenario, a term policy which offers staggered payments over 10 or 15 years will ensure that the family will get regular income over time. Even in a situation where the initially available corpus is compromised and lost, the consistent income overtime will help the family to stabilize, live with dignity & meet all upcoming goals.

Further variations & options -  Now, there is a variation of this policy too. The variation is that it offers an increasing payout every year for the agreed tenure of the payment. This is to adjust payouts to account for the effects of inflation.

There is another feature some of the term plans have. There is an option to increase the Sum Assured at the occurrence of predetermined life events like marriage of self, arrival of a child etc. This would happen without medical examination, upto a particular level. The premium would be set as per the prevailing age and premium tables. This could be very useful as one need not look around for another separate policy to account for increased insurance needs in the future.

Term plans linked to child goals -  Child plans have been a hit with parents as they want to ensure that the education and other goals of their children can proceed uninterrupted, even if they are no more. These policies tend to be costly.

Now, term plans have stepped into the breach and are offering similar benefits like a typical child plan would.  In case of plans which have this benefit, a certain portion of the Sum Assured ( say 50% ) is paid in the event of death of the Life Assured. The balance is paid on a monthly basis, at agreed levels, till the age 21 of the child. This would ensure that the child education or other goal will proceed uninterrupted.

The period of payout will be based on the timing of the death of the Life Assured. For instance, if the policy holder passes away when the child is 18 years of age, the regular payouts will only be for three years ( till age 21 of the child ). Hence, the monthly payout period can be much lower than in the other option discussed earlier ( where one will get monthly payment consistently for 10/ 15 years ). In the event the initial available money is frittered away, the regular monthly income can be for a much shorter period, which can be a problem area. Else, this is a great option and is a viable alternative to costly child plans.

Tax implications -   Though the amount is coming over time just like in case of a pension product, the monthly payouts are not taxable as it is still death claim payout, even if it is over a period of time. Only the investment returns of any deployed amount would be taxed as applicable. There is a positive in receiving the payout over time.

Since the payouts are going to come over time and most of it is going to be spent as they come, taxes will not be there in the future years based on investment income generated ( or it will be low ) from the regular payouts.

Conclusion –  Insurance industry has innovated wonderfully in the term plan space. First they came up with the online term plan option. Now they have come up with a pail full of variants that have great merit. The common man is finally able to ensure that his family will be well protected – in his afterlife too! His benevolent presence will be felt long after he is gone!

Article first published on Linkedin: A steady income to the family, even after you are gone! 

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

Staying with it & not straying…

Is it possible to ever predict which product will give the best returns in the next one year? It’s very difficult, almost impossible. However, market timing is somehow seen as the one thing that one needs to get right for financial success. Chasing returns and investing in instruments which offer the most returns in the recent past, is a favourite among investors.

However, most fail here. People latch on to a theme after it has run up quite a bit, in the process their timing of entry is really wrong. When the market turns, they do not exit and wait till it almost bottoms out - when they panic and want to exit. And then they sulk, lick their wounds and vow never to go near that asset again. Then they see another one which has risen and glitters on the horizon. They are not interested. The new asset builds up heft and is blazing forth a trail that is lighting up the country. Now the interest builds up & the thought comes up - is this the kamadhenu they were waiting for all along. And then the same pattern repeats, like before!

This has happened with Equity, FDs, gold, real estate… and now with bitcoins!

We as financial planners have seen that it is seldom that important to achieve high returns to achieve one’s goals. What is important is discipline & regularity in investing & a good choice of products according to one’s risk profile. In short, the asset allocation mix should be right.

Every person is comfortable only with a certain level of risk. The portfolio needs to be tailored based on their propensity to assume risk. This is ofcourse only one of the parameters to consider. The others are - number of years to retirement, age & life stage, their time horizon for investment, what their goals are & when their goals are coming up, the dependencies they have on their income & so on.

Based on this, we decide on the asset allocation most suited to a person. We call that strategic asset allocation. This is probably what would work best for them. Sometimes, we may want to somewhat deviate from this core allocation and add assets that could take one away from the strategic asset allocation. That may be done to temporarily increase allocation on an opportunistic basis. For instance, one can have a somewhat higher allocation to equity as compared to the desired level at retirement, as these assets may be required only after 10 years. This is called tactical asset allocation. 

Tactical allocation may be used from time to time; but it needs to be used carefully. The deviation from the strategic allocation should not be too much. A 10-15% deviation should be fine; but a 50% deviation would not be.

There is another reason to stay near the strategic asset allocation - that is the true comfortable allocation. The farther one deviates from it, the greater the chances of making mistakes - one may panic & exit, when the markets turn rough. For instance, when someone who is conservative by nature has added too much equity in one’s portfolio, would probably panic and sell when the stock markets drop by 20%. This would be hardly be in their best interests.

That’s the reason why we as advisors we give importance to asset allocation. Chasing various products is counterproductive. Various products give returns at various points. One needs to have the product in the portfolio to benefit from any upsides. A good, diversified portfolio that is in line with one’s risk appetite and needs is hence the best bet for a person. We have seen that most client’s goals can be achieved at just 9% posttax returns for the portfolio. If there is a need for very high return to achieve the goals, the goals have to be looked into - not the portfolio!

Getting the asset allocation right & not deviating from it too much, is the way to a well funded future. Stay with it - don’t stray. Sounds boring, I agree. But, truth is generally boring.

Is that the reason, why we find so less of it in life? :)  

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

Advisors vs distributors

There are several instances where we use consultants—we consult doctors, lawyers, architects, chartered accountants, and many others, as may be necessary. For instance, we go to a doctor when there is some bodily ailment and confide in her the problems we are experiencing. She would question, examine, analyse and arrive at a conclusion about the possible cause of the sickness. Then she would prescribe medicines. A fee is paid for her advice and the patient goes to a chemist and buys the medicines.

Let’s look at the alternate scenario. Everything is the same, but the doctor does not charge her fee. Instead, she asks the patient to buy certain medicines from a particular chemist. The doctor would get a cut on the price of medicines prescribed. Which doctor would you want to use, even if what you may pay overall is the same? The answer is self-evident. This example has been used to illustrate true, unconflicted advice versus advice where conflict is inherent and fully present.

Distributors have a role to play in the financial services ecosystem. There would be many customers who are looking at a basic level of engagement, which can be met by a distributor. However, a distributor is not the same as an adviser, and this is the distinction that consumers at large need to understand.

Differences

Distributors of financial instruments generally give advice and sell products that their clients need and are remunerated indirectly in the form of commission, which is embedded in the product they sell. On the other hand, fee-only advisers offer advice and charge a fee directly to the client. The argument is that the “only difference” between the two is the way they are remunerated for their advice. But are these two the same? They are not. Here’s how they are different.

Representation: Distributors represent their principal. They sell products of their principal to clients based on their own “advice”. Their remuneration is going to come from their principal, based on the products sold. A fee-only adviser represents only the client and is independent in this regard.

Conflict of interest: In such a scenario, there is certainly a possibility that distributors may sell the product that is most remunerative to them. Since they offer advice as well as products, there is a possibility that the product is not the best from the client’s viewpoint. So the issue is not how distributors get their remuneration, but the conflict of interest.

A fee-only adviser, on the other hand, offers advice for a fee. Hence, the judgement would only be based on what is in the client’s best interest as the client is the paymaster in this case.

Different standards: As distributors they need to follow the suitability standard, where they can sell the principal’s product if it is broadly suitable to the client's requirements. By this standard, they have done their job even if the product suggested is not the one with the least cost in the category or offers lower benefits in comparison to others in the category. Also, they need not worry about other categories of products which may be more suitable to the clients.

Fee-only advisers, who are registered investment advisers (RIAs) with the Securities and Exchange Board of India (Sebi), follow the fiduciary standard. The adviser is expected to put the client’s interest first, even above their self-interest. Thus, such advisers are bound to suggest products that best suit their client’s interests. They also follow higher standards of certification, documentation and compliance requirements, which again is in client’s interest.

It is, hence, clear that the difference between a distributor and a fee-only adviser is not just a matter of how they are remunerated, as various financial services intermediaries tend to argue in every conference or event. Doing so is obfuscating facts for pecuniary ends. Some veterans also opine that the regulator does not understand this and other “ground realities”. I would argue that the regulator is fully cognizant of the ground realities and that is precisely why it is tightening regulations. Self-regulation, I have heard, does not work well, globally.

Regulators need to protect investors from being taken for a ride. They may rub the entrenched participants the wrong way as tightening rules may affect incumbents adversely. But regulators have to play their role keeping in mind the larger interests. (To read the Sebi consultation paper on investment adviser regulations, go here: http://bit.ly/2sX9amO).

In a nutshell, distributors (or agents) represent the principal and not the client. This leads to an inherent conflict of interest. Also, they follow the lower suitability standard, which as we have seen, is not in investor's best interests. Fee-only advisers represent their clients, have no or lower conflict of interest, and follow a fiduciary standard. Those are the differences and they are significant from the investors’ view point. 

Article first published in Livemint: 

Advisers vs distributors: there’s more to it than only remuneration

Also Read:  

Should you pay for financial advice?

Good advice can make all the difference

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

In the Investors' best interest

There are very few people in life whom you could confidently say to be acting in your best interests. Mostly, people act in their own interests - which ofcourse is natural. The ones who act naturally in your best interests can be counted on the fingers. Your own parents, spouse, siblings may act in your best interest. Beyond that, finding those who have ones interest at heart is going to be difficult. The problem is that these people cannot advice you in all areas. So, there is a need to confide in others, in certain areas.

We go to a doctor for health issues. We have no other option. The doctor acts in your best interest and charges a fee for advice. The same is true with a lawyer, who represents his client in the court of law. These professionals represent their clients and act in their best interests. This is the concept of Fiduciary care.

A Fiduciary is someone who puts the client interest ahead of everything, including their own self interest. This is so comforting, especially in specialised domains, as the family cannot help anyway.

There was a domain where fiduciaries were marked by their absence - financial services. But over the years, legislation all over the world have been moving towards giving the customers at large an option to access advice, which is in their best interest. Some countries like Netherlands and UK have even dismantled commissions on products and has moved to a fee-only advisory model to make the advice conflict-free. There has been charges that, due to this, some of the clients who were serviced earlier by product sellers have become “orphaned”. While there may be some merit in the criticism, there is merit in what the regulators in those countries have done as well. They wanted to put in place a fiduciary advisory structure.

In India, SEBI has brought in Investment Adviser Regulations in 2013, where they have sought to create a new breed of advisors who will be Fiduciaries, would advice clients for a fee, not depend on commissions from product sales & have least conflict of interest. Any conflicts of interest that may be there like commission income arising out of past assets, referral fees from other professionals etc. would need to be disclosed to the client.

There are just over 700 Registered Investment Advisers ( RIAs ) with SEBI. A beginning has been made to offer the clients a choice of the kind of advisor, that they want to have. A SEBI registered adviser will also have to comply higher standards in Education/ experience & Certification, have to undergo yearly process & compliance audits, need to maintain documentation on services provided to clients, do risk profiling & have clear rationale for recommendations made. This is a clear departure from the Caveat Emptor ( Buyer beware ) approach which is prevalent in the financial services space.

There is another development which has happened about two years back which has given a boost to fee-only Fiduciary practice - Direct plans became available on MF Utility platform and SEBI had directed that the feeds of Direct plans be made available to RIAs. This enabled an investor to access advice from a RIA for a fee and invest in Direct plans, which charge a much lower expense to the scheme. By this, there may not be much cost savings to an investor as a fee is being charged by the RIA separately; but, since the advice & product sourcing are separated, conflicts of interest are avoided.

Now, investments in Direct plans can be done in multiple ways… one could invest through MF Utility, which is an industry platform that allows one to invest in Direct plans. The other option available is to invest in Direct plans through the MF house’s website itself.

There are also many online portals which deal in direct plans like Invezta, Orowealth, Unovest, Bharosaclub, Wealthfront, Clearfunds etc., which makes investing in Direct plans easy. Many of these offer a certain level of reporting too, for facilitating proper reporting for the investor. Some of them also offer automated advice ( popularly referred to as roboadvisory ), at a charge. 

In sum, the financial services space is offering more variety to the investor & allows the investor to choose which kind of advisor to engage and which channel one could go to get their products. That is clearly in the best interests of the investors!

Article first published on Linkedin :  In the Investors' best interest

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7