Sahil, a Software Engineer, approached me last week to have some guidance and discussion on his investments. He already had a financial plan at place written by some other planner 3 years back.
He showed me his investments which were totally different from the ones recommended in the Financial Plan. And even the Asset Allocation was quite different. He started with 40% of equity and now was holding 75% in equity.
He told me that the investments suggested by the planner were not performing well and thus he switched them to the better funds. But now he is not satisfied with the new funds’ performance too and thus seeking my advice on what to be done.
Like many investors, his way of selecting the better funds was also “Best performing mutual funds as per Value Research”.
His financial planner had advised him to Surrender some of the endowment policies. But those were also still lying there, as surrendering would result in the booking of losses. (Read: When should you Surrender your LIC Policy?)
So Sahil, if you had no intention of following advice why did you take it in the first place? I irritatingly asked.
Sahil smiled and replied, the whole idea of having a financial plan was to understand the financial structure and steps he should follow for a better financial future. And now when he knows how much he needs to save for which goal, he feels that he can do it himself, with maybe some guidance off and on, like for what he has approached me.
Ok. So, in the nutshell, you wanted to have a Financial Plan and are not bothered on Financial Planning. Right?
Is there any difference? He asked with confusion.
Yes. There’s a Big difference. And between both, Financial Planning is the most important part.
Just Imagine you want to go on a vacation after 3 months. What would you do today to achieve that goal? In other words, how would you plan for that?
You will start with noting down the places you want to go in discussion with the other interested travelers (Family or Friends), the costs associated (Travel, Stay, Food, Visa, Local Sight Seeing, insurances, etc.), the mode of travel (Road, Rail or Air). Read online reviews.
You may like to go with a budget in mind or may be open to spending all that you have saved. You may like to see how this travel would impact the savings you are already doing or want to do for your other goals, you may like to have a comparison on the total expected cost if you chose some other place out of your list.
All this is Creating a Plan. Which you first do in your mind and then put that up on a Sheet or notebook to have clear action points at the place. You may do it yourself or Consult a travel Planner for this.
Now the next step is implementation where you have to put your plan to the real action and make it a reality. This will be in 2 parts one you will work on the action points you have already noted down or as advised while writing the Plan and other when you are actually traveling.
You may find that the hotel that you booked which was looking exotic in pictures was giving some filthy look when you reached there, you may find your flights getting canceled due to some unanticipated situation, for local sightseeing the costs that you had assumed or read online was not correct and you have to go over budget or cancel some of the visits.
How will you be managing these kinds of situations? Whom you will contact for help or guidance? You may think you are well equipped with experience, knowledge or you know how to search in google…but some instances may require human intervention and guidance.
These are some of the occurrences which are totally unexpected, and never got accounted for in the Plan? For some, you may be prepared but there could be others too. For some, you may wait but for others, you may have to decide instantly, and for that, if you have done your planning well you may not have difficulty in deciding.
This is where the success of your travel lies.
How well you do the Planning part? Correct? and This includes Implementation of the Plan, understanding all the what if scenarios and Preparing oneself for the unexpected occurrences.
Well, this is just an example of travel which gets over in 7, 10 or 30 days…but your financial management requires you to do planning lifelong. Situations keep coming and going, and you need to keep deciding and acting on time and again.
The things written in the Plan may appear completely different in the real world.
Same goes with your Financial Plan and Financial planning.
What is a Financial Plan?
A Financial Plan is a document containing the analysis of the present financials, taking into account your present circumstances and advise on the list of things that need to be done, reviewed and considered as you align your finances to achieve your life goals.
A good financial plan takes into account all the what if scenarios that one may expect and come up with a possible alternative solution to each and every situation. It covers almost all aspects of your financial life, be it insurances, Taxes, Investments, Retirement, Estate distribution. ( See what we cover in a Financial plan)
However, it also depends on the adviser you are dealing with.
Like if you are dealing with an Insurance agent then to him the financial planning would revolve around the various insurance policies he wants to sell. If you have a Mutual funds distributor by your side then your financial plan would be having only Mutual funds as an Investments product. Your accountant would be focused more on taxes only. (Read: Financial Planning – A Smart way to Missell)
Financial Plan is a misused word and unless you have a true advisor to guide you, you may be getting misleading structures in the name of Good Advice. What you get also depends on what you ask for.
The true purpose of a financial plan is to put all aspects of personal finance together and try to find all the interlinkages, so all pieces of life should move in tandem towards the same life goals. It does not work in bits and pieces.
What is Financial Planning?
Financial Planning is a broad concept, which covers the writing of the financial Plan, implementing it completely, monitoring and reviewing the things timely and suggest corrective action steps as and when necessary.
It’s a Process and writing of the financial plan is a part of the process.
Monitoring and Reviewing do not only mean just to see if the implementation was done properly or not, and redoing the plan every year.
It means that the new information has been incorporated into the planning process in the form of updated expenses, new tax structure of the investor and the products, Changes in the investment’s philosophy and portfolio composition, Changes in the family structure, Income profile of the investor etc. and implement the changes as and when required.
For e.g. when SEBI announced the Recategorization of funds and the mutual funds have made the necessary changes in their names and structure, the Review of investment portfolio becomes inevitable immediately.
When Finance minister has announced the Changes in section 24(b) tax benefit rule on the interest portion of EMI’s, that calls for review of the Loan portfolio and adjust the savings and loan repayments accordingly.
Does that mean having Financial Plan is not enough?
Having a financial Plan serves the basic purpose of understanding and being aware of the situation so you know why what and how to act on? whereas Financial planning also takes care of the dynamic and unexpected part of the Plan which has not been accounted for or has changed in the Plan. For e.g.
The investment return assumptions: The achievement of the goals in your financial Plan depends on the assumptions you have taken on the Investment Returns, growth in Income, savings rate, expenses, etc. 10%, 12%, 15% or 20%. Higher the assumed investment return, easier would it be for you to achieve the goals at least in calculations. But Reality may have different Plans in mind and the actual return may vary.
How far you are from your goals, what is your investible surplus, the tax changes in the Invested allocation, the other near-term goals…all play their role in tweaking your plan so you may get the best possible results. And all this comes under financial planning.
Life and health assumptions/situations: Your retirement plan may need complete revamp in case you stuck up with some major health issue. Your immediate family needs a regular financial education to manage the complicated situation which comes with life and health risk. The Insurances may need some revision looking at the change in goal posts, family expenses, the addition of loans and other variables.
Goals: Goals comes in many forms. Some are responsibilities, some are desires, some are aspirations. Many goals are fixed and some are flexible. Some new may get into the system and may disrupt the saving process and some suddenly get redundant which calls for a redirection of money to something more important. These things happen, where a good Financial planning process keeps you in the right direction.
A financial plan gets written around many variables so it’s implementation and post-implementation need a regular watch., and this is where a complete financial planning process needs to be followed
Its like Wedding and Marriage. The wedding happens One time but Marriage is Lifelong. And to make your marriage a success you have to make of lots of adjustment in your life.
Sahil, if you have taken help of a Financial Planner you have to stick with him for regular guidance. There must be reasons for his advice. Discuss with him your apprehension on the returns and why would he feel that the suggested portfolio will suit you.
Yes, it may result in more cost to Investor. But when you do the cost-benefit analysis you will always find you on the benefit side. and this also could be true, that saving the cost may prove to be more costly in the long term. (Read: What we Offer in our Financial planning service)
Changing a Planner or doing it yourself after first getting the financial plan from a professional will not lead you anywhere. It’s a wrong thing and slowly will turn into a habit.
The success of a financial plan is in doing the financial planning the right way.