Here is a mail from a reader…I thought readers / fans of planners / etc. should respond. Would love a response from Babar Zaidi, Ritu Kant Ojha, Anirrudha, Kamya Jaiswal, Debashis Basu, Khyati Dharamsi, Deepa Venkatraghvan, …other CFPs, ….all others welcome. I personally do not understand how personal financial planners work (well to a great extent) so will reserve my comment for now.

Subra Sir,
I am a regular reader of your blog. Thanks for all the knowledge being shared. Could you please help me understand what exactly is financial planning/how it works? I am asking this question because to understand if the following is part of it and I do not know anyone other than you who could write about it. I Am writing this mail since I do not want to give some of my details to general public. If you could write an article in your blog, that would be helful. Here are my details

My Goal is to be wealthy and intermediate goal is to be financialy secure (In the sense, I am aiming for the starts so that even if I fall short, I’ll end upin moon)

I was reading about being financialy secure as I came to a conclusion that the financial security is everyone’s business and I read many article and came across a CFP and he advised that he couldhelp on my finacial planning through his firm.

1. I did a profiler stating my liabilities and my goals and how much I have saved for my goals and came with a plan on how much I would need going forward, paid the Financial Planning fees of 15000 Rs in 2006 (They advised that only if there is any major change to the plan, they would charge fee if the plan needs to be revised)

2. They told me the life cover I would need so that my family has sufficient funds if anything happens to me. took a term policy (They did not advise any insurer)
3. They advised me on the mutual funds I should take and what should be the SIP amounts, their name is there as advisor and my SIPs are still running from Jan 2007.

4. Initaillay it was agreed that 1% of actively managed money will be charged as fee for maintaining the sips and sending me statements monthly.(I was of the impression that actively managed money means the money that gets added from my pocket every year).

5. Later when entry load was removed from direct mutual fund investments, firm told that fees will not be collected from clients as the entry load was there for investments through advisors.

6. Then all the entry loads were removed and FP firm came back with 2 options (10% performance fee – this is like on a particular date if the portfolio value is higher than last year’s same date (anniversary), they will charge 10% if the portfolio value increased) – Point to be noted that additional investments of the last year is taken as is, which is not fair as per me. Second option is 1% of the market value of the portfolio at the anniversary date.

I am confused is this how the financial planning works? Financial planner will be fund advisor as well? why dont they say which insurnce company to use, coz the claim settlement ratio everything needs to be considered right?

Please advise. Please let me know if you need more information.
Regards

Ps: dear reader I am also confused. Happy republic day.

he did not want his name to be revealed, so not revealing it…

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  1. I don’t know why I’m taking the risk of responding to your reader’s query in your portal. It’s like entering the lion’s den!

    First and foremost, I feel that the charges he is paying on a very higher side and he is being taken for a ride.

    In January’07, the entry load was there. That works out to 2.25%

    Added to this he is paying 1% per annum for “active money management”, whatever it means.

    Also the FP would be getting a trail fee of around 0.5% per annum.

    I don’t know why they are asking for another 1% of portfolio value every year citing entry load abolition when his investments are still subject to entry load ( as he is continuing the same from Jan.’07).

    The other option of asking for 10% share in incremental value every year defeats the very purpose of investing through mutual funds.

    Few insurance companies have questionable claim settlement ratio. Many are fine. Private insurance companies do not have long history as they are young. That need not be a deterrent. He needs to be educated about insurance ombudsman in the event of his family facing any difficulty in claim settlement due to his untimely death. Assuming the FP is alive then, he can be of help to the family in this regard.

    Other things remaining constant, term insurance being plain vanilla product, the lesser the premium it is good. We need to know his habits like smoking. There are companies which offer preferential rates for non smokers.

    I don’t know what to say for aiming for stars and falling at moon. Need to know what stars and moon mean in the context of his personal data and life situation.

  2. no Muthu, fine reply. I have seen so many FPs giving generic advice without understanding and charging a fee, I am amused.

    “Equities are good in the long run” if you are planning for the long run keep money in equities. Buy critical illness, medical insurance, and term insurance. Keep money in a Unit linked plan for pension… none of this is a planners advice. this is generic and available on the web…but I have seen bills of 15k, 40k…for such generic advice. that is why i said ‘I have no clue what a FP is supposed to do’. Thanks for the reply…the names I have mentioned are all journos..wanna see their reaction.

  3. Ah! the eternal problem of how much is advise worth against how much can be paid?(Or extracted) and the derivative side – how to evaluate the evaluators?
    unfortunately we do not have structured and aggregated user side feedback which is a crying need in this market, something similar to badfaithinsurance.org. here is a gap that needs to be filled. At the very least it will act as some kind of a watchdog to mis-selling.(those thinking of regulators….)
    Ultimately a messed up planning AFTER paying fees (irrespective of quantum) is the cross between the half educated advisor and the unaware (greedy?) buyer.
    No easy answers here…

  4. I am not a CFP, Insurance/MF/PMS advisor but just a personal finance enthusiast. Having said that, I have certain thoughts on financial planning and being a smart money manager.

    1. Investments is just one component of financial planning. The other components are about maximizing income and optimizing expenses. So a FP exercise shd start with some kind of cash flow analysis and a review of the current situation.

    2. FP is also about two things. a)gaining info/knowledge about financial things and b) being aware of our financial behavior aspects. The behavior is more important in my opinion. So FP is more about improving financial behavior and not just doling out advice.

    3. I shared a “Schedule of advice” with Subra and got a lot of formative feedback. Maybe Subra can share that with his reader.

  5. Pingback: How Does Financial Planning Work? | Ranjan Varma's Blog
  6. In my opinion (a totally personal opinion), 1% of AUM, without any other fees, is pretty cheap if the planner can provide
    1. Profiling and asset allocation (once a year)
    2. Active mutual fund selection
    3. A post-tax returns based approach (personal/unique circumstances)
    4. Expense and goal-based advice

    I really can’t comment on term insurance advice as the claim settlement could mean too much liability for the planner.

  7. Hi Subra,

    I am a CFP so would not comment on fee charged because there is no structure format.

    What is Financial Planning?
    In a simple language it helps you achieve your financial goals whether it be buying a home, saving for your children’s education, protecting your family through insurance, investing your hard earned money, managing debt or planning for retirement.This is not the end but a start.Once you hire a Financial Planner then Regular Review, Changes in your Financial Situation and accomodating them in your Financial Plan should be the major task.
    As said by Ranjan, investment is only a small component of Financial Planning.What as a client you have to look is whether the advise given allign with your goals or not.

    Moreover, a Financial Planner will be neutral to any product advise.He should start with your current financial situation and should be able to analyze whether you will be able to meet your financial goals in your current situation.If there is a gap then how you can fill it is what his advise would move around.

  8. If there are PURE financial planners – those who DO NOT SELL ANY PRODUCT, i.e. live on fees ONLY..it is time they formed an association – and called it a ‘PURE FINANCIAL PLANNERS ASSOCIATION’ this should only have members who DO NOT CHOOSE THE CHANNEL of purchase. Heard about some planners who sell in their wives names, in a corporate name etc. However the money in selling is far higher than in consulting..that is a pain. Solutions are not easy, but have to be found, and fast

  9. Yes Subra,

    There is an association named “The Financial Planners Guild India”, or FPGI.This is a non-profit organization and you have only practicing Certified Financial Planners who run their business on fee based comprehensive financial planning services.
    You can get more info on http://www.fpgindia.org.

    Our sole objective is to create awareness on Financial Planning.

  10. How does the Financial Planners Guild ascertain that the CFP is not selling / favoring some product with his wife or a pvt. company as an agent. The gap between fees and commission is too high for people to be fee dependent 🙂 sad, but true

  11. Subra, I can write much on this and you know that, but I would have to restrain myself as lot of people will get hurt in the process. I entered and quit ‘financial planning’ and ‘wealth management’ within a year.
    My take on it is that people in India are still not ready to pay for ‘advice’. If you are a ‘financial planner’ and you have to take care of your expenses then it is extremely difficult to do a honest fee only business. I tried to do it honestly as probably that’s my weakness (strength?) but boss its not easy. Hell lot of will power and character is needed to say no or take a stand or let go of a prospective client because you are principled! And trust me, most do not have it in them.

    However, I feel that Subra, financial advisors are doing a great job overall. They are helping people in 2 ways. One is mutual fund investing and other is term insurance.
    If they (over)charge for it then it may be unethical but ultimately its helping the client make money which he may have never made. Probably, the gentleman who wrote this email to you could have NEVER become financially literate
    enough had he not interacted with the said financial planner. So all in all while the filed of ‘financial planning’ needs to mature more, it is doing more good than harm in my view.
    People who can be easily fooled by an advisor will ultimately lose money this way or other way in his/her life. Smart ones will always go the google way and self educate before taking a call.

  12. Sukumaran,

    One of the ethics or i say rule which CFP have to follow is disclosing all commissions he get from the produt he is selling.

    Any CFP who works on FEE based leave option with the client for implementation of any product.Its only if client likes to engaged his CFP to implement the product, the planner advised on the product.Even after advising the product he/she discloses to the client what he is going to earn from the same.I think if your Planner does that, then he is true to you and his profession and Thats where the difference lies.

    The Financial Planners Guild India does not promote the practice of any CFP but create awareness on Financial Planning.Thats why its a Non-Profit Organization.

    Giving fee to your planner is good.how Much–there cannot be a set standard.It all depends how an individual value the services of his planner.

  13. Our experience suggests that purely surviving on fee is presently impossible. There is a willingness to pay fee, but the quantum is very less.

    Commissions, as long as it is disclosed and comes through providing the appropriate product for the client, then I do not see any harm in it.

    I also notice a tendency to accept the inbuilt pricing rather than paying separately.

    I accept what RK says. Survival is very difficult. We’ve been there for last 4+ years and the journey is very tough.

    If someone is only charging fee and is able to make a decent living in the process, my sincere appreciation for him.

    May be there is a hope for people like us.

  14. Muthu,

    I agree what you say.Till commission are disclosed to your clients and he engages you to buy the product for him, there is no harm.Infact, thats what the right manner of doing a business.

    The move from a commission+fee business to only fee business will happen gradually and yes will take more time than we think.But will not happen unless we have an intention to do so.

    Moreover, when concept itself was not there we cannot point our fingers.The task behind us is making general public aware Why Financial Planning and why pay to your advisor?

    Probably, the gentleman who wrote this mail is disturbed by paying so much fees-Upfront,fund Management and then profit sharing.So he is exposed to two kind of Business-Financial planning and Wealth management.

    Now whether the fees charged is higher or right, he can only decide.

  15. I am a common man who looks after his own finances. I am unable to see the reason why any educated person should pay for financial advisory services in today’s world. Internet has opened the access to a wide range of information. More is available in the various magazines that come every month.
    If a person with little aptitude AND a little time on his hand, starts investing as he earns, there is no reason why you have to go to a consultant who charges you for advise. Is it not the first thing you learn in share market never to listen to tips?

    In early days, there were no options. Investing in mutual funds was only after you pay the agent his commission. I have used he services of my relative whose wife used to do work such as PPF, post office, mutual funds (UTI) etc agent. I always knew there was commission involved. She even offered to refund part of her commission as most agents were doing. I politely refused as I thought her efforts were worth the payment. Fact was I had no more that a few thousands to invest each month.
    With age came more disposable income. The Internet made more information accessible. As the amount of money per month increased, after a while I started doing my SIP’s directly. I still have the same share broker, who has changed methods over time and now is very easy to deal with. Gone are the problems of dealing with paper shares and signature mismatch headache.

    I agree with one opinion above. It is not palatable to modern investor to pay for advise as a % of the gains. The advisor dos not guarantee gains. It appears to me like Valmiki story, where the family was partner only in the + side. No advisor will ever share your losses. It is best that people who are completely ignorant about money matters, and find themselves suddenly in money, go to their tax consultant and get what advise is needed. Tax consultants charge for their services but do not ask a share of the profits you make.

    The HDFC, who made me run after then for two years to get a 80k loan for house in 1985 is now after me to avail of their financial advise, They see the bank balance and want a share. They even offer huge loans when you don’t need it.

    Regards

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