What is Financial Planning?

Financial planning could be understood as a plan which accounts for different goals and takes care of cash flows for these goals at various stages of one’s life.

As far as the rule related to financial advisory is concerned in India a broker, insurance agents, accountants, or even an individual with no financial credentials can be an advisor.

Financial planning covers a wider scope such as identifying and understanding both qualitative and quantitative goals, quantifying the goals as well as expense, constructing and understanding one’s own balance sheet (this can be personal or that of the entire household), creating a portfolio of investments which are aimed towards meeting those goals, taking care of asset and liabilities, estate and will planning, tax, etc.

The above point means it covers all the cash requirements of the current and future needs of an individual and household, provisioning and achieving them.

What is covered under financial planning?

FP is not a one-time thing rather it’s a continuous process and involves lots of research, patience, anticipation, and understanding. 

There is no general rule of financial planning rather it’s very personalized and very specific and differs from person to person.

For example, a young recently married person in his early thirties has a different financial planning approach vs an individual in his middle or late forties with one or two kids who have a different approach and different financial planning. Former has a higher risk-taking ability and a long-term plan (has time at his disposal) with lesser liability on the contrary in the latter case the individual has a lesser risk-taking ability (less time at hand) and more liabilities.

This is just a simple example but in reality, financial planning is a factor of lots of other parameters as well which the financial planner identifies and works upon to devise a proper financial plan.

Many times people understand financial planning as retirement planning whereas retirement is just one aspect of financial planning.

A financial plan covers everything right from an expense to goal-based planning to retirement planning, insurance end every other such aspect changes from various life stages.

It helps in understanding the cash flow over a longer period of time while planning to retire or achieve any goal as well as the cash flow after the goal is achieved.

A financial plan is a work in progress. It has to be monitored and reviewed periodically.

What is not financial planning?

one thing that investors frequently do is to follow a product-centric approach while investing without any concrete plan in hand and think of it as financial planning but it’s not.

  • Impulsive investing i.e. investing solely on market movement and buying on the basis of gut feeling or advice from friends/colleagues Is not financial planning.
  • With the advent of technology, information has become readily available. While it is good to have information but one has to be aware that not all information is knowledge.
  • Investors many times use WhatsApp forwards or any other such “ideas” which float on social media to invest rather than provisioning for big goals – marriage, retirement, education, and following a structured way of investment is not financial planning.

I do invest, but is it planning?

it solely depends on what is the objective of investing.

  • A planned investment need not be only long-term, even an investment with three months or six-month horizon is a planned investment as it requires diligently selecting funds and then investing.
  • For example, an investor has received a bonus of 10lakh from his employer and is looking to invest somewhere maybe buy a property or invest for the long term but is not sure and requires 3 to 6 months to finalize his investment options. Instead of keeping that money in a savings account which will hardly yield 3.5% he can park the amount in a short-term fixed deposit or even liquid funds. This is a planned investment decision.
  • Supposing if he has already decided that money is for the long term and keeps it invested in the same liquid fund instead of putting in a long term investment vehicle that is an unplanned decision and as a prudent investor one should do proper planning for investment.

Role of a financial planner

Most bankers these days use the word financial “planner” or “financial doctor” while advising the clients on investments but that is a loosely used term.

The role of a financial planner is not just advising on the products or investment tools rather educating clients on the overall approach and scope of financial planning. A financial planner looks at the asset and liability of an investor, understands their expenses and cash inflow and outflow.

A financial planner works closely with the investor to understand their requirements and work a plan accordingly. He tries to understand the risk-taking ability of the investor, his understanding of the various investment avenues and risks involved therein, how he perceives risk, and his reaction once risk is faced.

A financial planner also keeps an eye on the goals and how to achieve these goals in the best possible way.

Agent (distributor) vs. Advisors

An advisor is a very loosely used term in the financial market. The difference between an advisor and a banker/wealth manager/distributor/financial doctor is huge.

In India, all the banks are predominantly distributors which means they are basically selling agencies, and the employees glorified sales agents who are supposed to present or suggest the products and the onus is on the investors to select the funds.

In simple terms they are just like the sales guy in a mobile showroom who will show you the different models of mobiles, describe their features, and compare various models with one another, that is the exact job of the distributor.

SEBI (Securities and Exchange Board of India) is so strict on the regulation that the distributors cannot even use the word “advise or advisor” while suggesting the funds hence you will observe that while orally they might use the term “advisor” but in any written communication neither the individual nor the company uses the term “advisor” in any formal communications.

But due to lack of transparency in the industry and lack of understanding amongst investors often any person giving “advice” on investments is considered as an “advisor” which is a wrong assumption to make.

The challenge that many investor faces are due to lack of knowledge they end up in believing that the banker is also as equipped to advice as to any professional advisor which in their defense they might be but the biggest challenge for them is that since they are driven by commission (a banker receives a decent commission from the sale of mutual funds that he makes) and hence it prevents him from keeping the client’s interest in mind.

What difference does it make anyway?

The answer is – it makes a huge difference.

In the above example, the salesperson has a motive to sell the mobile phone to you as he completes his sales target (maybe earn some incentives as well) and every time he makes a sale the company makes a profit whereas.

Let’s assume that just adjacent to the showroom there is a shop where the owner does the exact job for you and charges you a nominal fee but does not have any vested interest in the sales.

Similarly, in the case of mutual funds a banker or distributor will always ask you to invest through them (have you noticed, they say that they will help you or guide you or they are the one-stop solution) and you will be investing in a regular plan of a mutual fund (which is obviously the costlier option as the distributor’s commission is also accounted in the cost) whereas an “advisor” will advise you to invest in the direct plan of the mutual fund (less cost as no intermediary commission is involved).

Often investors are made to believe that they are not being charged anything while investing as for example if they are investing INR 1lakh the entire amount is invested and the distributor points out that nothing upfront has been charged.

But what is important to understand that the cost of investing in any Mutual Funds is inbuilt in the product itself (as a part of the expense ratio) and a percentage of the same is paid to the distributor.

Regular vs Direct Mutual Funds - Expense Ratio
Regular vs Direct MF – Expense Ratio

The picture above shows the difference between a few funds in the Regular (with distributor commission) and Direct (without distributor’s commission) of the same funds.

This difference could range from 0.50% (in the case of some debt funds) to even 1.75%(in the case of few equity funds).

Regular vs Direct Mutual Funds - a difference in corpus over a long term
Regular vs Direct MF – a difference in corpus over a long term

The above table shows the difference in Regular and Direct funds (with a difference in the cost of an average 1%) over various time periods for an investment amount of 1,00,000.00 INR.

1lakh in 15 years at 8%(regular plan) grows to 3,17,216.00 whereas indirect plan it grows to 3,64,248.00 with a differential amount of 47,031 and the same amount in 30 years creates a differential of 3,20,502.00 INR

Financial planner vs. Banker

Financial planner as discussed covers all the aspects of financial planning over various life stages of an individual or household. A banker has a limited scope as mainly they are interested in sales and aimed towards making a sale of the product hence a very narrow vision.

For example, most of the bankers while constructing a clients portfolio (which is mostly without any detailed research rather just some basic information) are compelled or will add some type of Insurance (ULIP or Traditional plan) and would like to push the product to the clients whereas the advisor will construct the portfolio as per the client’s needs.

Have you observed lots of Capital Protection Funds (CAPRO as they are called in banking parlance), NFO (New Fund Offer), Funds with lock-in (having high commission payout), ULIP (Unit Linked Insurance Plan), and other such similar products in your portfolio? Now you understood the reason behind it.

Who needs financial advice the most? Do you need a financial planner?

Everyone needs a piece of financial advice. The challenge with the Indian financial advising industry is that an “advisor” charges upfront fees to which most of the investors have a negative response as they feel they are “wasting” money and they end up investing in the wrong funds without any plan from the distributors.

What they do not realize is that just by saving a few bucks they miss out on about .5 to 1.5% of the cost on the investment as discussed above which is a recurring cost till the time of investment and amounts to a huge amount in 5, 10 or 20 year as shown above.

Financial Advisory in India

What is financial advisory?

Financial advisory or financial advisors are a subset of financial planning? As discussed earlier financial planning covers a wide aspect of an individual whereas financial advisory is mainly related to investment both advisory and execution part of it.

Who is a financial advisor?

In India there is no specific requirement for being an adviser as to any graduate, CA, banker, etc can be a financial advisor but there are professionals who venture into this field with wide educational background and credentials, and experience in the industry and it is advisable to look for advisors who have relevant experience and certifications and credentials.

What is the difference between a financial advisor and a distributor?

In simple terms, a distributor (most likely my financial “advisor”) is as good as a salesman with their vested interest (in making as much and as many times a sales to earn commission) whereas an advisor is a certified and qualified professional who gives you a piece of advice and charges a fee for the same.

As discussed above as well a distributor can/should only present you the product with the features, for example, a comparison of different features of a similar category of funds (just like you see in any electronics store) and receives a commission from every sale that is made.

Whereas an advisor charges you upfront fees and has no interest in the product you are buying as he/she doesn’t get any commission from the manufacturer (AMC in this case) and hence provides a piece of unbiased advice.

Who is an Independent Financial Advisor?

An independent advisor has a fiduciary agreement where they disclose if there is any conflict of interest and is not linked in any way to the manufacturers of the products that he is advising.

An IFA is supposed to have no connection with the bank, AMC, or insurance provider and should work independently to advise clients without any bias.

They work independently and do not receive any monetary benefits apart from the fees from the clients and hence keep the client’s interest in mind.

But in India, these IFA’s are just glorified salespeople. They work independently in the sense that they are not directly associated with any organization but there is a catch.

Yes, they might have knowledge but that does not mean they are not biased. In fact, most IFA in India have affiliations with the banks/AMC and insurance companies and get the commission out of the sales that they make.

One can find lots of videos and articles on the AUM (Assets under Management) that they manage. Ever wondered why all this noise about managing higher AUM – yes! Higher AUM means higher commission.

SEBI registered fee-only advisor

Securities and Exchange Board of India is the regulator for investments in India and all the fee-only advisors need to register with SEBI as RIA i.e. Registered investment Advisor and can only earn as a fee from the client. It is regulated by SEBI (Investment Advisers) Regulations 2013 notified on January 21, 2013.

https://www.sebi.gov.in/sebi_data/attachdocs/1424862077270.pdf

Fee-only advisors are very limited in India but they offer the right approach, product mix, and cost-effective solution for the investors. 

Fee-only advisors in India

As we have pointed out earlier and discussed there are two ways to approach investment in terms of facilitation of it.

An investor has an option either to reach out to any distributor of his choices like bankers, stockbrokers, wealth managers, insurance agents, and other such personnel who sell the products to them and then facilitate the transaction and get a commission out of every sale that they make and are incentivized for every sale that they are making.

An advisor, on the other hand, is a professional who advises on the overall portfolio and the structure and execution mode of the portfolio and charges on the basis of the job that he has done and the investor is free either to chose any distributor or as it happens in most cases to invest in the direct mode of investment as it saves huge cost for the investors.

In recent times many RIA – fee-only have come up in the investment market and even the investors are tired of constant nagging of bankers leave alone so many incidences of product misselling and shoving products that are not required and unwarranted.

Online financial advisors in India

There are ample fee-only advisors in India who just charge a minimal upfront fee from the investor and encourage them to invest in cost-effective direct plans of mutual funds. One can search on Google with the term fee-only model and get the list of all such advisors.

A word of caution – if there is any individual or a company with ARN (AMFI Registration Number) then they are not fee-only advisors and are a distributor who thrives on the commission paid by the mutual fund companies and there are a few individuals who have an RIA (Registered Investment Advisor) license and provide fee-only model but use either their spouse name or some relatives to provide the distribution of funds. 

As per SEBI any banks, NBFC or body corporate has to segregate their distribution and advisory services. The investment advisory services in such cases have to be a different division, department, or subsidiary as the case may be.

There are some other advisers who charge an upfront fee and ask the customers to invest in regular plans (high cost) or get commission by up-selling insurance and other third-party products. As an investor one has to stay away from them.

Financial planning services for individuals

In India there are many individuals and companies providing advisory services and one can easily find them via the internet.

Usually, the method of the advisory is simple which starts with a client and advisor engagement wherein the advisor tries to gaze the understanding of the investor, his risk-taking ability, his requirements, assets and liabilities, goals, etc. the advisor here discusses the scope of engagement and fees.

The fees vary from an advisor to an advisor from the range of 5000 to 25000 or more, few advisors even charge on the quantum of money involved.

There is no fixed structure of the fees and it develops on the understanding of both the parties. The advisor also conducts periodic reviews to monitor the financials and readjust from time to time.

All the terms and conditions are it the fees, nature, and scope on engagement, the disclosures from the advisors, any conflict of interest if there is any have to be declared, etc are noted in writing.

Can I get free financial advisory services in India

The whole idea of providing financial advisory services for people is to charge them a small minimal fee as compared to a certain percentage at a regular period (in the form of the higher expense ratio of the regular type of mutual funds) but there are a few advisors who do it for free for households with an income level below a certain threshold.

Top 10 Financial Advisors in India

Once you Google this sentence you get lots of answers and the funny part of it all of them are showing the list of just distributors.

When one looks for “financial advisor” ideally the list should be that of fee-only “advisors” as that is what real advisor means but that’s the power of the distributor’s community in India who have a wide reach and have positioned themselves as the quintessential financial advisors.

In our upcoming articles, we will be sharing the list of some of the best fee-only advisors available in India.

How to choose a Financial Advisor?

There are various ways to choose a financial advisor suitable for one’s needs. There are a few basic things one has to keep an eye on while choosing a financial advisor such as –

Educational qualification

The advisor has to be educationally qualified and has to have the necessary certifications/license to be eligible to advise clients.

One has to be aware that it’s not just buying any product or commodity from the market but one is investing their hard-earned money/savings and hence it’s imperative to look at the credentials to start with.

For a fee-only advisor, a person had to be graduate and passed either NISM Series-X-A: Investment Adviser (Level 1) as well as NISM-Series-X-B: Investment Adviser (Level 2) certification or cleared Certified Financial Planner (CFP) certificate from FPSB.

Previous experience

Whether the advisor has any prior experience either with a bank or any other such organization where he has exposure to investments and advisory. How long has he been in the market and how much he knows about investment?

What has been his own experience while investing his money in the market and how he perceives the risk and returns associated with various investment tools?

The approach towards providing a solution

One needs to observe whether an advisor is just trying to make a sale and generate a fee or he is really looking to provide a solution to the individual. What is the process and how much importance is given to the financial planning process?

Understanding the subject

The advisor has to be substantially knowledgeable and clear about the concepts. Not only he has to be clear about also should be able to explain the complex terminologies and concepts to an individual who might not necessarily have an understanding of the same in simple terms.

Clients he already manages

The advisor might not tell you the exact details of the clients (due to the confidentiality clause) but you can have an idea of how many clients they manage, average portfolio, what is the demography of the clients, what is the average age group, etc of the clients that he manages.

Other Qualities to look for in a financial advisor 

Patience

As a client you should be able to and be comfortable in asking as many questions as possible without any hesitation (even if sometimes they might look silly) and the advisor should not feel irritated or otherwise while answering these questions as it’s his job to clarify any doubts.

Empathy

The advisor should be empathetic towards their clients and should be able to understand the apprehensions of their clients, the fears and doubts, their constraints and requirements.

Checklist for choosing financial advisors (10 important questions to ask)–

S. No. Question Answer(Yes/No)
1 Does your education qualify you for this job?  
2 Do you have relevant experience in this field?  
3 Do you use market timings?  
4 Do you use technical analysis?  
5 Do you conduct portfolio reviews as well?  
6 Do you receive any third-party commission as well?  
7 Are you easily approachable?  
8 Do you often do buying and selling (churning) of the portfolio?  
9 Do you have a fully functional website?  
10 Is there any grievance redressal mechanism?  

Ideally for the above table except for questions number 3,4,6 and 8 all the answers should be a “yes”.

Apart from this, there are few more questions that you can search the answers for –

How long is the advisor in the business?

What is the investment philosophy of the advisor?

You can ask the adviser why is he into this business, is it out of his passion?

What is the process to choose investment products?

Check the knowledge of the advisor if he knows the fundamental principles of investing and can explain the same in simple terms?

Grievance redressal mechanism

SEBI has launched a new web-based centralized grievance redress system called SEBI Complaint Redress System (SCORES). Investors can lodge their complaints at http://scores.gov.in. On receipt of complaints, SEBI takes up the matter with the concerned investment adviser and follows up with them for redressal.

ROBO advisory in India

ROBO advisory basically uses computer programs and algorithms without any human intervention to run various model portfolios on the basis of different scenarios depending on the client requirement coupled with market situation, fundamental and technical analysis formulated into the ROBO template.

The client is presented with multiple options of the portfolio and basis his judgment he can opt for one. ROBO advisory market is not evolved in India and still, there are very few players in the market.