was a call that I handled this week.

I said:

Gee, frankly I do not know. It takes a great mind to say “I will charge you Rs. 24k, but honestly there is not much to do. And if you do your Rs. 250,000 per month SIP with me under my code, I will rebate the commission for the first year from the fee that you pay me. Take term insurance from the cheapest source on the net. Take your medical insurance from a government run organisation (internationally Ergo and Alliance are great claims payers – but I have no clue how they will behave in India where medical records have no legal sanctity).

So I asked him more details about the financial planner. He had promised to

monitor the portfolio on a regular basis (I am still wondering what this means since I heard it 30 years ago),

will anticipate the changes and do a portfolio shuffling on a YEARLY BASIS (to me this was suicide),

choose a Pension Plan and a Child Plan (to me this was amusing)

choose a term plan and a medical insurance plan (he was choosing the MOST complicated company)

do a cash flow (what if analysis for 30 years including what would happen if he lost a hand, leg, heart, life, etc.)

do a cash flow projection for him during retirement (this guy is now 32 years old)

do an annual review for a fee of Rs. 5000

be available for 3 hours during the year for any discussion

The client had a choice of where he bought mutual funds from (he would be doing a 1 year SIP and at the end of the year decide whether to continue based on the performance), BUT the life insurance had to be bought through the financial planner.

Frankly from the clients point of view this was NOT  a good deal, nor was the client capable of doing it himself — he was damn too lazy.

I had no alternatives to suggest….last I know his wife was tugging his shirt collar saying “Yeh sirf gyaan deta hai….WE NEED TO DO SOME THING..so what if it is wrong, we are smart enough to handle adversities, are we not”.

God bless.

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He tried his hand at fee based financial planning, but was not very happy with the experience, so has gone into a semi-retirement mode. I spoke to him, and though it was not exactly an interview some of the things he said hit home.

Vats – let us call him by that very name has an economic background which allows him to choose whether to be in the financial advisory business, has a good qualification and adds value to the family business too.  I thought some of the advisers who read this blog might benefit…so here is what he said:

- Too many people think my time is free and do not like to pay: this has been my experience too, so I can empathise. People call seek advice, and then decide to do what they want to do, but for Vats that is time spent. He spoke about a GM in a consumer durable company – married to a VP in a finance company. They spent an hour with him, spoke about the fees, made the changes and left. Then did not pay. Simple.

- ‘I will pay you if I use your advise client’: this is so funny. It is like going to a hotel and saying ‘I did not like the food, so I will not pay you’ or worse seeing a movie and saying ‘I did not like it’. And it is a cruel world – how the hell will the adviser know whether the advise is being used? He does not have an E-access to all your savings bank accounts, damn it!!

‘Subra, how do I charge for advise like making sure that the client does NOT invest Rs. 50 Lakhs in a hair brained scheme?’…I know that there is only downside. If the investment does well, the client will call up and say ‘see you told me not to invest’ however if somebody loses money, I may not even know…LOL

Vats also (like me) has a very small area of understanding – equities and a little bit o debt’. So largely our advise (fee paid or other wise) is restricted to equities and / or equity mutual funds. This means Vats too does not (cannot is also right) tell you what to do with your gold, real estate, other metals, trading in equities, etc. This is a caveat which he says up front, but people still ask him all these questions….

Well he had other things also…..I do not remember them all…

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Of course one answer that is brilliant is…”I have bought a pension plan where I am putting Rs. 10,000 per annum as a premium”.  Cross your heart and tell me “what is happening to that money?”. Not sure, but the accumulation in this plan is likely to pay for your morning newspaper and perhaps a cup of tea! You bought that a few years ago because somebody told you there was a tax break. Correct?  Now that is your tax-plan, not your retirement plan dude!

Are you in Denial mode regarding your retirement financial needs?

I cannot comment for every one, but too many people are in denial about their financial needs for retirement. Most of us do not want to accept that we will buy 3-4 washing machines, air conditioners, refrigerators, maybe about 2-5 cars, at least one or two houses during our retired life!

And all this buying will happen with our own money – i.e. by selling our mutual funds, unit linked plans, shares, etc. and from our pensions!

Strong INDEPENDENT financial planning is the key to a comfortable retirement

If you’re planning to spend your retirement in comfort, you’ll need to rely on some pretty strong financial planning. You’ll want to take into account your current financial position and your anticipated retirement income, preparing for contingencies and unexpected expenses along the way. Then you’ll need to develop a strategy for setting aside money on a regular basis to fund your retirement financial planning and choose wise investments so your money will build as much as you need. It’s kind of a daunting task, and it’s no wonder that so many people planning their retirement are worried about the quality of financial planning available in the country.

Benefits of the top financial products for retirement planning – Critical need for Long Term Care Insurance

There is a critical financial aspect of retirement planning today. If you lose the capacity to take care of yourself and require either in-home assistance or be transferred to a nursing home, all the financial resources you set aside when planning your retirement may be spent in just a few years on the cost of health care. Long term care insurance will cover the cost of your medical needs without jeopardizing the wealth you’ve accumulated for retirement or want to pass on to your heirs. Unfortunately no such insurance is available in India as of now.

Choosing the right type of life insurance is also part of planning for the financial circumstances of retirement. If something were to happen to you before you retire, you likely would want your spouse to still have the lifestyle and financial security in retirement you envisioned in your planning, and the right life insurance policy can ensure that.

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You have just crossed your 24th birthday, when you’ve gained the education and/or skills you need for the career you’ve chosen, and you’re earning money and learning how to handle it. Ok, ok you are not in your twenties but are in your thirties and have started looking at financial planning. Fine, this article will be just as applicable to you – only that the time advantage of a 24 year old is not available to you.

AN EARLY START!

Remember the importance of an early start in a One-day International cricket match? Remember the heroes? An early start ensures that the middle order batsmen can play with lesser stress and strain. Similarly there’s no time like your twenties to start putting your money to work for you so that you can achieve your financial goals throughout your life. Developing good spending, saving and investing habits, and learning to budget and invest during your twenties, can help.

You prevent needless debt, put away money for the things that are important to you, and take advantage of the power of compounding. In fact, compounding of earnings is so powerful that those who start saving for retirement in their twenties can amass large nest eggs with relatively little effort, as long as they invest regularly. Also remember retirement is not an age, it is a state of mind and a particular level of asset accumulation. If retiring means doing what you can rather than what you must, maybe you may want to retire at 37 instead of 55.

For an example of the power of compounding, take a 23-year-old who invests a paltry Rs.10,000 a month – he will accumulate about Rs. 15 crores for his retirement. Contrast this with a difficult Rs. 51,000 for a 35 year old to accumulate the same amount. Not bad for an early start right? And I am increasingly seeing young people starting 25 year SIPs…surely these kids will benefit by the long term compounding effect…

GOALS! The first step in planning is to identify your goals. In most financial planning exercises, this is the most difficult task to achieve for most of the people that I meet. Your short-term goals (five years or less) might include a wedding, buying furniture, a new car or a career changing higher education, doing your own business, or more lofty ones like dedicating your life to social services.

Next, think about medium-term goals, such as owning your own home and financing your kids’ college educations.

Finally, list your long-term goals, such as retirement and travel.

Remember all these goals have a financial implication. All of these goals will mean some sacrifice of present consumption for a benefit in the future. You need to feel very strongly about these goals. To use a typical MBA term, you need a personal buy-in.

This article can at best motivate you into some action- but you need to be motivated enough to pick up the phone and make that call or send an email! Estimate how much money you’ll need to meet each of your goals, and determine how much you need to invest each month to reach that goal within your time-frame. Planning is a word document, budgeting is putting the plan in excel. When budgeting, set aside money to go towards your short-term, medium-term, and long-term goals. Try not to sacrifice one for the other. And try to prioritize them. Understand that since we all have limited means of income and too many goals to achieve, there will be conflicts. You need to resolve them.

Too many of my clients ask me to prioritize their goals. Sorry this is your job as a client.

Is your daughter’s wedding more important than your retirement goal? I do not think so. However if you do think so, so be it.

Just do it! It may be wise to invest in Savings Bank accounts, Mutual funds, etc. for your short-term goals, and unit linked policies for your medium and long-term goals. Historically, the stock market has outperformed any other type of investment over time, but it’s not for the faint of heart.

Its volatility makes it a less than ideal investment for short-term funds, unless you have a very high tolerance to volatility. Remember equity or debt is never the question – it is only how much of each. You can enter the equity market or the debt market through vehicles like Mutual funds or unit linked policies. As an ad for a shoe company says, “Just do it”.

It is better to implement a plan while waiting for the “best plan for the year” . With the wealth of information available on the internet, it’s never been easier to learn how to be a smart investor. You just need to know how to separate the information from the noise.

ps: I do not believe that unit linked plans should be bought by people who do not know how to reverse engineer a product and break up the components of costs.

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Well if I were to write a book on financial planning, I could write a few chapters on this topic. One thing however he MUST do is ask you a lot of questions – some painful. For example when I talk to a new, unknown person who wants some kind of help in planning, some of the questions they find difficult to answer are:

How do you feel about begging? (Yuck!).

If you wiped out your portfolio whom would you turn to for food? Will you be able to ask?

If you have enough money why are you working?

If your wife wants more time with you, will you quit your job? And let the trip to Switzerland vanish? What is more important – your wife’s ‘public posture of wanting time with you’ or her real stand of ‘a holiday in the Alps’?

When you know that you are not disciplined to control your spending, why do you go to a mall with your credit cards?

If you were to ‘help’ somebody, and that person took the money to spend on something YOU THOUGHT was frivolous, how would you react?

Have you ever stolen as a child? Did you confess to your parents? If not, can you do it now?

Do you have much more money at age 55 than you thought you will have at age 22? If so why are you working?

Because you can afford a few more THINGs than your father (perhaps) do you consider yourself more successful or lucky to have been in a higher growth rate economy?

..why so many questions?

Because answer to all this SHAPE your attitude towards money. Not just what you have in the bank. Money to me is a commodity – and lets you buy what you THINK you need at a point in time.

Too bad it never asks you 30 minutes later whether what you did was sensible or not

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Fee based Investment counseling is the cure to all problems, so say the Learned Men. They ought to be correct, because all channels are also saying it.

Now I met a ‘Good Intentions’ – we will only do what is good for the client financial planning company. They wanted their ‘planners’ to be able to talk to trustees, fund managers, directors about equity returns, mean, variance, goal setting, …..and generally be seen to be far more competent (significantly more as the MD said) than the general relationship manager in the market. So far so good.

They had very little training budget but they had done a cut paste from a leading course on fund management and had done a good job at that.

They wanted to move the ‘sales’ guy from selling to advising – they had enough ppt to prove to me how this will happen over the next 12-18 months. Voila they said “Our xxxx sales personnel will migrate to becoming an adviser”.

I said: “All nice to say things but in an industry where it is much easier to earn sales commissions why would you be in the fee business?”

He said: After some time we will also sell products like life insurance, P M S,….

I was stunned. Is the ‘Fee-only adviser’ dead or was he not born at all?

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1. Have a realistic expectation from the financial planner (see yesterdays post)

2. Know what to expect from a planner

3. If you do not have your data in an organized manner, the planner is not likely to spend time organizing it and THEN processing it. However some planners do it and then charge a bomb. Be prepared.

4. Both Husband and wife should participate in the whole exercise. If one spouse does not understand – the other spouse should take the trouble to explain. Remember at some stage the other ‘explainer’ will not be available.

5. Kill your ego – if the planner says ‘ABC bank has sold you this piece of lemon’ it is nothing personal . Financial salesmen are trained far better than the average man on the street, so the odds are terribly against you. This is not a reflection on your brainpower. It is the bankers persistence that you have succumbed to.

6. If you do not understand the ‘remedies’ being suggested, say so loudly and clearly. If in doubt ask me . Seeking a second opinion is always a good idea if you are in doubt. And on the blog there are others who comment, read the comments – many a times they are better than the posts.

more to follow…

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If you need bypass surgery, you should find the most qualified surgeon available. If you’re getting sued, you should hire the best defense lawyer in town.These 2 are fairly obvious and I do not think you can do your own root canal surgery, brain surgery or heart surgery. Come to think of it, it is so inconvenient, is it not! Imagine lying on a bed watching a ceiling mirror and cutting up your heart. Really tough.

Likewise, some people argue that if you’re planning to live well in retirement, you should hire the most expensive financial advisor you can find.

To me this causes a twitch! Especially when some of these people do not even know what to expect from a financial planner (alpha, did I hear?). If that is what you said, you are better off going to a casino or a horse race – the odds are just the same

I do sessions on financial planning and some of these sessions are well attended. Mostly at the end of the session the participants are unable to decide whether they can do their own financial planning or they need an outsider.And while people ask me questions on everything from momentum investing, auditor integrity, mutual fund loads, broker integrity, insider buying, role of SEBI and IRDA, etc. one question uppermost on people’s mind is

Can I do my own financial planning?

And

Can I do my own investing?

Similarly I do get a lot of emails asking me – do I need an advisor?

If you’re an investor who is seeking long-term capital gains, it’s crazy to pay a lot of money for a high-priced financial advisor who gives you an economic outlook and short-term market forecast with all sorts of commission-based solutions attached. To the best of my knowledge there are only a few (so few you cannot spot them) pure financial planners.Nor do investors generally need a “personal investment plan” based on their individual circumstances…

There’s Only One Objective for Long-Term Investors

A growth portfolio is designed to keep you from outliving your money. It should give satisfactory returns for a 25-year-old just beginning an investment plan, as well as a 55-year-old who may live three decades or more.

To quote Sir John Templeton, “For all long-term investors, there is only one objective – maximum total return after taxes.”

Of course, some advisors take generic advice and selling it as customized plans. For that reason, whenever I hear an investment advisor tell a client that he is drawing up a long-term growth portfolio based on that client’s “unique profile,” I’m invariably reminded of the Head of HR who tells his audience, “Never forget that you’re special… just like everyone else” to all the 284,000 employees of his company.

But, as is fondly said, “It’s 97% of investment advisors that give the other 3% of us a bad name.”

In the Indian context the commission structure is too badly designed – it is a design fault rather than a sales fault. But there is no body who really wishes to complain. After all in a bull run the manufacturer (called Mutual funds, Life insurance companies, PMS providers) need sales guys who go and get them money from the “client” for these guys to manage.So if it is a 70% upfront commission in a unit linked plan or the 6% asset management charges or the 2.4% amc in a debt fund, well there is no one to protest!

So you may need a financial planner (whose functions are so comprehensive) that I shudder to think why would somebody want to be a financial planner on a just fee basis. A financial planner with guts to give a simple plan – 2 good equity funds, perhaps one etf, an open architecture in life insurance and be wiling to charge (and get) Rs. 30,000 for this plan may not exist.

Frankly if you wish to create wealth in the long term put your money in the cheapest index fund, buy the cheapest term life insurance, and go fishing.

Leave your mobile, TV, broker…in the city and play with nature. You will return fresher and richer.

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IFAs are perhaps the most agile persons in the whole chain of getting the mutual fund to the retail customer. So if he cannot sell mutual funds profitably (I doubt how many IFAs kept the upfront commissions with themselves anyway – most was being rebated) he will do the following things:

Charge new clients a fee for most of the services – filling up the KYC form, getting the redemption proceeds, making changes in nomination etc. I know of 4 or 5 IFAs in Mumbai who are now charging between 200 to Rs. 500 for each transaction.

Charge an upfront fee for all applications: If a client does a 3 year SIP for Rs. 5000, he might be willing to pay Rs. 5000 one time to the IFA. However a client doing a Rs. 100,000 SIP may be willing to pay only Rs. 5000. So it may not be a great substitute, but it helps.

Push the fund house: As long as Managing mutual funds means chasing Assets under Management the fund house will happily bleed the shareholder. So the bigger IFA will push the fund house for a higher, much higher, upfront. Already one is seeing 1.25% kind of pay out. Not bad for a community which thought it was dead.

Sell Portfolio Management Schemes: All brokerage houses and mutual funds now have a PMS scheme for Rs. 500,000. This is easy to sell at least in the metros of India. Go to a client and say “Sir you are now a HNI (which means everybody) you should not be putting money in a SIP – that is for poor people. You can now afford a PMS, so please….”. Works very well to the wannabe client!

Take up broking terminals: It is quite easy to churn a clients equity portfolio than a mutual fund portfolio. So take up an equity clientele and make him take position in Nifty. The brokerage can be a small %age but adds up to a nice big sum at the end of the day. Big brokers are scouting for people with some equity knowledge so it will help to have the IFA do it.

Life insurance companies and mutual funds will find some other ways to compensate – it is far cheaper to have an agent who will take a %age of the business rather than an employee. So various solutions are being worked out some of them will be acceptable, some not acceptable.

Financial Planning: The most abused word. Everything flies in the name of financial planning. So everybody and his aunt will go and get some degree, certificate, charter, and call himself / herself a financial planner. This will work because neither the client nor the provider knows what is to be done in financial planning.

Associations: The Ifa will form associations (like Faaida, Ifa galaxy, Ifa forum, etc.) that will keep talking, writing, screaming about the changes in the business. However, nothing useful can come out of this because the entry into the business is quite easy and amazingly the agents have to pay Rs. 1000 per annum to an association of the manufacturers! Amazing.

If there are big distributors with a good trail income he already realises that not getting the upfront commission is just a small loss – and in about 5 years time he can make up the commission through trail. However, agents and fund houses which specialised in NFOs (Dhirendra Kumar of Valueresearchonline.com called on fund house an NFO factory, if you remember. I do not wish to name it, but if you google ‘Nfo factory’ I am sure you can find out).

So the smart IFA will adapt, charge, sell direct equity, sell real estate, trade options and futures, or get into school education. There is no regulator there. Not yet.

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Now a big financial player has got into financial planning. Knowing their attitude to financial planning as a group this was a joke – and a cruel one at that. So I called somebody there. He said “The client has to end up buying some product – so the question asking has to be tweaked”.

Let us take a typical conversation.

FP: Sir as per our software you have an income of Rs. 2.3 crores a year. So you need Rs. 23 crores of life insurance. You have only Rs. 4 crores of life insurance,  so please take a Rs. 19 crores for the next 17 years.

Client: But my son is already in a job and my daughter is 2 years from earning. I have already paid for their college fees. My wife earns about Rs. 45 lakhs and is likely to be employed till her age of 65 years.

FP: Still sir, our software says your life insurance should be 10 times Minus existing life insurance….

Client: Let me speak to your boss.

Boss: Actually sir you can reduce your liquid assets also. So in your case the insurance required can be reduced by Rs. 22 lakhs lying in your liquid fund.

Client: That money is to pay for my daughter’s term fees, so next week it will not be there.

Boss: Sir why do you not insure your children and your wife for some life insurance. Looks like you do not want to take any life insurance for yourself.

Client: Let them do it when they want, I am not doing anything of that kind. My friend has actually asked me to surrender my wife’s life insurance policies and put that money in direct equities. He says nobody is dependent on her,  so any policy on her name is a waste. I also read this in a website.

Boss: “#$%^&*(” the websites and blogs sir. Anyway we are launching a NFO in our mutual fund will you be interested?

If this is financial planning, SEBI should put a ‘Buyer Beware’ board…at least smoking kills only you. This kind of FP can ruin your wife’s retirement, your kids education,..and your own retirement.

Client’s parting shot to the Boss was good. He said show me ONE senior executive of your organisation who has a Rs. 2 crore salary and a Rs. 20 crore life insurance…preferably a unit linked plan. LOL.

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