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.
Loan mismanagement is more of a behavioral issue than a financial issue, so a financial planner should counsel clients well to bring wellness in their lives.
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
Very rightly said. Unfortunately most of the financial planners/advisors are not bothered about your financial well being or health. They are more concerned and busy earning their commission and remuneration, etc. And that too, at the cost of their clients with whom they have fiduciary relationship.
The less we say, better it is. In fact, the person at the other end, be it a bank employee and any independent financial planner, is not at all bothered about your financial health, in fact, they are not even concerned about all these things.
I guess that’s why Direct plans have come up and Financial planning profession is being regulated. Now the ball is in the court of Investors, if they are ready to pay the fee for the regulated and process based advice or commission to not regulated sales oriented structure.
With so much of noise around, Investors should have to be more vigilant these days.
Leave aside right or wrong advice from a planner/advisor/agent or whatever title, how can someone act on the opinions shared on social media? It’s in trend these days…FREE Advice 🙂
Agreed. There is other side to it also. Those who do not have the support of technology or do not use it but their intentions and integrity is beyond doubt can give good advice and also can sell good products to you with good service thereafter. The numbers may be very rare but one can not deny their existence.
Agreed Mr Desai. Thanks for your views.
It’s one of perfect article so far as the financial planning or personal finance matters of individuals in India are concerned. I congratulate Mr. Manikaran for bringing out real examples from practical life exposures for the right understanding of the importance of financial planning in today’s dynamic fast paced world for individuals. Actually people don’t find easily some one who can make them understand true meaning of financial planning. Even if they come across with one, he/she is like someone as explained in the article and finally people resort to internet or other such medium for ideas and with half-baked knowledge gained/understood from them, they themselves form their own perception/s (good/not so good) for financial planning and ultimately reach nowhere in the end. I feel there is still need of greater effort like the author to reach out to people and spread awareness about right financial planning and hopefully our systems, ideas, perceptions and general conditions will change for the better and more and more people will have access/resort to right financial planning services/practices
Yes Nagender Sir. But Problem is both sided. Where there are very few professionals, then there are very few who are ready to hire fee based and regulated professionals. Now to save fee, investors spend so much of their time in surfing, searching, asking…which leads to flow of information which is not possible to decode.
I totally agree with you saying – “need of greater effort like the author to reach out to people and spread awareness about right financial planning and hopefully our systems, ideas, perceptions and general conditions will change for the better and more and more people will have access/resort to right financial planning services/practices”
Some professionals sell their knowledge to ferret money out of simple and gullible people having scarce knowledge of finance.
On the contrary, it’s good to have professional like you who abide by ethical standards in illustrating fault line of others.
Your advice is well taken by likeminded groups illuminated by your insight.
Keep up the good work.
It is a one of the best article I ever read on financial planning. Risk management gives good direction to me where I miss something.
Hi, very informative article.
I am 28 years old and I am searching for good investment options. I just came to know about peer to peer lending as an emerging platform in India and wanted your views on that.
It’s an emerging platform, let it fully emerge first, let RBI put down some guidelines on it and regulate the process. I don’t recommend people to get into unregulated segment.
Excellent article. one of the best articles on the internet about financial planning, that I have read so far. Keep writing.