Planning is about Architecture, not products

Kesavan just staggered through the door and plonked himself on the sofa. He was sweating profusely. He had walked all the way from the gym to his home – a distance of 1.7 kms. 

His eyes were closed as he was relaxing.  He was immobile for a space of a minute. He languidly opened his eyes and brought the mobile in his line of vision. Ping! There was a message. He was going to close it, as he gets these all the time. But something caught his eye and he sat up and decided to open it.

It was information about a fixed income product that has “very little risk” and offers 14.5% pa returns. He was intrigued and read about it. It looked interesting to him.

Two days later he had put in a few lakhs in it as it was giving “amazing returns” which a typical debt product can seldom do. Kesavan has always been like this. He makes quick decisions on various investment options that appeal to him. Due to this reason, there are legions who keep sending information about new products and opportunities all the time.

With this approach, Kesavan has a bloated portfolio. He has several vendors from whom he buys products that are new, unique and have high return potential.  He does not  worry too much about the product category, risk inherent, liquidity, taxation etc. Nor does he keep a proper track of his investments, their maturity etc.

His friend Raja, a financial advisor, had tried several times to correct Kesavan’s buccaneering investment style. But Kesavan was unflinching in his quest for new bling to add to his treasure trove! Kesavan’s logic was always that he is diversifying his investments well, though not by design and he is investing in products that have very good return potential.

What’s more, Kesavan insists that this is his way of planning his finances. Raja tried telling him that accumulating various kinds of products is not Financial Planning. Kesavan was unfazed. He asked Raja – “You tell me what is Financial Planning and why what I am doing is not right?” 

Raja was not one to let go of a golden opportunity like this!  He explained thus –

When planning for anything, we should know what the end objective is. As an example, when we buy a piece of land to build a home, we need to be clear about kind of home we want based on who all will live there, the needs of the residents, how many rooms are needed, the kitchen format, whether balconies and a veranda are needed, whether it will have more than one floor etc. All these and other specific requirements need to be communicated to an architect, who will create a blueprint that takes into account all the requirements. The construction can start only when the blueprint is finalised. We would not dream of constructing a house without a blueprint, would we?

So should be the case with any endeavour – whether it is a birthday, a holiday, marriage or any other. We need to understand what we want to achieve and put in place a plan that helps to achieve that outcome. Such a plan will breakdown what needs to be done and in what sequence, so that the end objective is achieved. 

We consult a doctor for anything to do with our health, go to a lawyer for counsel on legal matters, dietician to know what we need to eat as per our constitution to stay healthy. The only place where we do not do this is with our finances. We all spend the prime of our lives working and earning money – yet we do not give that money the respect it deserves, as we do not manage the money earned well. 

We mostly do not have a proper blueprint for what we want to achieve in the future, in terms of our goals and targets. Hence, surpluses keep accumulating, till someone recommends a hot product into which the money goes in! This happens for a disconcertingly large percentage of the population. Financial Planning is mostly marked by its absence!

Most people think investing for highest possible returns is how one can plan one’s finances. With that approach, one will not know whether their various goals and objectives, including a comfortable retirement, are going to be possible or not. Most people shrug their shoulders and say that they are doing their best. So how will a planner change anything if they only have limited surplus to invest?

Financial planning will certainly help. Firstly, the financial planner will try and understand what the client’s goals are, when they are coming up and what they want to achieve in their life ahead. Feasibility and goal achievement will be established throughout life, right in the beginning based on some assumptions. Then, the planner will have to understand the personal life situation, risk profile, liquidity and contingency requirements, tenure for investments, tax implications etc. before coming up with a suitable asset mix for the portfolio, so that goals and longterm needs can be met.  

Also, the financial planner will review the plan and portfolio from time to time, offer counsel on anything affecting the client and advise them appropriately to ensure good outcomes. Mistakes and blunders will be avoided. Investments will be in appropriate investments and they will participate in the up moves the asset experiences. 

Life can go on smoothly, without hiccups when there is a professional to offer counsel. With a financial planner in tow, money management is smooth, proper budgeting provisions are made for goals, expenses and contingencies are provided for and the portfolio is manageable with appropriate diversification.

This will allow a person to focus on their personal & professional aspects of their life, while the financial planner takes care of the finances.

When Raja was finished, Kesavan felt this whole planning thing sounds unexciting, so boring.  Raja just replied that financial planning and advice may be boring, but is effective. Raja helpfully suggested that Kesavan should consider a casino or horse races for excitement!