It’s your money. Choose whom you get financial advice from

People generally get advice from a variety of sources namely colleagues, friends, family, banks, stockbrokers, chartered accountants, insurance agents, advisors, wealth managers, and planners.

Most people today end up taking advice from several different people and hence end up with so many unnecessary and irrelevant products. Some people are completely fascinated or fixated by the gold or platinum tag their private bank allocates them. They believe that just because they are gold clients, they get the best and customised advice that is possible, and more importantly that their advice is free. I recently came across an intelligent person who said, “I am a Gold client of this bank. They have allocated a relationship manager specifically for my account. I am being taken care of on a regular basis. Besides, they don’t charge a fee and have given me a financial plan”.

When I saw the financial plan this gentleman had received, it was just a canned copy printed directly from a software. All the relationship manager had to do was sit for an hour with the person, tick off boxes spread over 6 – 8 pages and the financial plan was done. This gentleman was given a printout of this after 3 – 4 days to show some additional work was done and that was it.

There was no detailed analysis, no thought given to the overall financial goals and strategy, and no effort that was put in by the relationship manager to create a sound financial plan. There was nothing mentioned about what to do with existing insurance, investment and loans. There was no debt strategy, no estate planning exercise, and no real estate strategy. The ultimate objective was to sell some irrelevant unit-linked insurance plans and proprietary investments that were not required at all. I told him, “This is not a financial plan and this is not how you should be taking advice.”

What is then the correct way to get advice?

The correct approach is to create a comprehensive written strategy that would cover every aspect of personal finance for you. In short, there is a pressing need to take a holistic view of your overall situation. There should be one person or a team who takes stock of your cashflows, assets, liabilities, liquidity needs and helps you firm up your financial goals. What is the point of having several lakh earning 4 per cent when you are paying a loan with an interest cost of 16 per cent? What is the point of having several properties, if there are no inflows from them or there are severe negative cashflows for the properties? What is the point of having life insurance if you are severely under-insured despite paying huge premiums?

Just as an infection to your liver can spread across other key organs, similarly a decision in one area of finance impacts another and your overall financial situation. It is very important that people understand this and make prudent decisions.

The first and key decision that you must make is to select a good financial advisor. If you think you are capable enough of making money decisions on your own, great. Even then, a good financial advisor can prove effective and efficient in managing your overall finances. But, if you do strongly believe that you do not need any, then you should be able to spend enough time to understand several areas of personal finance, changing economic trends, products and options suitable for you. Finally, you should implement the strategies that you have devised for debt management, risk management and insurance, asset allocation and investments, tax planning, retirement planning and estate planning in a timely manner. For others who believe that they could benefit from sound financial advice, you must at least understand the basic parameters on how you would choose a financial advisor/planner.

How should you choose a Financial Advisor/Planner?

A lot of agents, financial distributors and banks try to call themselves financial advisors or planners. They generously also use the term financial planning/wealth management as and when it pleases them. Consumers are naturally confused about the various terminologies used and hence do not actually question what a particular designation means. If you ask a person whom he would go to advice for [of these two titles] given a choice, Certified Financial Advisor or Certified Senior Financial & Investment Specialist [CSFIS], 95 per cent of the time, he will opt for CSFIS. Incidentally, both these certifications are fake.

I was talking to a journalist friend the other day and he asked me what questions a person should ask a financial planner. I told him that more than the person asking the financial planner, what is far more important is the questions the financial planner asks you.

First: How detailed and comprehensive was the data-gathering interview?

This is one of the most important steps in the financial planning process and will drive all the advice to be given. Was the data gathering comprehensive enough? Did the financial planner make notes of the information that you did not have and ask you to get back with this information? Did he take in information about you, your family, your aspirations, dreams, goals, income, expenses, cashflows, assets, liabilities, insurance, investments, tax situation, wills, powers of attorneys and information that might be relevant? Did he ask about your behaviour towards risks and how you react in bullish and bearish situations? Did he understand the mistakes that you have committed in the past and how were they committed?

A good financial planner should take anywhere between 3 – 5 hours including a social chat over 1 or 2 sessions to complete this data gathering process. He will then review the data collected and revert to the client for more clarifications to make sure he has understood the overall scenario well.

This first step itself is the single biggest clue. I find that most people genuinely interested in financial planning are keen to understand how their financial decisions will affect their life, much more than how certain products work or how to get the highest returns. In fact, the biggest value-add of a good advisor is how he utilises his skills to better understand the client’s overall situation and emotional issues and how best he handles the overall picture.

A salesman on the other hand will ignore most of the issues like estate planning, debt and cashflow management and be only interested in how much money you have to invest and how much insurance can be sold. Another category of sales people will just focus on how their scheme will make you rich, save tax for you and give you the highest returns. This is the most dangerous category and should be avoided completely.

Second: Look closely at how the planner discusses risks and returns with you.

Does he promise you the moon and tells you how good he is and that he has provided the highest returns? No good financial planner in his sane mind will ever do so and this is the kind of person you should look at working with. Does he take you through a proper risk profiling exercise, and tell you that the long-term return of the stock market is around 12 –15 per cent and therefore one should not believe theories of 30 per cent returns?

Third: Don’t look at the bank brand and opt blindly for advice, as the bank is not going to advise, it is the advisor that does. Most relationship managers in banks are primarily sales people always on the lookout for selling more products to clients. They frequently change employers so a relationship manager at Bank A can tomorrow be at Bank B and then at Bank C.

Fourth: Does the financial planner take you through estate planning matters, retirement planning, different offerings, as might be suitable to you, and any other issues? He might not deal directly in any of those things but most good planners will at least give you an overview of what you need and refer you to someone competent. Finally, the composition and presentation of financial plans can vary immensely. The groups most notorious for doing rudimentary financial planning or misusing financial planning are banks and big distributor of financial products. I told a person, “If you ever want to insult a good financial planner tell him that his plan was as good as the one you got from your bank’s financial planner!”

Most of the private banks and distributors have a well-deserved reputation for first selling life insurance as investments and churning portfolios under the garb of financial planning.

As a popular business anchor says on television, “Would you go to a chef for a haircut, or a barber for food advice? Then why go to the wrong person for advice?” The problem today in the financial services industry is that you don’t know who the barber or chef is because everyone uses the same title or name. Make sure you understand the terms financial planner, financial planning, wealth management and wealth manager, and that you are not just getting a lemon in the name of financial planning.

Who should be on your team?

Several key members should be a part of your team.

Chartered Accountant [CA]: Having a good CA on your team is absolutely necessary. CAs today provide help on several areas such as bookkeeping [day-to-day accounting], preparing and filing returns; tax audit, tax planning advice, project finance and so on. Understand that they are professionals and expect to be compensated in a fair manner. Do not cut corners by just thinking about costs. In fact, most times the advice that you will receive will be a function of the fees that you pay.

Banker: People are likely to have a high amount of loans. Having a good relationship with a banker could mean preferential treatment and rates on loans and other deposit products. This is also a function of your account size with the bank. If you are unhappy with your bank or if your bank has not acted in your best interests, move on to some other bank.

Public Sector Banks are likely to give you loans at a much lower cost than private sector banks. Although the infrastructure might not be so great and documentation could take time, the savings that you will make over a period of 10 – 20 years is likely to compensate for the initial inconvenience.

Financial Advisor/Financial planner: We’ve already discussed this in detail above. This is again one of the key decisions a person should make. The key requirements here are someone acting in your best interests, his integrity and his skill in creating customised solutions for you.

Real Estate Agent: Considering that you are likely to own several pieces of real estate, make sure you have an ethical broker with you who does not just show you some properties but also objectively tells you appropriate prices and gets you the best deals. He should be conversant with the paperwork required, do appropriate due diligence and constantly keep abreast of real estate happenings in the area. You might also want to consider real estate consulting firms, if the ticket size of your real estate is sizeable [above ` 5 – 10 crore].

Insurance Agent: Most people think of life insurance as an investment and as a means to save tax. At the same time, they think of general insurance as a pure cost. Hence, most people are inadequately insured [low covers], have the wrong set of policies with them and are paying a huge premium. You must get the risk transfer piece of your financial planning process right. Your Financial Planner can help you arrive at the quantum of cover you must take for every financial risk that you are exposed to. A good insurance agent will help you implement action items as detailed out by the Financial planner and regularly service you with updates, premium collection, submission and receipts.

Lawyer: There are several areas, where most people, require legal help. Considering a person’s real estate exposure, it is very important that a real estate lawyer vets all your property-related documents right from title of the property to preparing the legal buy or sell document. Additionally, lawyers can create the leave and license document for you and other paperwork that could be needed. Many people bypass lawyers by letting the real estate agent handle the real estate paperwork. It would always be beneficial that you double-check all pieces of paperwork with a lawyer specialising in real estate. Another area where a lawyer will be of immense value will be is estate planning. A competent lawyer can handle creation of wills, power of attorney and trusts.

Excerpted with permission from The only Financial Planning Book that you will ever need, by Amar Pandit, Network 18 Publication Pvt. Ltd. INR 499

This was first published in the April 2013 issue of Complete Wellbeing.