BackPeople are uneducated about real return
They don't have access to basic financial planning education in schools
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Financial Planning Standards Board (FPSB), the certifying body for financial planners worldwide, organized a Financial Planning Symposium 2013-2014 on “Managing Financial Planning Practice amidst Dynamic Economic Environment" in Mumbai. On the sidelines of the event, Richard C. Salmen and Dan B. Moisand, both past presidents of Financial Planning Association, US, spoke to Mint Money about the challenges and similarities of financial planning in India and the US. Moisand currently is principal, Moisand Fitzgerald Tamayo, LLC and Salmen is senior vice president and senior advisor, GTRUST Financial Partners, USA.
How is financial planning different in a developed country like the US and a developing country like India?
Salmen: I am surprised that there are more similarities than differences. The level of financial planning that is done in India is comparable with what is done in the US. In India, when it comes to investment, people give a lot of importance to both real estate and gold. These are the first two things many people want to own. In some cases these are the only things that the individuals want. Hence, a financial planner in India has a difficult challenge of helping clients understand the concept of diversification and of owning other asset classes than just real estate and gold.
Moisand: I agree with it too. We have done a few of these trips in the past to Russia and China. The Russian and Chinese planners are very enthusiastic. But the level of conversation is much higher here. There are experienced practitioners in India who are better able to look at multiple areas of a person’s or family’s finances. For instance, if you talk to a Chinese planner she will basically sell products of her bank. In India, there is a much broader scope of services. The number of independent businesses is not as huge as that in the US but the level of sophistication is very high and hence comparable with the US.
Which is the one investment product that people in the US want in their financial portfolio?
Salmen: Individuals are right now more concerned about the entire economy. So there is no one specific investment product that they want to have. In the US, six or seven years ago real estate was that one investment product that everybody wanted to own because then real estate was doing what it is doing in India now. Over the last year, the US stock market has been going up. But there is a great deal of fear associated with it as people are worried whether it is going to stay at that level. But in India, I don’t think people perceive that there is any risk in real estate. When I talk to Indian financial planners, I tell them that when the day comes when the Indian real estate market goes down, that will be the day when you will have a lot of value for your clients if you kept them away from only buying real estate.
Moisand: In the US people were also very interested in gold when it went up to $1,900 an ounce. But now that it is under $1,300, nobody is interested. Owning gold in the US is all about price rise, speculation and hedge against the dollar collapsing because our debt is higher than ever before. There is a section of the population who are worried that we are borrowing too much. The biggest issue the US investors have right now is low interest rates. Inflation is low but interest rates are even lower. This is forcing them to re-enter the stock market after the big decline in 2008-09. Though they are very nervous about the markets, they are forced to take riskier assets than they normally want to.
Post the Lehman Brother crisis, has the outlook for financial planning changed for people globally?
Salmen: Definitely, there is more importance to financial planning in the US post the crisis. This is because whenever things are going well, be it real estate or stocks or equity, people feel it is easy and they can do it themselves. But when things go wrong, like they did in 2008-09, that is when people start to say, may be I need professional help. Just like, right now it is for Indian consumer who are buying real estate when prices are only going up. But at some point when prices stop going up they may say that they need to talk to somebody.
Moisand: It was miserable during the crisis time. But the last thing you want to do when everyone is panicking is panic yourself. During the crisis we were trying to keep them away from panicking. But now few years later, they have more money than they ever had before. And it is not because we were able to outperform the market, but by being disciplined, financial planning helps you create an investment portfolio in line with specific goals.
What is the most common problem individuals have while managing their finances?
Salmen: Universally, having enough money during your retirement period is a big challenge because many people wait too long to start planning for their retirement. In India, there is a much higher savings rate than the US. But in the US we have social programmes such as social security and medicare which you don’t have in India. So you have to save a higher amount to be able to cover those future costs. Another problem is risk aversion. What causes a crisis is that people feel they know the investment product very well. In India it is real estate right now, as they think it will give 15-20% returns every year. Similar to what was in the US in 2004-2006 and until 2007-08 when the bubble burst. Now potentially in the US you have the same problem with stocks because they are hitting a record high only because the US Federal Reserve is pumping so much money into the economy. It is a constant problem fighting against consumers desire to make easy money. Everybody wants to make easy money and they don’t want to take any risk for doing this. But remember that there is no free lunch and no easy money with zero risk.
Moisand: Complexity is another challenge for consumers and planners. People know they need insurance and various investment products. What they don’t know is how to co-ordinate these products. With the financial world getting more and more complex all the time, the number of problems is astronomical.
Is understanding the concept of real return a universal problem?
Salmen: It was a bigger problem in the US 20 years ago. People are so fixated on what the number is on investment. What they don’t think is in terms of real return. In 1982, you could buy certificate of deposits at 13-15%, but inflation was 18%. You were losing money after you have factored in taxes. It is the same case in India right now. If you get 8-8.5% on a fixed deposits but the consumer inflation is 10% and you have to pay taxes on these fixed deposits, you end up losing buying power.
Moisand: It is a very universal problem to not look at real return. People are uneducated about real return. They don’t have access to basic financial planning education in schools. They can’t read their credit card statements, they don’t know how banks work and these are smart people but they are not financially literate.
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