The missing link - Wealth creation!

Financial Planners explain their role saying how they take care of the financial health of an individual or his family in the same way that a doctor takes care of his physical health.

Hence it will be relevant to mention the various individuals or domain specialists who belong to both these professions –

Doctor * Dentist * Cardiologist * Orthopedic * Eye specialist * ENT * Endocrinologist * Urologist * Oncologist * Pharmacy * Diagnostic Aid * Physiotherapist * Nutritionist/Dietician * Gym Instructor

Financial Planner * Tax consultant * Stock broker * Insurance planner * Mutual Fund advisor * Estate Lawyer * Banker * Property consultant * Online Financial mart * Financial stress test * Financial rehab consultant * Career counselor * Personal coach

As you read this, I hope you will get the connect (or disconnect?) that I am trying to draw your attention to.

At a recent get-together of professional networkers for business opportunities, I was truly amazed to see the enthusiasm and energy of the members and their guests (I was one of them) at an early hour.

One of the speakers at the event, who was highlighting the manifold benefits of networking, asked the audience – “How many people want to be a crorepati?” The response was on expected lines as quite a few enthusiastic hands went up promptly.

While the speaker continued, my mind wandered off….I was pondering over the common thought that all of us face “How can I get rich?”

A point to note about this group of networkers is that they only allow one member from one business category. As a result there is always a scram for different types of financial intermediaries – LIC agent, MF advisor, Financial Planner, CA etc. You’ll realize that rarely you will come across a financial intermediary (yours truly included) who will stick to such a narrow band of specialization.

If you refer to the parallels between a physician and a Financial Planner – The numerous specializations that you come across in the field of healthcare, where each specialist is able to carry out a sustainable practice without encroaching into another specialist’s domain, vis-à-vis the financial domain where everybody is trying to be the proverbial “Jack of all….and master of ….”.

This is a reality and not my or anybody’s perception, hence not debatable. This reality hurts because the financial intermediary (at large) suffers from an acute myopic obsession of maximizing sales and commissions.

However, further pondering will certainly reveal that in the healthcare domain the multiple domain specialists can sustain their practice, because there is something tangible to create, look after and protect, i.e. our health.

In contrast, the financial domain is poorer as it can hardly sustain multiple domain specialists without an acute degree of cannibalization because there is no significant wealth to take care of. It is not that we do not have our share of HNIs and super HNIs (high net worth individuals) but their numbers definitely do not justify the existence of a vast army of financial intermediaries and the masses would rather look at them as ‘agents of commission’ rather than specialists capable of delivering any ‘fee-worthy service’!

At the root of this disconnect is the acute absence of a “wealth creation” culture. A life insurance agent is driven by MDRT and TOT goals, a stock broker’s earning is driven by the number of times a client churns his portfolio, a mutual fund advisor is driven by maximizing NFO (new fund offer) sales to the lure of an overseas junket or other goodies; and so on and so forth. Rarely do you come across intermediaries who will shun the limelight of being in the media glare because he needs plenty of time to do his homework in an ever changing financial landscape.

Back to the prompt affirmative response in wanting to become crorepatis – the need for a culture for ‘wealth creation’ needs to be driven by a vision, mission and plan of action backed by a passion to show up on time, every time round the clock and the year.

Then, the problems of overlapping domain specializations and the rarity of clients willing to pay fees would melt into oblivion. There would be something tangible to create, look after and protect. Any possibility of damage to wealth will be countered with a resolute determination and the need to keep growing one’s wealth will become the bed-rock of all exercise.

Rounding off with the oft-repeated Buffet-ism on wealth creation “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

Saach ka Saamna - Your moment of truth!

TRPs of a TV serial of the same name indicate that it has captured the imagination of TV viewers. As all my friends in the TV industry would vouch, they would give a limb in exchange for having the credits to a program which can boast of such high ratings. What else to expect in an age of fickle loyalties!

Reality TV is the new thing on TV these days and not only in India. Globally audiences are hooked onto watching their favorite TV stars facing up to some challenge or the other, but, set to a scene devoid of any script…completely unrehearsed, unedited, WYSIWYG – What you see is What You get!

The attachment is largely based on our obsession with the lives of our TV stars. We try to know every detail about their lives and how they fare in the face of real life adversity & challenges. This curiosity is heightened because mostly, our awareness about our favorite stars’ lives (and of course their actual abilities) is limited to some creatively spun media bits & bytes.

What has this got to do with personal finances? Well everything! This world is also getting real!

Sweeping changes are underway in the financial regulatory environment. Mr. Swarup, chair-person of the Committee on Investor Protection and Financial Literacy, says - “CIPFL is looking at aspects of greater transparency, common disclosure norms of financial products, and attempts to bring all financial products to a level playing field. It will also regulate the advisors.” The committee is also looking at removing commissions that are embedded in financial products, where the agent gets a commission from the investment.

The upfront commission on mutual funds has been barred by SEBI w.e.f. 1^st August 2009. But, the IRDA (the insurance regulator) allows commissions that are as high as 40 per cent in the first year. All these and more have been reported, discussed and pretty much highlighted by the media in a laudable effort to guide the investing public!

Having said so, let us see how you will fare under this new emerging reality. You are live on TV (or better still, stand in front of the mirror!) on the program Saach Ka Saamna – Your moment of truth! And, your questions are –

a. You choose investment & insurance products based on the latest fad (friends are buying)?

b. You buy a financial product and then forget all about it?

c. You feel asset allocation is a good theory but not for you?

d. You never review the performance of your investment portfolio and record the same every year?

e. You don’t know how much commission your agent/advisor gets for selling you any product?

f. You will not pay a transaction fee to your agent/advisor, even though mutual funds are now subject to ‘zero entry load’?

g. You have no idea of the name or the type of insurance policy that you own?

h. You last purchased a ULIP without verifying (from independent sources) the ‘expected return’, ‘promised’ by your agent?

i. You have bought 20 life insurance (endowment) policies of Rs 1 lakh each (sum assured) which will mature every year starting 25 years from now, because you were told that this is a ‘pension’ plan for your retirement?

j. You don’t like term insurance, because you do not get any money back on maturity?

k. You don’t want to buy a health cover on your own, because your company offers you a group cover?

l. Your banker is your advisor because you believe he is the best person to manage your money?

m. Your choice of agent for investments or insurance is based on his willingness to pass back (highest amount) commissions?

n. You refuse to pay a fee or offer a performance-linked-incentive to your financial advisor for his advice?

The above is a list of common mistakes made by investors who miss the big picture!

If your answer to any or all of the above questions is “Saach” - I’ll not be surprised if at the time of retirement, you feel you would have done much better in terms of your savings & investments; If, you had gone about the task in a more objective and methodical manner, based on sound principles and rationale!

We invite your feedback – constructive criticism, sharing of personal experiences, bouquets & brickbats…all of this. Without this, our efforts will be in-effective in making this platform, informative and interactive towards helping the layman achieve Financial Freedom.

Also, please take some time to cast your vote on what you think is the most important criteria for being a successful investor. Click on http://polls.linkedin.com/p/53641/jkbij

Choosing a Financial Advisor – a critical decision

To understand this better, let us start by analyzing what are the objectives you want to achieve through your Financial Plan. To list them down, in order of priority -

a. Liquidity management

b. Risk management

c. Investment management to beat inflation & generate real returns

d. Tax Planning

In short, wealth creation for a lifetime and beyond (to leave behind an estate for inheritance or philanthropy)!

I come across many individuals and families who save a significant amount of their annual earnings (foregoing the pleasures of the present in order to secure their futures) have bought themselves Life Insurance policies which will damage their future like a 'slow-poison'.

Your advisor's qualifications & experience are important. But, more important is his advisory style. Check if he tries to explain & educate or is busy closing the deal with a sales-pitch that would leave you tongue-tied and afraid to ask questions. If you find an advisor who is e.g. a "Star Insurance Agent" you need to ask him about his strategy for beating inflation. They are likely to start fibbing, for sure!

While many advisors may still fit this mold - LIC or insurance for everything: marriage to death! "Zindagi ke saath and Zindagi ke baad". Some are evolving their practice into a more comprehensive approach. They look at not just insurance, but also investments, budgeting, taxes, retirement, education funding and estate planning.

A sensible advisor will not ask you to get into straight-jacketed solutions - long term products without flexible options for an easy & early termination. These may be considered only if they offer you asssured returns which beat the long term trend line inflation rate. Will you want to invest in a 20 year bond which offers 9% RoI (taxable)? This is not recommended because the post-tax return will surely be less than the rate of inflation. In short they will be "long term value-destructive".

If you'd rather not have someone who struggles to manage his or her own finances, manage your money (or even better someone who is extremely focused on his own financial planning and does not focus on your financial plan!) - Then, you had better do your advisor homework!

Be cautious with wealth managers affiliated to your bank or stockbroker. They are "glorified salesmen" pumped up by terrific incentive structures. They dump you with ULIPs, MFs and proprietary PMS schemes. They manage to get their targets like sharp-eyed eagles. They are continuously 'preying on the next kill' by browsing through your bank and de-mat accounts, sniffing for the smallest opportunity.

You will be better off to keep a check on - whether your advisor follows any benchmarks in measuring portfolio returns? How does he profile client's risk tolerance and allocates assets? Whether the recommendations are 'one-track' - only SIP recommendations or only MFs? Does he analyze your real estate portfolio (investments)? In short, does he have the band-width to put together a comprehensive and cogent analysis of your entire balance sheet (though it is not practical for an individual to have expertise in diverse areas) with the help of a team of experts?

If your advisor is a 'one man show' you can help him get closer to his goals of becoming a 'Star Agent' by being a proposer - you pay the premium, for a life insurance policy with the advisor as the life assured and you as the nominee! Are we not supposed to address the risk of what happens to you if something were to happen to him?

If you want someone to look at your entire financial situation, seek the help of a comprehensive financial planning firm. They will have on their panel an insurance agent, tax professional, estate planner and investment advisor.

Understand all that is on offer and what you are paying for?

* Will it track your investment on a total cost basis for you?

* Can it file your tax return and help you with other tax related questions?

* Does it look at risk management? (i.e. life insurance, long term care etc...)

* Can it help you plan your estate?

* Will it refer you to another professional if the firm cannot provide the service itself?

If the advisor works with a narrow focus of achieving short-term business targets, avoid them like the plague. Visit their office and you will have a clue about the same!

Once you zero-in on a financial advisor that you trust, you'll need to agree on how your advisor will be paid. Will it be a fee-only model, or commissions-only or fee-cum-commssions?

Good financial advisors are akin to 'life coaches'. They will help you tackle the many challenges and complex financial decisions throughout your life. Great financial advisors will help you make money on your investments and also save you money on your insurance premiums. They will help you reach your goals and positively impact major decisions throughout your lifetime.

To get the best results - meet your Financial Advisor regularly. set up meetings with specific agendas to update on the latest developments on the personal finances front, your concerns & goals. allow your advisor to review all of your financial and legal documents. After all, it's all about - his competence & reliability and your trust!

We invite your comments - constructive criticism, sharing of personal experiences, bouquets & brickbats...all of this. Also, if you find this post (or, any of our other posts) informative or helpful, please forward this to people in your network...without this, our efforts will be in-effective in making this platform, informative and interactive towards helping the layman achieve Financial Freedom.

Also participate in the poll - "Does a Financial Planner have an edge over your MF agent or Insurance agent or CA in helping you achieve your financial goals?" click on http://polls.linkedin.com/p/52394/mwkgw

Financial Planning for a secure future

Everybody saves, just as, everybody eats. The big question is "Do you eat right?" or "Do you save right?" While what you eat will reflect on how you look and feel. Similarly, the way you manage your finances (from now onwards), will reflect on how secure you will be, financially, as long as you live.

In our (fairly complicated) lives where the use of jargons tend to put off the mild-mannered and the easy going, "Financial Planning" or FP, is an addition to the jargon overload. Before you turn this page without reading it fully, let me assure you it is no rocket-science.

FP is the art and science of managing finances in a manner, so that you always have sufficient money on hand to take care of your needs, at present and in the future. While in the present context it will suffice to say that your income should always exceed your expenses. Post-retirement, the accumulated corpus should be sufficient (amount wise) and should be invested carefully in order to generate a regular income to meet your needs. All of this has to be done in a manner so that an unfortunate twist in the tale - unforeseen expense, loss of income, damage to assets, or an increase in liabilities; will not leave you scarred.

To begin with you need to ask yourself the right questions -

a. Am I saving enough?

b. Am I spending right?

c. How can I enhance my income?

d. What are the various risks I face?

e. What is my ability to meet a risk without succumbing to it?

f. Are my investments and savings liquid (enough) to meet any emergency need?

g. Are they suitably diversified, so that they are not hit by any single event-risk, all at the same time?

h. Are my investments and savings generating enough returns to beat inflation?

If your answer to all these questions (in reasonable detail) leaves you satisfied, then, you are most likely to be up-to-date on your financial plan. In case, you are not, then you need to work on them and maybe a Financial Planner will be able to ease your worries.

A simple list of dos and do'ts will be just right as a starting point -

a. Track every rupee you earn and spend. Also teach it to your kids, it will serve them well for a lifetime.

b. Make a complete inventory of all your assets - property, MFs, shares, bonds, FDs, Insurance policies, gold, jewelry, etc. whatever you own and wherever they may be located.

c. Revisit the questions listed in the first section.

d. Keep going back & forth, working on all the small improvements that you can make. List down the plan of action and set yourself a date by which you will have them re-worked.

e. After doing this, if you feel you need professional help seek out an expert.

f. If you resort to action 'e' (above), without working on the steps that come before it, you will make a big mistake - please avoid it.

It's a common practice to have savings in the form of stocks, MFs, insurance, FDs, etc. done over a period of time without any method or plan. It is recommended that one reviews and integrates all assets rather than retain them in bits and pieces, as this will lead to sub-optimal results (jargon again, but an easy one!).

A Financial Planning exercise with the help of a professional will help you realise the best results only when you are prepared for it!

Myths that make up our daily lives

The govt.'s take on inflation at -1.56%, could be circuitously extrapolated to infer that the neighbourhood priest and kirana-wala have the best pedigree in leading honest lives.

Think through - if you take one who preaches homilies, at face-value, without a peek at what lies behind the smokescreen, you may find a Ajmal Amir Kasab, the terrorist who wishes to be hanged, because he says, 'I wish to be punished by the people who I have sinned against, rather than by God, himself!'

Wow, conscience - thy name is Kasab!

A plethora of garbage is packaged as news bytes in print and the electronic-media, including tweets and wall-posts on FB. Garbage, that not only wastes your time and energy but manages to perpetrate some fabulous myths. This, in a simple moment of reflection would not only get busted, but lead to detoxification of a kind that you may begin to have withdrawal symptoms!

Just sample a few of them -

1. Inflation is negative
2. Aided by overseas capital (inflow)...we are in a 'falling interest rate regime'
3. Infrastructure development is happening ...TINA (there is no alternative)
4. Any businessman who is doing well must be cracking a few crooked deals
5. A business or technical degree-holder is a professional
6. Service providers loot their customers through the fees they charge, and .....I can go on and on, but that will defeat the purpose!

Now, let me help you analyze -

1. The growth in your bills - grocery, utility - viz. electricty, etc. and your monthly salary - Yes Sir! Your competence aside, the contribution of inflation is significant.
2. India will attract lots of portfolio and FDI, which will drive investments & growth...but a lot of which will also drive inflation and push interest rates higher.
3. Investments in infrastructure is on...albeit at a pace slower than we would like....this drives up costs and risks, as a result end-user affordability may go for a toss!
4. Businessmen essentially are entrepreneurs who risk career & capital to stay afloat. They use their resourcefulness to survive - because he knows there will be no bail-outs (remember Citi Bank and Air India?). His resilience adds to the resilience of the economy. In contrast, the middle class white-collar cribs at every opportunity - they will make you believe that they are doing society a favor by clinging on to their 'risk-free middle-class heritage' no less!
5. A degree holder and that's his badge - he is the self-anointed 'professional'. Ask him about his 'professional ethics' and he might shoot back - Aw, come on, what's that?
6. Service providers, if they are lawyers, as Mr. Chidambaram had famously remarked - They don't provide any service hence they need not pay any service tax! A big 'thank you' to Pranab-da for ensuring, that, now, lawyers are also 'service providers'. By the same yardstick, financial advisors have been providing service to their clients for a long time.

If you fail to understand how inflation eats into your long-term savings and can't seek remedies for it; If you are bullish on India because the 'firangs with money have nowehere else to go'; If you believe that all businessmen cheat and are a threat to the country's growth and prosperity; If you are happy to be 'professionally' qualified, without being 'qualified' to discharge your responsibilities like a professional; If it inflates your ego to be treated like 'royalty' by rogues masquerading as Wealth Managers at your bank (incidentally they too belong to the 'middle-class white-collar') -

Then, you are bloody right, to tell any advisor who dares to ask you for a fee for managing your hard-earned money to ****-***!!!!!

SEBI queers the pitch for Mutual Funds?

On 18th June ’09 SEBI announced that henceforth, no entry loads will be applicable for mutual fund transactions (click here for details). This has set the cat amongst the pigeons. The agent fraternity is ‘up in arms’ and words like a ‘regulator-induced lay off’ are being use to describe the possible after-effects.

While I can understand the antecedents of the reaction, unfortunately, it is not a simple & easy thing to either support or oppose this view. Let us understand the background –

SEBI thinks the investor and investment advisor should come to an agreement on what is the fee to be paid for a particular transaction and this is a ‘fair practice’. This is something that is (perhaps) agreed upon by the entire industry – AMCs, distributors et al.

However, the hue & cry being raised is not the ‘negotiation’ aspect of the fees to be paid. It is the method and manner in which it is to be paid by the investor to the advisor/agent. According to SEBI, the investor should henceforth, pay the agent separately. So far, the practice has been that the entry load is deducted from the amount invested by the fund house and paid to the agent.

Most AMCs – though they’ll not admit publicly, and agents are outraged or should I say ‘shaken by the prospect of an uncertain future’; but, for different reasons. Understandably so….let’s examine why?

Typically the investor approaches a MF agent/distributor asking for their recommendations on how or where he should invest his money. The agent dutifully shares with the investor, what, according to him is the ‘best’ way to invest his money and the reasons for the same. The investor feels obliged by the help provided by the agent. Hence he does not mind paying for the entry load; he understands this is towards the commission earned by the agent for his efforts.

So far so good! However, there is a twist, as always.

MFs are managed by intelligent people. They are hired to contribute an ‘alpha’ to the job they do. Let’s say this ‘alpha’ is the ‘extraaa’ that the guy brings to the table. So what does Mr. Extraa do?

He puts together a concoction of strategies resulting in multiple product launches. Some of them may be identical to each other but are launched as “New International Lux”….ok, ignore the FMCG parallel!

He plans a roll-out which catches the imagination of the investor; and, has a mouth-watering gravy train for the agent. The rewards are not restricted to the entry load paid by the investor. Plenty of other rewards in kind follow - which makes the agent go weak in the knees, he succumbs to it, going all out to achieve targets.

I lay particular emphasis on the last word – I am sure in this context, it will not be difficult to understand where the agent’s loyalties would lie – with the investor or the MF.

The agent/distributor community has allowed itself to be ‘used’. It is the role of a regulator to remove any (actual or perceived) unfair practice exercised with the help of an undesirable clout which a manufacturer may have over its distribution channel. Please remember what the ‘I’ in IFA (Independent Financial Advisor) stands for!

I suspect SEBI has specifically tried to remove this. However, as in so many other areas the articulation that should have preceded the actual implementation has left a lot to be desired. Part of the reason could be the regulator’s efforts at conducting ‘intelligent communication’ using the media to mould mass opinion is fairly limited in comparison to that of the Mutual Fund houses.

I have been an agent/distributor for more than a decade. Over the years one has seen how the average agent’s vision and mission of doing business has got thoroughly distorted. He has lost his ability to think independently. He is completely dependent on fund house inputs to decide on what to recommend to clients. The removal of entry load has almost, as he sees it, pitted him as an adversary of the investor.

He is completely missing the point. He is supposed to play a collaborative role with the investor in helping him create long term savings and wealth.

However, I will not blame the agent entirely. Many a time, investors behave in a short-sighted manner. This creates a sense of insecurity in the agent about the ‘lack of loyalty’ factor. Most importantly it contributes negatively, discouraging the agent from improving his service delivery and advisory practices.

We have to understand that all of us – investor, agent, mutual fund house and the regulator; are part of the same eco-system. We have to work together in ensuring the eco-system is strengthened…that, we are ALL able to achieve our objectives through sustainable practices and win-win solutions.

A better way to handle the abolition of entry-load would have been to abide by a time-frame for the change-over. This would have provided sufficient room to all stakeholders to thoroughly understand the pros and cons of such a change and take appropriate measures for adjusting to the same.

The biggest Buy vs. Rent decision of your life?

“Manufacture vs. purchase (or outsource)” is a common topic in business strategy. Simply, put, this is about deciding, which is preferable from a strategy point of view, given a host of myriad situations.
Buying houses and repaying loans over 15 to 20 yrs periods (with higher cost of apartments and fluctuating rates of interest, the average loan repayment tenor is seen to have increased from the historical average of 6-8 years to 12-16 years)? Or should one simply take them on rent?
Buying houses when kids are staying with you, leads to buying bigger houses. Post-retirement the need for a home is modest in comparison. By this time the house purchased while working, is not only older but also costlier to maintain.
Financially speaking, this leads to sub-optimal cash-flows. First, while paying EMIs for the loan and also, since the cost of maintenance of a property (which is bigger than post-retirement needs and also older by the time you retire) will be higher.
Compare this with staying in rented apartments till close to retirement – loss of tax-breaks due to avoiding housing loan can be set-off by adjustment of rentals paid to HRA (tax-wise!) and the flexibility of choosing apartments based on location of employment/profession, size of family and/or socio-economic status – a highly flexible package. Also, the low levels of house rentals as compared to their capital values (3to4% annually) will lead to accumulation of retirement corpuses with lesser probability of outliving them.
Post-retirement, if you out-live your retirement corpus, the need for reverse-mortgage leads to a second incidence of sub-optimal cash-flows. Since, this is driven by value (older the property lower the value) and hence lower will be the sum of annuity through RM. Add to this a high rate of interest (prevalent rate?) and a low cap on loan to value. The cash-flows from the RM could be way below the needs and/or expectations.
Alternately, if say, 1-2 years from retirement an apartment, closer to actual needs post-retirement, is purchased (as the unit is likely to be smaller, the need for loan may be minimal if not required at all), then….the possibilities look rosier.
Chew on it! Our back of the envelope calculations suggest that practiced over a 25 year period of working life, right from the time one gets married (assumed @ 30 yrs) till age 55 yrs (a well managed corpus of retirement funds should make it possible to retire at that age) – the retirement corpus could be at least 2 times the corpus of the more conventionally inclined.
Caveat - Even if you are convinced about the numbers, there are actually plenty of risk factors in this course of action and they are –
a. There is a lack of adequate and steady supply of apartments for rent.
b. The non-existence of landlords who give apartments on long term lease
c. Can the popularity of the renting vs buying option lead to a speculation in rentals as we have seen with respect to asset prices of apartments in most towns and cities in the country?
We will be discussing about what is required in the macro-environment and the attractiveness of this proposition from both the macro as well as the micro points of view, in the second part of this article.

What did Shahrukh Khan and KKR forget?

(This is the second part in a series on the need for Customized Financial Planning)

Imagine! Ages ago, life for our fore-fathers must have been very difficult – what with all kinds of predators roaming all over the place, the most sensible thing to do would have been to stick to others, as in a group, the collective intelligence or strength or survival instinct of the group would have ensured the highest probability of surviving any ‘clear and present’ danger.

Point to note here – the hunter and the hunted belonged to different species of life forms. In layman’s terms ‘even a child could recognize the difference’!

Cut back to the 21st century – Long gone by are the days when the greatest threat to a man’s survival was from any other form of life. Man’s ingenuity at surviving the various odds has helped him in ensuring that most life forms which pose(d) a threat to him are either at a significant dis-advantage or are already extinct.

However, life never ceases to surprise us! Doesn’t it? We now face the risk of annihilation – physical and economic, from fellow humans who have armed themselves with WMDs and varied financial instruments (which can also be labeled as WMDs?) through the use of which life can change irreversibly for a vast segment of the population even before they can blink or think!

The hunter and the hunted now belong to the same species….though luckily, some things never change….. ‘even (now), a child can recognize the difference’!

Let me explain – Let us begin by assuming that there are 2 ways to reach a mountain-top which signifies achieving your goals. Path A leads you to the top through a rough terrain, through a forest of thorny bushes, a few life-risking steps etc. Path B leads you to the top by taking a chopper, a relatively comfortable-ride, provided you are able to get into the chopper. Since, quite obviously, there are many people willing to take Path B. There are few choppers available and each can carry only a fixed number of passengers. The probability of getting ahead in the queue and getting into a chopper, to reach the top within a certain time-frame is then subject to a number of variables. Variables which are uncontrollable, viz. – the total no. of people ahead of ‘you’, whether people behind ‘you’ will not break the queue to go-ahead, whether the choppers will be reliable (mechanical faults and weather related problems) etc.

It is in the context of the higher number of uncontrollable variables of Path B, that many or at least a few may choose Path A, where physical endurance, route planning and having a reasonable back-up (in the form of equipment and provisions) will likely ensure the successful completion of the journey to the top, albeit with a lot more sweat than in Path B.

However, based on real life experiences familiar to all of us, more people will opt for Path B. Why? Let’s try and understand. Perhaps more people prefer to avoid hard work, are not physically fit, don’t want to get involved in any planned activity etc. etc…..However; I get the feeling while all these could be factors, they are NOT the most important factor. The bigger, if not biggest factor at play is the unwillingness (or the ability?) to THINK!

….and, Any kind of unwillingness repeated over a period of time can become an inability, but the more pertinent aspect about thinking is that since the dawn of industrialization or mechanization (it has become more acute with the advent of computing) humans are increasingly becoming lazy. The expectation that every bit of work that we do can be ‘outsourced at a price’ to gadgets or other humans has led us to this current state of physical and mental laziness.

What is the relevance of all this to personal finances or Financial Planning?

Everyone wants to make a quick buck by investing in the stock-market or doing a ‘leveraged’ investment in real estate. Money making was never easier, right? Ask the guy who invested at 21000 (Sensex) and finally threw-in the towel at 8000! Do you think he is ever going to come back to the markets easily?

Path B definitely is like the ‘age-old stereotype’ - without any glamour or hype, but I’ll tell you what, it requires more brains and thinking and has a far higher probability of making it to the top (your goals)…….and that is exactly what is the objective behind doing Financial Planning - Reaching your Financial Goals, within an appropriate time-frame by taking ‘tolerable’ risks.

Caveat – For all those who are looking for some quick buck in stocks, riding on the decisive mandate given by the people to the UPA, will do well to remember the lessons from the past and not get carried away by the ‘euphoria’.

Footnote – For those who are wondering about the relevance of this write-up to the headline, I assure you that it was not a cheap attempt at grabbing eye-balls…..it was a deliberate ploy to make you ‘read between the lines’ and figure out the obvious…..maybe, I should apologize for playing mind games…..but then, isn’t that what the team management at KKR has been doing from day One?

Heard in a ‘herd’ and the contrast of gray matter & graying at the temple!

(This is the first part in a series on the need for Customized Financial Planning)

Often times we feel helpless about the state of affairs that govern our lives – market slowdown leading to uncertain incomes, multitude of financial service providers each with a holier-than-thou attitude….the list simply does not end.

Come to think of it…..actually we don’t want to because of the remembrance of the pain & misery that we experienced the last time we faced such a situation…..de-ja vu seems overtly simplistic to describe the feeling.

The meltdown in the financial markets have left savers & investors in such a quandary (try recollecting 1992 or 2001) that they are left licking their wounds like “never before” with resolutions ranging from the “never again with stocks or mutual funds” to “this time when I invest I will exit the moment I get my 20% appreciation”.

I did not hear anyone say the same about ULIPs or property or gold or LIC endowment policies! Did you? Transparency never made anyone or anything popular! The bigger the myth, greater is the following.

Perplexed about what I am trying to get at? Come on, give it a shot……individually we are all reasonably intelligent people, right? You bet! (Honestly, I am not being sarcastic.) But then before you get carried away by a bit of self-adulation…..try remembering, when was the last time you had a serious, path-breaking conversation with a group of buddies over a couple of beers? Or, even better, do you seriously think or expect the leaders of G-20 nations to come out with some miracle pill that will act like a panacea to the ills facing the global economy……don’t get me wrong, I am never for a moment suggesting that there is something wrong with the abilities of these people……the problem is that try doing path-breaking thinking as a group and you will know what I am getting at.

The problem is that whenever we are in a group and we agree to a single path of action, the probability of compromises being chosen just for the sake of arriving at a consensus, surely enough kills whatever ingenuity each person is capable of. What is ingenuous to one is surely going to “challenge the status-quo for another with damaging consequences” and mark you this is void ab-initio for the ‘consensus seeking mindset”.

Given this, we need to ask the all important question – Is consensus such a bad thing after all? I can’t seem to make up my mind whether it is bad always, but, at the same time the experience of economic booms (and the inevitable bust ups that follow it) is rarely ever seen without its fuel in the form of consensus on most matters which initially lay the seeds of the boom but eventually turns out to be a highly inflammable potion which ensures that the boom is ensnared in its flames.

Alternately, replace the word “group” in the afore-said piece with the not so respectable “herd” and “boom” with “bubble” and you will get an altogether different feeling. If I have managed to provoke you to think, do so silently, while sitting all by yourself, choose your poison (wisely) but do remember to let me know your thoughts……..that will be the source of my intoxication and my next ‘wave’!

These days it is not un-natural to have stray thoughts, sample this – Do we have enough gray matter? If yes, then, what do we do with it?

(This is the first part in a series on the need for Customized Financial Planning)

Reflections of random interactions

In an economic environment which is fast losing momentum, the desperation of various players in the market is palpable. The news flow since the November attacks on Mumbai have gone from the ‘worst’, to, looking for new words to describe the gloom & doom.

The wave of diplomatic claptrap has led to a situation where we are resigned to meandering from one sub-issue to another. The ‘puppet’ leaders of the enemy have assumed a halo of ‘cool’ of mega-proportions. This has left our leaders shivering at the prospect of having to counter the economic downturn as the only panacea for a disillusioned populace which is bracing up for the polls.

I recently met (informally) a reputed fund manager, who took ‘polite interest’ in what we were recommending to our clients. I told him about our negative outlook on equities because nothing really seems to be working. That generally we were asking people to park money in short term debt. He expressed his concern and surprise at investors becoming so completely risk-averse. To his mind, investments in govt. debt of longer duration made absolute sense. He felt that the govt. had no choice but to reduce interest rates to stimulate demand. My supposition to that was what can happen if demand did not respond to such stimuli? His answer was much on expected lines….in which case, things could get worse before they got better.

The various mis-deeds of the Satyam management keeps tumbling out with unfailing regularity. The CID has claimed that Satyam had an inflated headcount, this to my mind, is a rare silver-lining to the dark clouds floating over the Satyam skyline. Let me explain, in my interaction with clients for financial planning, we have seen that over the last 2-3 years, i.e. from 2006 to 2008, salaries of executives have gone through the roof! Now when the economy is slowing down, businesses in addition to fighting the downturn in sales have also got to right-size the salary bill. When it happens eventually, it will result in a lot of pain. Satyam may find this easier to do, as ‘rightsizing’ for it is going to result in little or no pain….now you see, why Mr. Raju could still keep his missed date with the WEF at Davos in a few years time!

At a second follow-up meeting for offering financial planning services to a prospective client, I realized that I was running into a dead wall. His resistance to paying fees for services was understandable. A first generation entrepreneur who has just woken up to the reality of the effects of an economic slowdown - a straight 40% fall in top line would blank the daylights out of anybody.

However what was puzzling was his efforts at trying to prove a point by ‘transparently rationalizing’ the pros and cons of the benefits of hiring a financial planner. His reasons were many – this year he would not have profits, to invest; he did not want to disturb his existing portfolio even though they were down significantly; given the state of business financials whether he should hire the services of an advisor etc. etc. He also actually ended up saying that if he were to focus for 2 entire days without any distraction, he would be able to research the market and his portfolio to come to the same conclusions which an external advisor can provide!

In his efforts at ‘trying to be fair’ (in his own judgement) he then put this query to me to answer – Do you think I can manage my finances?

My reply was direct and no-nonsense (when reality dawns, it hits you somewhere between the eyes!) – I asked him whether he wanted to hear a ‘palliative-Yes’ or a ‘discovery-of-truth-No’? By the high standards of fairness that he had set for himself, he wanted the truth. I told him that he was in the same business for the last 15 years and yet could not foresee (by his own admission) the coming downturn. In comparison, given the relative newness of his familiarity with personal finances, where did he think he would stand in navigating through the future? His reaction was fair to us both – he needed more time to think it over.

Now let me mention about an unfolding event, and invite the reader to think and reflect – L&T, an Indian corporate icon, is in ‘hot pursuit’ of Satyam Computers, which it feels has a ‘strategic fit’ to its own InfoTech subsidiary – in terms of its significant strengths (experienced team, numerous Fortune 500 clients etc.). It thinks if Satyam is allowed to die & dis-integrate the ‘natural way’, it will be a big loss of ‘opportunity’. Hence L&T has decided to use its considerable cash reserves in hiking its stake in Satyam, from 4% to more than 10% to wrest a seat on the board of the company. Why on earth, should a company (which is a leader in diversified engineering and related businesses with more opportunities awaiting it in the nuclear area, in addition to its existing portfolio of core businesses), choose to throw its money for another company, working in a sector, where its own subsidiary (more than a decade old) has managed only an ‘average’ existence?

The fund manager referred to here-in earlier, alluded to his personal experience of interacting with the ‘thought leader’ at L&T and summed up his feelings in one word – ‘difficult’!…to fathom, I presumed.

First generation entrepreneurs or technocrats with decades of experience (obviously, in their own field) will always have a high probability of making mistakes when taking on challenges outside their area of core competence. As a consequence a financial planner and a management guru (who helps companies focus on their core competence), may both, have new prospective clients to look forward to.

The last year’s events – both economic & political, has left us in a significant state of dis-array, it has left us much humbled and wiser. When you look back at such periods, later in the future, you are able to take stock about the mistakes made and of course the significant learning that one carried forward from the experience – in fact it is this that will differentiate the future actions, as well as outcomes, for all, who experience the turmoil and live to tell the tale, another day!