Soon it will be tax season again, and despite your best efforts at filing, record-keeping and using Excel spread sheets to track business and personal expenses, you’re wondering why on earth you didn’t hand it all off to a professional. Don’t be harsh on yourself. Most people are like you.
Even those who sought help typically went to a chartered accountant, often recommended by your father or a friend of a friend. And every year he would recommend a list of instruments—public provident fund, national savings certificates and so on, that helped you save taxes. It didn’t matter how well these products fared—after all you were saving on taxes.
Well nowadays, it’s not the chartered accountant but a savvy relationship manager at your bank who offers advice (or pretends to), telling you that it’s not just about tax saving anymore but about maximizing returns.
And then there is all that ‘free’ advice on the hot new mutual fund that is ‘safe and solid’ or the easy personal loan you can get, to pay off that huge credit card bill. And did you hear about that unbelievable insurance product?
This new breed of professionals—financial planners—are starting to emerge in droves to offer a range of services including personal investing, home buying and estate planning. Financial planners, good financial planners that is, help you decode the matrix of money matters. They are there to make money—for themselves or for their institutions first—and then if all goes as planned, for you too.
Going into the tax season, we decided to try and help you take the guesswork out of choosing the right planner.
And rather than tell you all the stuff they ought to know and do, here are 10 things your financial planner may be hesitant to tell you and which you need to know.
1. ‘I am a disguised seller’
Many people working in banks, distribution houses or insurance brokerages will claim that they can do financial planning for you—sometimes for free. More often than not, it’s the commissions they get from pitching products or the monthly targets that their firms have, which drives them to recommend a particular mutual fund or a unit-linked insurance plan. Gaurav Mashruwala, a Mumbai-based planner, recollects getting an e-mail from a person asking whether he should go for a unit-linked insurance plan (ULIP). “His credit card bill was (a) few lakhs. His advisor at the bank told him that if he went in for a ULIP, he wouldn’t need to pay back his card balance immediately. Little did he realize that he would end up paying a regular insurance premium and huge interest on the credit card,” says Mashruwala.
Besides making a plan, financial planners may also offer to help you execute it. “Some planners follow a model where they may not charge the client for making a plan, if they execute it themselves,” explains Surya Bhatia, a Delhi-based financial planner. In that case, has the planner told you the amount of commission he is getting from the company whose products he is recommending for your plan? Do you often find your planner taking a Libra Star cruise or going on a family vacation every quarter? Well, that’s not bad provided he tells you upfront if that last family vacation was funded by the company whose products he recommends. It’s your money so do ask about the fees and commissions upfront. You might be better off paying a fixed fee for your plan and having the flexibility to choose different products and offerings to achieve that goal rather than leaving it all to the planner.
2. ‘I am accredited but your plan is my debut’
Before making any decisions on a planner, you might want to visit the Financial Planning Standards Board India web site at (www.fpsbindia.org) to see if your advisor is accredited. However, this diligence doesn’t guarantee that you will find the right planner. In fact, this doesn’t even guarantee that you will find a qualified one. Most of the financial planners today were either mutual fund or insurance agents till yesterday. You will still need to grill them on their past experience—how many plans have they made in the past, which are the areas of their expertise and so on. The course structure of the Certified Financial Planner (CFP) programme is such that one doesn’t need to even make one—yes, even one—financial plan to become a certified financial planner. FPSB’s chief, Ranjeet Mudholkar, insists that the new certification structure is in line with the international standards of having only an objective test. “We are just playing the role of a gate-keeper,” he says. At this rate, you might as well get recommendations from friends or family.
3. ‘The 10-point questionnaire does n’t really help’
Again, the concept of planning is misunderstood to be just an investment advisory exercise. Filling in a 10-point questionnaire, which tries to gauge whether you are adverse to risk or not, isn’t financial planning. If anything, it’s just a template that lazy planners use to come up with generic plans. Ideally a planner should first get a very detailed sense of what you want to achieve, be it the need to build a nest egg for your daughter’s education at Oxford or Harvard, or paying off that home loan which is eating into your income because the interest rates are going up. Only after such a detailed inventory should a planner start putting together a customized plan that focuses on spending and savings. Then comes the investment bit.
4. ‘Here today, gone tomorrow’
Archana Bhingrade, a Mumbai-based financial planner, shares the experience of her client who was earlier dealing with a bank for planning advice. Every time the client went to the bank, he found himself dealing with a new face across the counter. “Once he was in dire need of hard cash and gave instructions to the bank to redeem his investments. But the bank couldn’t do it as the (specific) employee dealing with him had left the job. Frustrated by the experience, he stopped dealing with the bank,” says Bhingrade.
But it isn’t just the banks where you could end up with a revolving door of financial advisors. The same can be true of planners, especially those who are part of a larger office. Make sure you figure out whether you are signed up with the organization—in which case your relationship stays with the company—or if you have signed up with a specific individual. Always ask whom you should contact when your planner is unavailable and make a point of getting an introduction in case the need arises. If your advisor isn’t willing to give you this information—or his mobile number for instance—think again.
5. ‘I am a planner because of my status’
Whether it’s at a senior banker’s office or in the office of a mutual fund CEO, one thing you won’t be able to miss is a framed certificate from FPSB on the wall. Pay close attention to when it was given out because some of them may not be worth the paper they are printed on. The CFP degree could have been conferred upon them, as was done in the past by the FPSB, to promote the concept of financial planning in the country. “This practice was stopped only two years back,” says Mudholkar. These grandfatherly CFPs, as they are known, still have to regularly contribute to the profession either by way of giving lectures, attending seminars or writing articles, he explains. Not exactly hands-on financial planning, if you get the drift.
6. ‘I hold the master key to your life’
To get the most out of your planner, you should ideally disclose everything, including the details of that secret Swiss bank account, the list of your lenders, net worth and income. “As a part of the client agreement formalities, I tell my client about the list of people like lawyers etc, with whom I might have to share his details,” says Mumbai planner Mashruwala.
To do his job properly, he may have to share your details with other professionals, so make sure you are comfortable with the scope of any disclosures and get it in writing. Make sure this agreement also covers the broker even when he no longer works at the firm where you have your business.
7. ‘Don’t need to meet you at all’
As more and more services are outsourced, and independent financial planners are increasing in numbers, it would be tempting to save some money and work with a planner who may not even reside in your city. If you’ve never seen his face and he’s never seen yours, then you might as well buy a book on financial planning and do it yourself. At least it will be cheaper and you will have no one to blame but yourself. Deena Katz, a US-based financial planner, believes that understanding the psychology of the client—his attitude towards spending and saving, is crucial to a planner’s job—and it is hard to do that over the phone or on e-mail.
8. ‘The plan I once made is outdated’
He made your financial plan in 2003—when the housing loan rates were still below 9% and debt funds were the best asset class to be in. Four years on—it’s a different world altogether. Borrowing rates for home loans, credit cards and personal loans are going up every six months. But your financial planner doesn’t bother to review your plan—you may need to switch from a floating rate to a fixed rate loan for house, or you may need to put aside more money for your children’s higher education as the fees have gone up.
“At the time of signing up, you should always get clarity on how frequently he will review your plan, and if so, at what cost,” advises Kartik Jhaveri, CEO of Transcend Consulting, a financial planning firm. Ideally it should be at least once a year, even if it is a routine status check. Much like your annual medical check-up.
9. ‘Pay for performance? What is that?’
There is no standard fee structure followed by all financial planners. Most independent planners charge a fixed sum as a fee. This could range from as high as Rs30,000 to Rs40,000 in the first year and Rs10,000 to Rs15,000 from the second year onward. Beware of the planner who offers free plans or advice in return for letting your money be directed to a select few funds or other specific investment offerings, through him or his firm. You might end up saving some money upfront but the advice won’t come cheap in the long run as some of these funds may not be the top performers in their category. So, and at the risk of repeating ourselves, always ask the planner how he plans to make a living from free advice. And good luck in finding those who will offer to charge you less or drop their fees if the plan isn’t achieving your targets.
10.Good luck pursuing a complaint against me’
FPSB lays out 54 rules for the professional conduct and ethical behaviour of financial planners. But there really is no watchdog to keep up with these rules, so a planner can mess up your finances and get away with it. After all, he is only there to give you ‘advice.’ “Since the population of financial planners was small, we were doing it on an ad-hoc basis,” says Mudholkar of FPSB. “Now we are forming a professional review committee on the lines of the Institute of Chartered Accountants of India and income tax authorities, which will evaluate the planners and address the grievances of the client.”
We know we are being tongue-in-cheek here but finding the right planner can make a huge difference to your financial well-being. And there are a lot of very good ones out there. So ask a lot of questions, do your homework, especially on the products and services they recommend, and then stick to the plan. The very fact that you are looking for a planner is a sign that you are being serious about your financial future. And that is a great start in itself.
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