Financial Planning is something which every regulator wants the agents/advisors to learn so that they are able to guide their clients well and make them invest through goal based advisory. This is the reason why NISM Mutual funds advisors exam and IRDA Insurance agent exam has 2-3 chapters on financial planning in Curriculum.
In my starting years of this profession, I have delivered training to many insurance agents on how to use Financial planning calculations for their clients, How to use excel to calculate future value, Present value, and regular investment required. To them financial planning is all about goals and numbers.
But now when I see around I feel that financial planning has become a tool to missell to clients. It is being used to calculate some number so you can invest for some years to achieve per-defined goals. That’s it. This mathematics leads to the coming up of many online tools where you just punch in the numbers and you will get your financial plan in a well-crafted format with lots of charts in it, to give you a feel good factor that you have something important in hand.
All this has created confusion in the minds of investors too and now they have also started thinking this way and feel that if this is all, then they can do it themselves. Financial planning to them has become a commodity, which they can buy from any financial services website and that too For FREE.
Few days back, I was approached by my wife’s friend who’s started her “financial planning consultancy” after leaving her well paid but stressful job. She now deals with all investment products and has got a certificate of “Goal specialist planner” from a well-known Mutual fund house. She was not aware of my profession, and neither had she bothered to ask. I was just a reference to her. She wanted to do some financial health check on me.
She took out her I pad , login to some software and presented with few calculations on what are the areas i should be concerned about and “how much Insurance i should take”, “How much I should save towards child education and marriage” and “How much I require to save for retirement”? And also pitched some of the Insurance and mutual funds products that i should buy
She did not ask anything about Cash flows, Loans, Emergency fund, what goals are important to me and why, do I really give importance to child education or why should I consider retirement as most important goal? Now when she did not ask, how would she counsel as to how we should look at the life, how to set goals and prioritize?
You may have met somebody like her in your bank. She may be there in your insurance or Mutual fund agent or you may find her version of advice in the online tool you use and mistook the whole pitch for Financial Planning.
Many people who think that they have a financial plan may not actually have a real one. Financial plan is a much broad subject and cannot be restricted to just goal based investments. In fact you may not able to make investments or stick to your investments for long if the other areas of your personal finance are not in order.
So what important aspects should be covered in a financial Plan and how does one know if they are being presented with a financial plan in the way it’s intended to be presented. Let’s have a look at those. From the pointers below you may feel that these are what you already know but to understand the essence of it you need to read out in detail.
- Financial Statements Analysis:
True financial plan always starts from Analysis of your Income, expenses, Assets and Liabilities. This is the base of any financial plan. If you can decode this structure well, half the job is done. Your cash flow and net worth (Asset minus liabilities) gives a clear view of your lifestyle, your investment behavior, your fears, greed, taxation structure, good loans, bad loans, liquidity in profile etc.
It’s not about taking the details and presenting in some chart or table by showing some calculations. Your Planner/advisor is not just a calculator, he should act as a counselor too and should give his views on the important aspects to take care of in future. Like your expenses, your taxes, your EMIs, your Liabilities etc. Tables, and charts can be prepared through software, but analyzing these numbers and suggesting strategies to improve on some areas requires a human involvement and his strong hold on the subject.
Also Read: Why it is important to know your Net worth?
Many so called financial planners avoid getting into this area. The major reasons are:
- They are not proficient enough to understand all this.
- They are not bothered about these things. Of course this is not the revenue generating work for some.
- To avoid delaying the investments process.
- Their clients don’t trust them and are not ready to share their financial details with them.
Now a day there’s one more problem with advisors. If they do this analysis and presents client with detailed recommendations, then they have to get registered with SEBI as Registered Investment Advisors, and follow the regulation to the core. This is one of the reasons, why there are very few SEBI RIAs in India.
2. Debt management:
I was once talking to one of my banker friend on this topic. He said why should he be bothered about any client’s credit card debt, it’s not his problem. I asked then why do you use the term financial planner along with your name, he replied – “This is the “in thing” and what client likes.”
If your Adviser/Planner is not asking about your loans, then you may not be getting true financial planning advice. This stems out from your cash flows and net worth only, but it can be dealt separately too. Rather than jumping directly to investments, the loans should be analyzed in details and high interest paying debts should be closed down first. And also you need to have enough liquidity in place as emergency fund to service your loans comfortably in case of Job loss/Health problem.
Taking loans sometimes comes out of a requirement or goal, but many times it has been observed that taking loans has become his habit. Every small purchase, he wants to buy on EMIs. This behavior needs to be tamed. No investments can stay for long if Loans are not in control.
This also impacts the credit score which again has long term impact. So if you consider only investments will help achieve goals and make your life smooth, you are being mistaken.
3. Long term Goal based Investment Planning –
This is the first discussion that every advisor and client has before starting off with the calculations. Most of the investors in the name of financial planning only look at the investments aspect, and those who advise them also prefer to stick to investments only.
But the issue here is that if this is true investment planning, then why not the already invested products like EPF, Super annuation, NPS etc. gets discussed. In my experience, half of the salaried people’s retirement goal gets met by EPF and Superannuation only.
Actually the whole issue is that when the planning is oriented towards product selling/buying then going into EPF/PPF would not result in money making for advisor. But a true financial plan should take these investments too into consideration.
This is not all, for a proper investment planning Risk profiling and asset allocation is mandatory. Looking at one sided market performance you may be tempted or sold towards the product that has given positive returns in recent past, but if you are truly doing planning then you should be exposed to every possible asset class depending on your goals prioritization and risk profiling.
Financial planner should be able to counsel you on your goals, as goals also come out of emotions only. Sometimes adviser/seller take advantage of these emotions and sell the products that may not suit your profile but his targets…like selling Children Plans to Grandfather for Grandchildren.
- Risk management-
Now Risk management generally gets related to Insurances. Like you feel that if you have adequate life insurance, Health Insurance, accidental insurance, you are done with Risk management. This is not completely true. When you are actually considering financial planning, then you should look at others risks prevalent in your lives and seek out the possible answers. Some of them are:
- Who will take care of your kids in case of any eventuality? And how will you ensure the same?
- You are saving for your family, but is your family equipped enough to manage money after you?
- You are investing in the name of your parents just to save tax, but you have not made any arrangements to ensure that money comes back to you only, in case of their demise.
- You have given a personal guarantee for a friend’s loan and have not made any provision to protect your assets in case he defaults
…these are few cases that I have experienced while dealing with my clients, but I am sure there could be many other loopholes too which expose your financial profile to major risks.
Your financial life is more about life than finances. But life without financial wellness can be distressing. Financial Planning is a brilliant exercise which makes you aware about your finances, behavior, requirement and actions required. It puts you into a process and creates discipline. Believing and limiting it to investments may expose you to misselling by Self-proclaimed professionals.
Financial planning is a serious affair which affects your overall wellbeing. You need to follow it completely, as doing it in bits and pieces will be of no use to you. It is more about your journey towards where you actually want to go. Proper financial planning will make your journey comfortable, rather than just make you sit in the vehicle and leaving it on the fifth gear.
There’s a very popular saying – Happiness is measured in more than just dollars and cents. It’s not “he who dies with most toys wins”; it’s “he who gets the most out of life wins
Do you agree with me that Financial Planning now days has become a tool to missell? Please share your views in the comments section below