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!