One of the providential upshots of India’s growth story has been the acute surge in the income levels of individuals. In fact, such has been an increase in a corpus of individuals, that its judicious management, along with deriving solid, stable returns post-investment has been a task in itself.
More so, with the growth story continuing for almost five years, the increase that you have been observing in the income level was unexpected and rather unforeseen. At the same time, we are experiencing a time when rising life expectancy is accompanied by reducing retirement age.
Hence, the task of managing the increased wealth created is not a cakewalk. It has become an endeavour which calls for immense dedication and in-depth understanding as well as unmistakable execution of strategies involved in achieving of one’s financial goals.
As the adage goes, “time justifies the arrival of a need.” Considering the time constraints, which individuals face, and given the varied management skills individuals have, there have emerged professionals, who provide customised wealth management and help an individual achieve his or her financial goals.
This is where the financial planner steps in.
It is critical to look at the technicalities involved in choosing the right financial planner and follow clear dos and the don’ts involved in selecting one. The reason being, money once earmarked for investment needs to be in safe and astute hands for the right use.
Ideally, financial planning is the step-by-step process of assessing one’s financial condition to achieve your specified financial goals through different strategies at different points of time. It involves answering three basic questions: Where are you now? Where do you want to go? How will you get there? And though it can start at any age, it is better to start at a young age. It gives more time to plan for your goals.
Need
Imagine this: you take three days to buy a mobile phone. One week for a two-wheeler. One month for a four-wheeler. Six months for a house. One year to select your life partner. But only ten minutes to select a mutual fund scheme and equity stock. Why? Normally people are very cautious about spending, but not so about investing. Individuals usually do not spend much time getting to know all the investment products available in the market.
Shenanigans
You may come across professionals who call themselves relationship managers. They suggest stocks for investing and achieve their trading targets even if their clients make losses. The case is same with some mutual fund advisors. They normally suggest some new fund offers where they get maximum commission. However, once the scheme re-opens, the advisor shows little interest in recommending it to clients as the commission receivable is not as attractive as it was in a new fund offer (NFO). Also, there are some mutual fund advisors, with vested interests, who coax their clients to sell immediately after the re-opening of the scheme and to invest in some other NFO.
Financial planner
There are many who claim to be financial planners. Financial planner is a term which is still used rather loosely in the Indian financial market. There are many who are mere distributors of financial products and do not offer any consulting as such. On the other hand, a genuine financial planner is certified by the Financial Planning Standards Board (FPSB).
A financial planner will give you professional advice based on your financial needs and income level. He will try to assess your financial needs and status and accordingly adopt a process or strategy to achieve your financial goals. And in this process, you end up investing in an idea and benefit from it over and above the charges paid to your financial planner.
Advantages
Financial planning is a must for every person irrespective of his or her age, family responsibilities and social status. Planning well in advance for the future is the best thing. It gives you a sense of security and confidence towards achieving your financial goals. Here the financial planner is an expert who will make you understand the way to meeting your financial objectives.
The financial planner takes a holistic view of your financial situation – reviewing your revenues, expenses, savings, taxes, investments, insurance and retirement needs or works with you on a single financial issue, like retirement planning, but within the context of your overall financial situation. This comprehensive approach may set the planner apart from other financial intermediaries, who may have been trained to focus on one particular area of the financial aspect of your life.
Traits
Once you understand the need of a financial planner, it is time to find a good one. This is the real task for you. First and foremost, forget transaction-driven financial intermediaries like insurance agents and mutual fund advisors. A financial planner has to be a process-driven professional working towards your financial good.
The process remains the same while the strategies and time horizon change as per the objective and goals to be achieved. A financial planner can handle clients across varied income levels.
Qualifications
You may come across a person who is claiming to be a certified financial planner (CFP). You need to confirm his or her certification. The 4E’s that make a CFP are education, experience, exam and ethics. A certification from a competent body like FPSB ensures transparency and credibility.
Also, one should note that the certificate has to be renewed every year. Non-renewal results in cancellation of the certificate. This provision ensures that financial planners update themselves regularly.
Selection
You should have a look at the financial planner’s track record. Some of the checkpoints are the certifications done by the CFP, beyond the mandatory ones, like AMFI, additional certifications from Insurance Institute of India, LIMRA and other professional bodies. Some of the financial planners come with professional qualifications in the field of accounting and law. Some appear in the media and write well-researched articles on related topics. You can always ask the CFP about the number of clients and assets managed by him or her, though verifying this is not easy.
A financial planner can practice independently or work with an institution. You can choose either one, depending on the services provided by the CFP. The common factor in all financial planners will be the process-driven approach. The difference will be in the services they render, the level of expertise and the fee structure the services are subject to. These factors will influence your decision.
Services
Your financial planner should discuss your goals and objectives with you and explain all the services provided by him in totality. After understanding the services, if you think that your goals and objectives can be met, then you can go ahead with the financial planner. You should give sufficient information so that the CFP can formulate the best suitable plan with clear timelines.
If you need a financial planner that typically provides you with advisory services like preparation of a plan, review of a plan and periodic consulting, then things look a bit easier. However, there are many among us who want to look for a cradle-to-grave solution. If you are an NRI with ample savings, for instance, you will certainly look out for one who will not only provide you advisory services but also provide you with ‘execution support.’ Some of the financial planners may offer you value-added services like property maintenance through their associates.
Charges
There is no uniform method by which the financial planners are remunerated. If you have approached an institution, then you will be charged a fee, which is either flat or a percentage of assets managed. Needless to say, the institution with which the CFP is employed compensates him or her. However, be sure that the services rendered to you are towards your financial planning and not the traditional portfolio management services.
Things, however, change drastically when you deal with individuals who are practicing financial planners. You may come across financial planners who charge a flat fee or a percentage of assets managed. Also, when the financial planner sells you financial products as an authorised distributor, he or she gets a commission. You are entitled to know the commission they receive. In most cases, you come across financial planners who disclose the commission earned and the fees charged.
The fees, however, differ with the services on offer. Also, the size of the assets managed by the financial planner will influence the fee structures. The active management of the assets, like equity, typically fetches higher fees and in some cases does come with profit sharing norms. On the other hand, one-time services like borrowing advice and debt counseling will attract lower fees.
Depending on the expertise of the CFP, you may come across varying fee structures for the same type of services. As Milton Friedman rightly observed, “there are no free lunches,” especially when you come across some ‘simple’ plan that helps you meet the targets but is difficult to pay for. Many people complain that financial planners are costly. However, they conveniently forget that the so-called ‘simple’ looking plan is the toughest thing to come up with.
Documentation
Like any other commercial transaction of high value, documentation is required. Documentation brings in recording of the terms and conditions of the services provided and charges levied against it. It also brings transparency into the transaction. From a qualitative point of view, documentation provides you with a record of the financial plans prepared and helps you ascertain the progress that has taken place as per the plan.
Documentation can be used for redressal purposes. Professional bodies like FPSB have provided for arrangements like a professional review board that investigates the complaints of clients of financial planners registered with them.
The financial planner and you
Selecting a financial planner is not the end, but the start of a journey. Financial planners can very well provide you with the best plan that will lead you to a better financial future securing all your financial goals.
However, it is up to you to act on these plans. It is up to you to take advantage of the services rendered by the financial planner by actively following his advice. Because ultimately, it’s your money.