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personal finance advice

You can access high quality personal finance advice now

For most areas in the world, there is someone we can turn to for advice. Doctors, Lawyers, Architects offer counsel in their respective fields. In personal finances, there was no one until now, to offer client-centric advice.

personal finance advice

You can access high quality personal finance advice now

High-quality advice 

SEBI has created a new class of Advisors – Registered Investment Advisors ( RIAs ) – who are to act in Fiduciary capacity & offer client-centric advice. Fiduciaries are those who put the client’s interest ahead of everything else, including their own interest. Conflict of interest will be minimised or non-existent in this model. Investors can now access advice truly in their best interests.

There is an allegation that RIAs are doing pretty much what distributors are doing. SEBI regulations allow those transitioning, a dual role. There are corporate advisors who have both advisory & distribution divisions. There are individual advisors who have relatives/ friends doing distribution. But then, there is segregation of activity, arms-length dealing, full disclosures of any conflicts of interest & options to the client to source products from anywhere. There is a legal Fiduciary responsibility, annual process/compliance audits & possible inspections. So, it is not really the same.

Advantage Investor 

There are also many fully fee-only RIAs too, which is the ultimate destination for RIAs. RIAs are registered with SEBI as Fiduciaries & hence customers can fully expect them to put their interest first. RIAs represent only their clients, their advice is aligned to the client’s specific situation & are well qualified as per regulatory requirements.

Paying an advisory fee separately for the advice provided ensures that investors get back control over what services they get and what they pay for it. In a product distribution situation, the commission is collected and paid to the agent by the principal, irrespective of the service quality – which is a problem for an investor.

Remuneration & services

RIAs collect fees for advice rendered. The important fact to remember is that RIAs also suggest commission-free products, which lowers the cost to investors. For instance, Direct Plans of equity MFs & Debt MFs are on an average 1%pa & 0.5%pa lower in cost as compared to Regular plans ( where commissions are embedded ). Likewise, many RIAs are offering commission-free products in various categories – PMS, AIF, P2P lending, Debt products, etc. All these together significantly lowers the cost to clients.

RIAs offer a range of services to clients like Financial Planning, Plan reviews & Portfolio reviews, Quarterly client engagements, Estate Planning services, Life Planning services, etc. Such services would typically be available to clients who have engaged them for a fee. After taking into account the savings, the client would overall pay the same or lower outgoing amounts and would also get a range of advisory services from the RIAs.

Fee charge mechanisms 

There are different fee charge mechanisms which RIAs use. Some charge a lumpsum fee while some others charge as a percentage of profits & yet others a percentage of Assets under Advice. There are many other hybrid models which use flat-fee to an extent & variable fees beyond that.

Firstly, the fee-charging mechanism is a matter of which model works well between the client & the advisor. Many clients want to pay based on what they earn – it is a psychological thing. They are willing to pay more when they earn more & many times they insist on such an arrangement. For some advisors, this works well as there is participation in any upsides which the clients enjoy, especially in a profit-sharing model.

In the AUM-based model, they get paid a higher amount when the Corpus they manage goes higher. They are paid more for the work and the responsibility that goes with it. The analogy is that of a CEO of a company who spends the same 8-10 hours a day but may earn multiple crores, which is far higher than what even a senior management person may be paid. He is paid more for the responsibility he is shouldering – that of giving a vision and moving the company itself in a particular direction to achieve certain agreed objectives.  These advisors fashion themselves like the Personal CFOs of their clients & offer a range of services for their clients. So, in these two mechanisms, the fee is a percentage of either the profits or assets.

There are also those who work on a flat-fee model of engagement. In this model, it is mostly based on the amount of work and the time spent for doing that work.  This is a transactional kind of model, which again works well for people who are looking for specific services/ engagements.  In a hybrid model, there are a certain set of services which are offered for a flat fee & further services offered for which a variable fee is charged.

The fee & service arrangement are usually discussed & decided upfront by the investor & the advisor.  The important point is that the advisor would work in their best interests as a Fiduciary, irrespective of the fee arrangement chosen.  The client has the option to decide the advisor, the services, and the fee charge model that works best for them.

Conclusion 

The financial landscape has undergone a transformation. Life has become far more complex now. The goals and aspirations are many. We are living longer than ever before & hence our corpus needs to be much bigger. The stakes today have become much higher. A true advisor can help in effortlessly navigating finances & life itself. Such advisors are available for providing counsel. It’s advantage for investors now.

Suresh Sadagopan

Founder   |  Ladder7 Financial Advisories

financial planning client

Delivering what the Financial Planning Clients don’t even ask for

Many times clients don’t know what they really want. What they think they want, may not be the right thing for them. These statements are somewhat puzzling. Let me explain.

Let us first talk in terms of events that have happened. When mobile telephony was introduced, it was thought that there will not be any market for that. It was thought that there will be a tiny market for it predominantly among truck drivers, who constantly keep travelling. Today, India alone has about one billion mobile connections!

Apple launched the Iphone in 2007. Then, we had phones which were covered with buttons. Phone makers were falling over themselves to launch phones that had more fuctionality and for that they were bringing in more buttons, front & back. Iphone was launched with just one button & a touch screen. It evoked a lot of curiosity & the market for such phones exploded.

The customer did not know that such phones were good for them. The interface and the user experience was superlative. The product itself was well engineered ( like all other Apple products ).

Manufacturers then did not know that the customer would accept a phone sans buttons. They made functional products which were often clunky. I have wondered a lot of times how some of the Nokia phones of the day, ever got into mass manufacturing!

financial planning client

Steve Jobs was able to anticipate what the customer may be expecting before they even know! His products were sublime pieces of engineering… they were almost works of art.  He delivered a user experience that the customers did not know was even possible. That was his genius. He used the same philosophy while launching Ipod, Ipad, Macbook etc.

In our industry too, we can benefit greatly by taking a leaf off what Steve Jobs did. But, how many of us are anticipating what the clients may need & deliver that even before the clients ask for it?

The routine stuff of performance reports, portfolio reviews, once in a while client meetings etc. are done by most of us. The customer is also largely accustomed to this and is not expecting anything over this – atleast for the moment.

Therein lies the opportunity. There have been lots of changes in the lives of the client – the technology & social environment has changed significantly over time. The expectations from life themselves has undergone a sea change. For instance, today, there is a premium on experiencing things rather than buying & accumulating stuff. That’s precisely why travel, adventure sports, gourmet restaurants etc. are doing well. People are willing to spend serious money in these areas. The other area which has gained traction is physical & mental well being. We see more people focused on living healthy lives. People have taken to exercises/ gymming, running, aerobics, dance, martial arts, lean food etc. to stay in good shape. Hence, we see a lot of Gyms, dance studios, martial arts teaching centres etc., these days.

Life has become far more complicated. We have huge amount of stress and tension in our lives.  In view of the stressful lives we are leading, we are searching for ways to calm down the jangling nerves. Yoga, meditation, detox & destress courses, ayurveda therapies for rejuvenation etc. have become mainstream.

We don’t have time. Life has become easy and tough at the same time. It is easy because we can accomplish a lot of things with just our computers and mobile phones. We can book tickets, pay bills, pay taxes, order stuff etc. without as much as moving a single step. But the options and choices have exploded. That information overload is leading to decision paralysis, as even the thought of analysing all the information and taking a decision is daunting. Financial area has become extremely complicated. That is exactly where we come in.

We need to recognise the magnitude of changes that have happened in our client’s lives. As advisors, we need to come up with offerings to fulfil what the clients may require today. What is easy today is the transactional aspect. Even our clients can buy or sell using a platform. All manner of reports are available on tap. What is tough is the way finances themselves need to be managed. In their complicated lives, where they are already overwhelmed, they will welcome the idea of someone helping them with their finances.

Clients of course have limited expectations – for they don’t know what to expect!

They are just looking for the basics – someone who can tell them where to invest the money, help in monitoring their investments, a chat once in a while & some reports which will keep them informed as to where they stand. These are precisely what most financial intermediaries do. But, the client’s unstated requirements are much more than just these.

Ideally clients would need all these – they need someone to comprehensively examine their situation, analyse their investments, understand their goals & needs, assess the risks they are exposed to, come up with a suitable asset mix based on their specific needs and risk bearing capacity & then suggest all that they need to do. This is Financial Planning. Very few come and ask for financial planning; but once we explain about it, everyone wants it!

Clients want meaningful engagements with their advisors. They are expecting more than courtesy calls, from their advisors. This is largely lost on the intermediation community which thinks that a courtesy call from time to time and a discussion on portfolio performance is more than sufficient to engage clients. Clients don’t attach much value to courtesy calls. Nor are they thrilled at portfolio performance discussions, which often adds to their stress. Anyway, advisors are expected to take care of portfolios and their returns – right? So, why make that the centre piece of the discussions.

What can add meaning to clients would be special scheduled discussions about their plan, update on the happenings in their lives, changes in their personal/ professional lives, qualitative discussions about truly important things like their children, parents, their career etc. Seeking to know these would help the advisor to understand their client in a much deeper way. This will enhance the quality of advice & help in keeping the plan meaningfully updated. The clients also will truly value this as we are trying to find out/ understand all there is to know before we dole out advice.

There is an even more fundamental area, where the clients can be helped. Mos of our clients go through life, without really thinking about the kind of life they would be most happy about. We all have one life and living that life to the fullest should be the motto. People get that wrong and think that aggressive financial goals is what counts for a worthy life. That’s why we see many clients leveraging themselves and buying many properties, expensive cars, bring on a lavish lifestyle, world tours etc. While these may be enjoyable & may even offer a high, they come at a price. They chain the client to keep earning at a high level. They also crowd out the truly important & valuable goals in life. We have seen cases who are stressed out & want to quit, even though they seem to be doing quite well for people from the outside.

Can we advisors help there? Sure, we can.

We can help them understand what is that they truly really want to do in life, what is that which will excite them, what is the quality they would want to bring to their lives which will make their lives well lived & worth looking forward to. What will give them back the wonderful feeling of freedom, the vigour, vitality & the sense of fulfillment? Once the clients understand this, it is easy to help them financially to create a life of meaning. This is Life Planning.

Are clients going to ask for this? No. Is it valuable & useful to them? Absolutely yes!

There are many more such services – Estate planning is an important area. If advisors are able to understand the client situation and are able to advice clients professionally here, it will be a huge help. Coaching client’s children on money matters is an important area, where we can help. Helping clients through life transitions, assisting/ advising them while their children want to go abroad for studies, assisting/ advising them on emigration to third countries etc. are things advisors can do for their clients.

Clients won’t expect their advisors to do so many things for them. But, if their advisor can do all these things, they become invaluable for them. They become their CFOs, their confidants & mentors.

To get there, the advisors will have to upskill themselves. But once we get here, would our remuneration be questioned?  It’s a rhetorical question for which the answer is self evident. I don’t have to answer that!

Suresh Sadagopan

Founder  |  Ladder7 Financial Advisories

Adapting Financial Planning Process For Couples With Changing Times

Ki & Ko decided to get married after a long 8 years of courtship. They had decided to respect each other’s space and individuality even after the marriage. As a part of this arrangement, they have a very one of a kind way of handling their personal finances. Their Financial Planning is quite unique. They have life goals as a family and they also have their individual financial goals.

They are contributing to the common goals as well as following their respective dreams. The household expenses including the rent of the house are shared equally between the two of them. The remaining surplus is then assigned to Investment Planning towards individual and common goals. Welcome to new India. Welcome to new Independent families of young India.

As financial planners, we have handled quite a few families in the age group of 35 and more which are following the societal norms of ‘One family One Plan’. They generally have family goals like child education, marriage and retirement. May be international vacation and a nice car. The couple together will work towards these goals. There will not be any goals specific to husband or wife alone. But there is a noticeable difference in the new age couples. They have individual viewpoint of their life.

They will have some common goals like children education, Retirement Planning etc. They will plan parental care for their respective parents. Additionally, they may have goals like starting one’s own business, taking a sabbatical to explore the world, starting a NGO for some cause, embarking on spiritual journey to find purpose of life, etc.

Financial Life planning is the solution to provide solutions to this generation. We have to blend seamlessly the togetherness with individuality. We first start with Cash flow analysis and asset -liabilities. It is followed by their income versus expenses assessment and individual networths. Budgeting of expenses for both the partners is very essential to ensure that they contribute towards day to day expenses in equal proportions. Example: If Ki is spending Rs 24000 on household expenses, Ko will take the responsibility to pay rent of Rs 23000 p.m.

The next step is creation of Emergency fund. Two Separate Emergency funds for individual needs (parental care etc) and one common for household. Then Life insurances are taken after assessing the financial dependency of partner as well as their respective families. So, Ki will take Life Insurance Planning to safeguard financial liability towards Ko as well as her own parents. Same will be done by Ko. Medical Insurances are generally taken as family floater and Premium is equally shared by Ki and Ko. They will take separate policies for their respective parents and pay premium for the same.Finally, before goal-based Investment Decisions are taken, the couple’s individual risk appetite are considered as each would be investing the surpluses proportionately and the type of investments will reflect their risk profile and goal.

The recommendations for their respective goals need to be given treating them as individuals. Since there are many individual goals, their prioritization becomes important from financial feasibility perspective. Lot of time is spent understanding the logic behind these goals. The scenario is changing and more and more such parallel lives enclosed in togetherness of marriage are being witnessed. We as planners have to accept this and design the plans to suit their requirements.

Which Schemes To Buy From Gold Saving Schemes

Gold is a very favorite metal to Indians, there is a tradition also attached it, woman are very fascinated about gold jewelry normally Indians buy gold on every holy occasion. India is a 2nd largest consumer of gold in world.

Few consider buying jewelry as investing in gold, but they are misleading themselves as it is not true because of following main reasons,

The jewelry once bought never sold unless and until it is the only source left,
There is a loss in to it, as at the time of selling the jeweler reduce the weight of the ornament on the account of impurities. so if it is investment then the loss starts immediately as you buy.

One of my client, who is my friend also whom I told not to buy gold more than the specified amount was approaching me in different ways to take yes from me to buy gold. It is mainly because gold had appreciated as never before to current young generation.

One day he came to me with some options investing in gold which are floated by most of the jewelers around which is also very well known as Gold saving schemes or gold bhshi.

What is a gold bhishi or savings plan: In this plan you have to invest some fixed amount (which normally is Rs. 1000/- and in multiple in most of the cases) every month for a specified term like 12,18,24,36 months and at the time of maturity you can buy the gold items from the maturity amount, now most of the jewelers are giving flexibility of buying Silver, Diamond, platinum or any such item if you want. The maturity cannot be cashed.

The Lure:

These schemes are made attractive to the customer by giving discount or additional few final installments depending on the plan you select. As well as some of the jewelers gives discount in making charges of ornaments.

The Benefit To Jeweler :

He gets a fixed advance business because when the scheme matures client is going to buy the items from his shop only, so jeweler is assured for his future business, as well as this allows client to accumulate in small amounts the reach also increases.

The Benefit to You:

The small saving help you to accumulate for buying your desired item. It is like a recurring deposit which you are doing for buying gold jeweler.

Why to enroll:

You can enroll in this scheme if you want to buy a jewelry to your loving ones. If you have some fixed commitment for gold items in coming 1 years or so. Define how much amount gold ornaments you want to buy and accordingly select the plan.

The Risk:

The risk in these type of arrangement is high as compare to Bank deposits and fully depend on trustworthiness of jeweler.

Which plan to select :

First you have to understand that even if it is called as gold saving plan or gold Bhaishi it is not actually you are purchasing gold during payment of installments, it is just like RD where you keep on doing installments and you will get invested amount plus interest at maturity, here jeweler gives additional installment.

There are many plans which are offered to the client and are sufficient to create confusion in the mind which to select.

To select which is a good plan for you let’s calculate yield from this investment.

Have a look at following schemes:

A. You pay for 12 installments + get 1 installment free and can buy the goods in 14th month.

B. You pay for 24 installments + get 3 installments free and can buy the goods in 27th month.

C. You pay for 36 installments + get 7 installments free and can buy the goods in 40th month.

D. You pay for 12 installments + get 1 installment free and can buy the good in 13th month.

E. You pay for 18 installments + get 2 installments free and can buy the good in 19th month.

F. You pay for 24 installments + get 3 installments free and can buy the good in 25th month.

Can you tell me which is better? Confused and most of you will either go for scheme C or F because as you go for more installments the scheme becomes more attractive by giving you more free installments.

To arrive at right calculations I used internal rate of return (IRR) method and surprisingly finds following results.

The returns on yearly effective basis for the schemes are as follows.


A. 13.54 %

B. 10.09%

C. 10.20%

D. 15.73%

E. 14.00%

F. 11.75%

This shows that the sooner is better so going for small duration schemes make sense above schemes are offered by local jeweler there is one corporate which is offering You pay for 11 installments + get 1 installment free and can buy the good in 13th month.

The yield in this scheme comes to 15.93% which is better than the above schemes.

Now you have offered a analysis on the schemes available, ball is in your court.

Read More: SEBI Registered Investment Advisor l Insurance Planning l Taxation Planning

 

Focus On Portfolio Returns, Not Individual Investments

For more than a decade now, we have met different types of clients; some conservative, moderate and aggressive investors. Some wish to focus on short term goals, while others have medium term and long-term goals to take care off.

In this diverse group of investors, when we looked at portfolios of our newly on-boarded clients, we noticed a common trait. Investors were concerned more with their equity portfolio rather than their entire portfolio. The rationale being, “Equities are risky; it can erode capital or/and enable wealth creation. The rest of the portfolio is fairly safe, so why worry about it.” That’s reasonable justification indeed, isn’t it?

This phenomenon is well explained in the Loss Aversion Theory, where for the same quantum of money, investors feel 2.5 times more psychological pain when losses are incurred compared to gains. Naive investors have designed home-made Risk management tools for this purpose. In most cases, they maintain very low allocation to equities ranging from nil to 5%. The balance portfolio is invested in safer instruments which include Fixed Deposits, Postal schemes, Insurance Policies Planning , gold, etc. This way, they ensure their downside is well protected, while expecting super normal returns from miniscule equity allocation.

With such actions, naive investors are shouting out loud, “We need investment advisors to guide us.” Think about it, an investor is excessively obsessed with performance of only 5% of the portfolio, taking 95% of the portfolio for granted. Is this behavior rational or irrational?

In such a portfolio, 95% of the portfolio will deliver approx. 7% returns, while return expectation from equities will be plus 12% to 15%. If projections meet reality such a portfolio will deliver meager 7.45% returns, which cannot beat inflation in the long term. Investors need to allocate their investments in different assets as per their goals and time horizon.

For example, if they have a Financial Planning goal which is 7 to 10 years away then the allocation to that goal should be in equity as over that period, equity volatility gets moderated and returns get enhanced. For short term horizon investors should look at fixed income assets which provide safety of capital. In the endeavor to earn huge returns in short term from equities, investors may take too much risk, relying purely on luck to get the desired results.

On the contrary, if investors focus on Asset Allocation whereby they invest as per their goals and risk profile from a long-term perspective, their investment journey will be way more pleasant. For example, if you have 40% equity and 60% debt, having reasonable return expectation of 15% from equities, the portfolio return is likely to be close to 12%. The major difference being, we are not betting in equities, but investing in it for the long run.

Conclusion

Investors, stop betting on equities with miniscule portfolio allocation, it is not going to help much in the long run. Use suitable Asset Allocation, which enables you to worry lessand reap the rewards in the long run. Simply put, when the whole portfolio works hard for you, the results are likely to be better than a portfolio where only a small portion works hard. The choice is yours!!!

Read More: SEBI Registered Investment Advisor l Planning for Early Retirement

Buying Ornamental Financial Products Out Of Obligation Can Be Disastrous

There may be various apprehensions. Why do you become a martyr? The word “martyr” may slightly pinch you! Obligatory products mostly don’t quench your thirst for financial freedom. It’s your choice, whether or not you’ll keep away from buying obligatory financial products or services from someone.

Obligatory financial products are traditionally commission based. There may be no visible upfront charges but there are hidden costs, which’s inescapable. The martyr doesn’t have knowledge about amount of commission payout. As you’re ignorant, you feel obligated to buy irrationally. When some advice is offered for “free”, you have to indirectly pay more and even the financial products become ornamental or disastrous.

“Nothing is more costly than something given free of charge.” – Japanese Saying.

We come across prospects/clients, who have financial plan and they may buy financial products by ignoring Financial Planning out of obligation.

They’re fulfilling salesperson’s expectation and not their personal requirements/expectations. It’s their illusion as it resembles an oasis in the desert. On comprehending, it becomes too costly and can hardly offset the financial loss.

Who is to blame? You being a subject, entire responsibilities are yours. You jump to solution out of obligation without understanding your exact requirements. While buying any complex financial product out of obligation/sales pitch, you don’t have answers to why you need, when you need, what you need& how much you need. You’re hypnotized by salesperson. But in short, product suitability is the ultimate diagnosis.

A salesperson’s objective is to be benefitted by selling financial products only to their “customers”. While an Adviser’s objective is to be benefited by benefiting his “clients”.  An Advisor is regulated by SEBI Registered Investment Advisor; where as a distributor/sales person is not subject to regulatory supervision. An Advisor is client centric because of which he’ll analyze a set of parameters before giving any advice.

At the time you buy financial products out of obligation, you can see one side of a coin only. You ignore invisibles. You’re biased and you may be suspicious about the benefits of financial products. Hardly have you known about the merits & demerits, i.e. you have incomplete information. You’re dependent on the salesperson and reluctant too. This is because you are obliged to buy the same and product analysis becomes secondary concern. A salesperson may not consider your uniqueness, like:

  1. Your risk profile & risk taking ability;
  2. Your investment time horizon;
  3. Your investment objectives &
  4. Your priority and expectations etc.

I’m recalling a recent incident, where one of my clients mailed me that he’s approached by an Insurance Agent & he’s feeling somewhat obligated to buy a life insurance endowment policy out of sympathy. My client feels obliged on humanitarian ground and simultaneously his concern was about the product suitability. It indicated a complex behavior (humanitarian ground as well as product suitability).

My responsibility was to send him an unbiased illustration. I strongly advised not to buy the insurance product after thorough analysis. His needs were not associated with the benefits of the complex financial product. My client’s emotion overweighed his rationality.  It’s very difficult to manage other’s expectation unless you’re independent. An Advisor is unbiased and guides you professionally and impartially. But if you ignore his advice, hardly you can offset your financial scars.

Time and money both are limited. If you lose money, either you may not get time to offset or you may not get the required money to offset the loss.

A traditional life insurance may generate 5% to 6% rate of return (ROI), whereas if you invest prudently in equity & debt combination and if your investment time horizon is more than 5 years may generate much more than the Life Insurance Policy India. Moreover, you can hardly offset inflation. Still your emotions over weigh logic (rationality) .

During your earning/accumulation phase and during your distribution phase (retirement/start collecting from accumulated amount), you may be approached by salesperson/ agent/ broker/ bank relationship manager etc. They will try to push their products. Without analyzing your requirement, if you buy, hardly you can get rid of the bitter consequences.

To conclude, I’ll strongly recommend you to go for financial plan first, and then you follow your action plans with periodical reviews until you reach your aspirations. Your emotions are your great enemy unless you regulate them. You’re expected to face this situation multiple times in your life. Take your own decision, best suited to meet your own aspirations. It’s your choice how you live your life.