Sahil, a physician in his late 30s, approached me last week to have some guidance and discussion on his investments. He already had a financial plan in place written by some other Financial Planner, prepared almost 3 years back.
He showed me his investments which were totally different from the ones recommended in the Financial Plan. And even the Asset Allocation was quite different. He started with 50% of equity and now was holding 75% in equity.
He told me that the investments suggested by the planner were not performing well and thus he switched them to the better funds.
But now he was not even satisfied with the new funds’ performances and thus seeking my advice on what to be done.
Like many investors, his way of selecting the better funds was also “Best performing mutual funds as per Value Research”.
His previous financial planner had advised him to Surrender some of the endowment policies. But those were also still lying there. Since surrendering would have resulted in the booking of losses, so he preferred not to close the same.
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So Sahil, if you had no intention of following advice why did you take it in the first place? I curiously asked.
Sahil smiled and replied, the whole idea of having a financial plan was to understand the financial structure and steps he should follow for a better financial future.
And now when he knows how much he needs to save for which goal, he feels that he can do it himself, with maybe some guidance off and on, like for what he has approached me.
Ok. So, this means, you wanted to have a Financial Plan and were not bothered about Financial Planning. Right?
Is there any difference? He asked with confusion.
Yes. There’s a big difference. It’s like you only wanted a Diagnosis and Prescription, and were not interested in treatment. And now you think you can take care of self, by assuming that you will never fall sick again. And if at all that situation arises, then you already have the prescription to follow. Correct?
See, who better understands it than a doctor, that just visiting a doctor will not cure the patient, they have to follow the complete treatment. With medications, some diet changes, wellness exercise, a healthy mind, and a strong Will to get cured, all play an important role in the treatment.
And post the treatment to maintain the health, one may be required to modify the lifestyle and regular health check and follow up with the doctor.
Same way Financial Planning is important for your financial wellness and only financial plans can’t do anything alone.
In fact, even a financial plan gets redundant soon, as the Financial profile of the person is dynamic in itself which asks for a flexible and dynamic financial plan, and needs to be reviewed and modified as per the then circumstances.
Imagine if a patient after taking a prescription from you, takes different medicines suggested by a chemist, never gives a follow-up visit to you, and finds easy to read WebMD for all his medical problems, what are the chances of his staying healthy in the long run. You should not expect good advice on Whatsapp messages.
When wellness is the ultimate aim, Money and Health both play an equal role in it. The way you manage to keep up with your health applies to Money management too. That’s why Financial Planning is more important than the Financial Plan.
Planning includes the implementation of the Plan, understanding all the what-if scenarios, and Preparing oneself for unexpected occurrences.
Just like health management, your financial management requires you to remain active lifelong. Situations keep coming and going, and you need to keep deciding and acting on time and again.
What is a Financial Plan?
A Financial Plan is a document containing the analysis of the present financials, taking into account your present circumstances and advise on the list of things that need to be done, reviewed, and considered as you align your finances to achieve your life goals.
A good financial plan takes into account all the what-if scenarios, that one may expect and come up with a possible alternative solution to each and every situation.
It covers almost all aspects of your financial life, be it insurances, Taxes, Investments, Retirement, Estate distribution.
However, it also depends on the adviser you are dealing with.
Like if you are dealing with an Insurance agent then to him the financial planning would revolve around the various insurance policies he wants to sell. If you have a Mutual funds distributor by your side then your financial plan would be having only Mutual funds as an investment product. Your accountant would be focused more on taxes only.
Financial Plan is a misused word and unless you have a true advisor to guide you, you may be getting misleading structures in the name of Good Advice. What you get also depends on what you ask for.
The true purpose of a financial plan is to put all aspects of personal finance together and try to find all the interlinkages, so all pieces of life should move in tandem towards the same life goals. It does not work in bits and pieces.
What is Financial Planning?
Financial Planning is a broad concept, which covers the writing of the financial plan, implementing it completely, monitoring and reviewing the things timely, and suggest corrective action steps as and when necessary.
It’s a Process and writing of the financial plan is a part of the process.
Monitoring and Reviewing do not only mean just to see if the implementation was done properly or not, and redoing the plan every year.
It means that the new information has been incorporated into the planning process in the form of updated expenses, new tax structure of the investor and the products, Changes in the investment’s philosophy and portfolio composition, Changes in the family structure, Income profile of the investor, etc. and implement the changes as and when required.
For e.g. when SEBI announced the Recategorization of funds and the mutual funds have made the necessary changes in their names and structure, the Review of investment portfolio becomes inevitable immediately.
When the Finance minister has announced the Changes in section 24(b) tax benefit rule on the interest portion of EMI’s, that calls for review of the Loan portfolio and adjust the savings and loan repayments accordingly.
Does that mean having a Financial Plan is not enough?
Having a financial Plan serves the basic purpose of understanding and being aware of the situation so you know why what and how to act on? whereas Financial planning also takes care of the dynamic and unexpected part of the Plan which has not been accounted for or has changed in the Plan. For e.g.
The investment return assumptions: The achievement of the goals in your financial plan depends on the assumptions you have taken on the Investment Returns, growth in Income, savings rate, expenses, etc. 10%, 12%, 15%, or 20%. The higher the assumed investment return, the easier would it be for you to achieve the goals at least in calculations. But Reality may have different Plans in mind and the actual return may vary.
How far you are from your goals, what is your investible surplus, the tax changes in the Invested allocation, the other near-term goals…all play their role in tweaking your plan so you may get the best possible results. And all this comes under financial planning.
Life and health assumptions/situations: Your retirement plan may need complete revamp in case you stuck up with some major health issues. Your immediate family needs a regular financial education to manage the complicated situation which comes with life and health risk. The Insurances may need some revision looking at the change in goal posts, family expenses, the addition of loans, and other variables.
Goals: Goals come in many forms. Some are responsibilities, some are desires, some are aspirations. Many goals are fixed and some are flexible. Some may get into the system and may disrupt the saving process and some suddenly get redundant which calls for a redirection of money to something more important. These things happen, where a good Financial planning process keeps you in the right direction.
A financial plan gets written around many variables so it’s implementation and post-implementation need a regular watch, and this is where a complete financial planning process needs to be followed
It’s like Wedding and Marriage. The wedding happens One time but Marriage is Lifelong. And to make your marriage a success you have to make lots of adjustments in your life.
Sahil, if you have taken the help of a Financial Planner you have to stick with him for regular guidance. There must be reasons for his advice. Discuss with him your apprehensions on the returns and why would he feel that the suggested portfolio will suit you.
Yes, it may result in more cost to investors. But when you do the cost-benefit analysis you will always find you on the benefit side. and this also could be true, that saving the cost may prove to be more costly in the long term.
The success of a financial plan is in doing the financial planning the right way.