Why is it risky to have adhoc approach for financial planning?

In my discussions with friends, colleagues and clients, financial planning does not quite get the attention it deserves and for the right reasons. Some believe that a formal approach to financial planning is not necessary to manage personal finance, while some others have reasonable comfort with the finances they have and believe that everything will fall in place but the majority of them are busy with their work and are not able to find time to focus on this.

A recently conducted survey, in a social media group on financial planning, shows that 64% of them have created financial plan on their own whereas 36% of them did not have any financial plan at all and the majority of them have not taken any professional help to either review or create a financial plan. While it is encouraging to note that 64% of them have taken the initiative to put a plan in place, the question is – Is this plan optimized?

To help you understand what is financial planning, let me put a few questions on the table.

• Have you identified all your Long Term goals (e.g. car purchase, primary home purchase, kid’s higher education & marriage) and recurring goals (e.g. Leisure Travel, Charity donation) and how that will be funded?
• Do you know all your assets and what you are going to get through inheritance?
• Do you know when you should retire?
• Do you know what your Life expectancy is?
• Do you know what annual inflation you should assume for various goals?
• Do you know what ROI (Return on Investment) you should assume for various asset classes in your overall portfolio?
• If you were not there tomorrow, would your family be able to manage financially?
• Do you know how much you should insure your life for?
• Do you know what coverage to take for health insurance? Do you know how much amount to insure and how it should change over time?
• If you are laid off tomorrow, would you be able to transition smoothly?
• Do you know goal-based investing and how different assets are used at different points of time to achieve one’s goal?
• Do you have a good understanding of various asset classes (e.g. Debt, Equity, Real Estate, Commodity)? Are you comfortable investing in all these asset classes on your own?
• Do you know what will be the right asset allocation at different stages of your life?
• Is your income optimized for taxation?
• Have your parents created a Will? Do you have a Will in place?
• What are the best practices in Financial Planning?

If you answered “Yes” to all the questions above, you have a good financial plan in place. If not, then there is an opportunity to do better.

In simplified terms, the financial plan is a plan, which helps you understand your current assets, future goals and the plan to use your existing assets to reach your financial goals.”

Listing below examples of some real-life situations, which one might face in the absence of a proper financial plan.

• Jogi comes from a small city Nasik and is cautious in investing. Based on the advice from one of his close friends and in search of a higher return; he invested his hard-earned money in the equity market unfortunately right before the 2008 market crash. During the crash, the market kept coming down. When his portfolio came down by 50%, he could not muster the courage to stay put in the market further and ended up coming out of the market incurring significant losses. (risk profile and investment mismatch)
• Murali was doing well with his company in Chennai and intended to stay with the company till retirement. With a net worth of Rs. 1 crore and with Rs. 1 crore company life Insurance cover, he thought his family (wife and two kids) would be able to manage finances well in his absence. His unfortunate demise the following year made things difficult for his wife. Beyond the grief of losing their husband, friend and the sole breadwinner, she had to deal with the harsh financial reality that she would need approximately Rs 4.5 crore to manage regular expenses, purchase of a small house, kid’s education, marriage and kitty for her retirement (wrong assumption and calculation of sum insured amount)
• Gagan is young and earning well at Bangalore with an IT company. During one of the visits to his hometown in UP, he met his cousin who had taken the agency for selling Endowment and ULIP products. He took two Endowment policies and two ULIPs policies over a period of four successive years. Since the advice came from his cousin, he did not question it. Later on, he found out that these products have higher charges and pathetic returns. He stopped the future premium payment but had to contend with a meagre return of 3.5% on his investment. (poor knowledge of investment products)
• Nair has a good job with a multinational company in Mumbai. His family has good background and experience in owning real estate property. From 2000 to 2010, he ploughed in all his earnings to buy one apartment and two land parcels, which was 95% of his total asset. The property price in the early part of the decade appreciated well but the passing of RERA regulation and demonetization put significant pressure on the price. His son was in 12^th standard and had to go for an undergraduate programme in the US, which would cost him Rs 1 crore. Since he had only Rs 10 lakhs in liquid money; he was forced to sell his land at a discounted price to fund his kid’s education. (poor asset allocation, Unable to use illiquid assets at the time of the need)
• Brajesh hails from a well do landlord family in Bihar with 40 acres of multiple fragmented lands in his hometown. He has three siblings and their livelihood is based around agriculture using family-owned land. He is an aberration and with his focused effort, he has cleared the Indian Administrative Services exam. Recently, his father expired without a written Will. He cares for his siblings and wants to make sure that property is distributed amicably but in the absence of Will, there is no clear guideline. and conflicting opinions from siblings have made it very difficult to come out with consensus distribution breaking the family bonhomie. (absence of Will)

As you could see, these are just a few examples of complicated and irreversible situations, which could arise as not enough thought have been given to the most important financial activity of our life i.e. financial planning.

Financial plan is the blueprint and roadmap of you and your family’s financial security and freedom. If designed and executed well, it takes away your financial worries and frees you to do what you want to do and cherish your life experiences. The importance of having a good financial plan cannot be overemphasised.

Well, if that is the case, then should not your financial plan by leveraging the best in the world. This is where the involvement of a trusted Financial Adviser comes in handy. An Adviser will help you do the following;

• Streamline your financial plan
• Educate you about investment options
• Align your investment according to your risk preference and appetite
• Take objective decision for you
• Challenge you to increase your income or reduce expense if that is what it takes to reach your goals
• Work with you to implement the plan
• Ensure financial plan implementation stays the course for the rest of the life

But the best Advisers are those who go beyond their usual duty, leverage their network to find you a job when you are laid off, support your family in distress (beyond you, he has the maximum knowledge about your finances), encourage you when your chips are down and never let you down in your life. They could be your best friend, mentor and coach. Very hard to find one but if you have one then you are done.

Great! So, how do you go about finding the right Investment Adviser?

First, let me start with whom to avoid. Avoid advice from anybody selling Endowments and ULIPS products. Here it is not about the advice but the sub-optimal products they are dealing with. Avoid advice from bank personnel’s on any product where the bank is getting the commission. I had a few very good Relationship Managers from the Bank who were objective, honest and transparent and will never do forced selling but at the same time, will not discourage some of the bank products even if there are better alternatives in the marketplace and for the obvious reasons.

In order to stop the constant mis-selling by the intermediaries in the name of advice, SEBI came out with the Investment Adviser regulation in 2013. According to that, in India, the advice can only be given by SEBI Registered Investment Adviser who has a fiduciary responsibility to keep the client’s interest above everything else. Today, there are only 1100 SEBI Registered Adviser in the country. Refer to the list SEBI Registered Adviser. To further narrow your search, you should look for a Fee-Only Adviser who only takes the fee for advice and do not take any commissions for recommended products or securities.

Beyond this, have a word with the Advisers and pick the one with whom you are comfortable, and who will keep your interest above everything else.

“A goal without a plan is just a wish.” — Antoine de Saint-Exupéry

You may also like to read How to Select the Best Financial Advisor in India.

The writer is a SEBI Registered Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services. If you want to know more about him, click on https://finmyn.com/about/.