About Financial Planning

This calls for a proper understanding & analysis of the client’s situation, evaluation of alternatives & strategies to help them achieve desired outcomes and finally coming up with appropriate recommendations to put the plan in action.

In the financial planning process, products come at the end as investment recommendation – as a byproduct of all the planning process & deliberations. Along with it, there will also be recommendations on what to do about loans, properties, liquidity & contingency to be maintained, risk mitigation through appropriate insurances, appropriate asset allocation based on their specific situation and suggestions on investments.

The focus here will be on efficient management of resources at the client’s disposal and optimize it based on the client’s specific needs. That means choosing the right vehicles for the right purposes, ensuring tax efficient investments, meshing the investments with the overall requirements on risk-return, tenure etc.

Financial planning crafted at one point would need to be reviewed and course corrected as one goes along. Hence, to make it work well for the client, we have an optional ongoing engagement which starts with a plan and continues to engage clients & offers appropriate advice going forward.

It is reasonably evident that Financial Planning can be helpful for virtually everyone.

Who is a financial planner/ advisor?

Investors have a problem in recognising a financial planner/ advisor. Most who just sell products hold out as planners and advisors, which confuses people at large. It is even more confusing as distributors of products call themselves Independent Financial Advisors ( IFA ). In reality, they are not independent as they are agents of a Principal. They are not Advisors either, for they are product sellers.

Naturally, there is a huge confusion in the minds of Investors as to who is an advisor and what to expect from them. Securities & Exchange Board of India ( SEBI ), which is a Financial Services regulator in India, oversees the area of Financial Advice and have come up with a regulation called Investment Adviser (IA) Regulation 2013.  Those who have chosen to come under this SEBI regulation are Registered as Investment Advisers ( RIA ).

As per this regulation, an RIA should advise clients on a fee-only basis and should not receive any remuneration by way of commission/ brokerage etc.  IA Regulation enforces a higher standard in many areas, be it compliance, education & certification norms and avoidance of conflict of interest etc. Any residual conflicts of interests are to be disclosed to the clients completely. 

Many RIAs also have commission income as they continue with the legacy investments of their clients or continue to solicit new business too.  In such cases, RIAs who have a distribution practice too along with their advisory practice, need to segregate the two practices clearly & maintain arm’s length distance between the two, so that client’s interests are not compromised. There is a conflict of interest here & needs to be clearly disclosed to the client. This is not an ideal situation.

In our case, we do not do any product distribution activity. We do not seek to derive any commission or brokerage from products suggested. That’s why we are fee-only advisers ( who earn their income from the fees they charge their clients), which makes us conflict-free, independent & truly client-centric. Hence, due to this model we have chosen, we are verifiably conflict-free and are working only in the client’s best interests.

Also, the SEBI Regulation wants the RIA to be a Fiduciary. Fiduciaries are those who put the clients’ interests above everything, including their own. That should be very comforting for a client to know as they would now have someone, apart from their close family who are thinking in terms of their best interests.

Why should one deal with an advisor who is a Fiduciary ?

Fiduciary responsibility is the guarantee that the advisor is acting truly in the client’s best interests.  To act only in the client’s best interest at all times, the advisor needs to be independent & should receive the remuneration only from the client, by way of a fee. 

This way, the advisor’s interest can truly be aligned with the client. Conflicts of interests get minimised when they just represent a client, unlike a product seller who represents his/ her Principal.

Also, since the remuneration is only by way of fees from the client for a fee-only advisor, they would need to demonstrate their value & usefulness on an ongoing basis to justify the fee they are charging. That ensures that the advisor has a clear incentive to stay updated & offer high quality services to justify their remuneration.

This is in sharp contradistinction to product sellers who would be paid a fixed percentage on product sales, which is in no way linked to their knowledge levels or the service received by the client. The client has no control over what they are indirectly paying – they can do nothing about it, even if the service quality is bad.

Is Financial Planning the preserve of the rich?

Many people think that they do not make enough money to hire the services of a financial planner/ Adviser. People have this impression that financial planning is for the rich & well endowed. The other opinion that is widely prevalent is that financial planners are wildly expensive and hence are not affordable.

Financial Planning is needed by everyone. It is needed more by those who are moderately endowed compared to the rich ones – for the margin of error in the former is much smaller. Hence, financial planning is needed more by those on a tight leash than by those who are rolling in money.

Also a good adviser would be able to help the client to manage money more efficiently, bring in tax efficiencies in their investments, suggest right investments ( which are commission free & hence saving money for their client ) in line with their goals, risk profile & ensure mistakes are avoided – all of which will save money for the client.

Hence, the fee would be more than offset by the savings. And most importantly, there will be a blueprint to follow and there would be clarity & peace of mind.

Is it necessary to always go to a financial planner/ adviser?

If one has the necessary knowledge, interest, skills & the time to understand one’s requirements and evaluate options, an advisor may not be necessary. There are people like this who can do it themselves. But they are a small minority.

For most people, it would be advisable that they approach a financial planner to seek professional advice. This is just like going to a lawyer, doctor or an architect to get appropriate advice. When choosing an adviser, exercise caution. See whether the adviser/ planner is an RIA with SEBI, their credentials, experience, etc.

[Also read about, How To Choose The Right Financial Advisor]

Half the battle is won, if you choose the right advisor. With someone posing as one, you will only add to your problems.