Engaging the right planners, for best results

Financial Planners keep comparing their profession with doctors – the process and result. A doctor works on health of their patient & financial planners also claim to improve financial health of their clients. Process is again very similar – people come for consultation, doctors/planners do diagnosis & suggest some medicines/products/solutions.

Process of Financial Planning

I am not getting into the six step process but a basic process that actually client and planner follow & understand – which can also be compared to a doctor’s process.

Client visits Planner–Patient visits doctor & talks about his health condition. He talks about the medical history and some specifics related to his condition & looks for medication immediately. This interaction is similar to client-planner interaction where they talk about the concerns faced by client, current financial situation & planners try to see what can be done.

Planner does Diagnosis – After initial consultation Doctor suggests some diagnostic tests to the patient so that exact problem can be identified. Even financial planner talks about constructing a plan which will go deep to identify the problems & based on that solution can be provided.

Planner makes some recommendation – After looking at the various reports, doctors write their prescription which includes some basic suggestions on taking precautions & medicines. After construction of plan, planner recommends some products including insurance policies, FDs, Mutual Fund etc.

What is Basin Test?

First time I heard of this term on Aamir Khan’s show Satyamev Jayate. “Basin Test” is a fake test where blood/urine is taken but no actual test is done because result is already fixed. What happens is, when someone visits a doctor & tells about some medical ailment – with experience doctor realizes that there’s nothing to worry but to earn some extra bucks he says that this can be something very serious & advises some tests. Without having any choice and trusting the doctor, patient agrees to it.

Doctors write some SILLY tests and give the slip to patients – clearly mentioning that go to CHOR Diagnostic center as his results are perfect. He puts a code word in the RX slip that there is no need to do these tests so dump the urine/blood in sink & generate a normal report. Patient comes back with the report, doctor glances at that & then suggests some medicines from his favorite drug manufacturer. Finally doctor & diagnostic center earns money at the expense of patient.

Basin Test by Financial Planner

If you end up with the wrong kind of planner, whose aim is to sell products to you, they would have their own version of “basin tests” after which they will handout products. Such planners, after preliminary interaction with the client, make suggestions that are fixed & is mostly based on thumb rules.  Let’s talk about couple of things:

Setting Asset Allocation:

Financial planners always talk about this term while advising & this is actually based on investor’s risk profile. They try out some qualitative & quantitative test before suggesting some asset allocation but most of the times the number is close to thumb rule result. Rule says Equity percentage in your portfolio should be equal to 100 minus your age or in other words debt should be equal to your age. For eg if you are 30 you should have 30% of your investments in debt & 70% (100 – your age) in equity.

Finding Emergency Fund:

Planners give lot of stress on keeping emergency fund. Emergency Fund helps people in case of sudden loss of income, medical emergency etc. Thumb rule says one should have emergency fund equal to 3 to 6 times of monthly expenses.

Insurance Requirement:

Real planners always talk about buying term plans & for that they use some methods including Human Life Value & Need Based approach but approx. amount can easily be identified even by layman. Rule says one should have sum assured of 8-10 times of his yearly income. I think this rule is far from perfect but still can be used as starting point. This does not take care of any of your goals, liabilities & even complete expenses. Some modified version of this rule says that if you are in early 30s insurance should be 12-15 times of your annual income & if you are in 50s take 6-8 times.

Finding how much is required to achieve goals:

Planner does some calculations & suggests that this should be the monthly amount that should be invested to achieve these goals. But there are lots of tools available on the net to find out these numbers.

So he compiles all this information, adds some graphs, pictures & gives it in the name of a financial plan. The client is happy too to get this professional-looking plan.

So if you end up with an unscrupulous financial planner, the financial plan itself is just a conduit to suggest some insurance & investments. It is hence imperative for a member of the public to ascertain whom they are going to and actually do a bit of background check before engaging a planner. It is important to find out about their professional capabilities, their standing in the profession, their commitment to the clients ( can be checked from references ), the thoroughness of the financial plan, their integrity, trustworthiness among others. If you are referred to them by a trusted source so much the better. Else, probe well to find out if they are really interested in helping you or are just interested in your money. It is not difficult to find out, once you talk to them. Take an informed decision.

Conclusion

I am not writing any conclusion – this was just food for thought for the financial planners & clients, how financial planning is different from financial advisory or is it just old wine in a new bottle. Talk to your planner & ask him how he can create some difference in your financial life.