The importance of hiring a financial planner

In an earlier article on what is financial planning, I talked about the basics of financial planning.

The understanding of the importance of a financial planner has not yet caught up with the Indian investors in general. We have not yet warmed up to the idea of advisory services – which is loosely defined as paying fees to an expert for his consultancy.

That to most of us is money lost. Ask your self this – are you ready to pay fees to someone for just getting advice ? If your answer is no, maybe the next 5 minutes can help you change your mind.

Can you do your own planning ?

Imagine this. If someone were to task you to assemble a car, how would you do it ? It seems pretty simple – all you need is a carburetor, 4 wheels, a steering, seats, an engine, lights, some more machinery and a key.

You would buy the best of these products individually and probably cheaper too. But you would probably not know how these products related to each other – what if you buy a small wheel when the engine provided to you  is  of a big car ?

Not many of us are car experts to take a call on that ! You could possibly end up with a car that would not start, leave alone serve your purpose of traveling. Assembling a car is a skill that best rests with some manufacturers and not ordinary folks like us. The same is the case with financial planning.

You can read loads of books on making money from the stock  market and do all but make anything; you can read loads of free information on the internet and educate yourself; you can watch good TV programmes on personal finance but none of these will provide you a holistic financial plan that a financial planner can.

Most of the investors learnt it the hard way in the aftermath of the 2008 crash. They invested in the stock market based on recommendations from brokerage houses and they were doing good till the time the markets ran up – however, their net worth got eroded when the markets tanked.

Investors think that putting in money haphazardly in the stock market, mutual funds, insurance, debt, gold and real estate is the same as financial planning. It is not.

Sure, you could go and research on which mutual fund is the best; which stock could potentially return you a decent amount; which life insurance policy to buy, but do you have the ability to put them together in an overall fit to your financial plan ?

Products can serve you to a limited extent on a stand alone basis; for them to serve the right purpose, they have to be brought  together. They should be bought only after their impact on your overall financial health has been ascertained. Now who can do that ? Your insurance agent cannot as he is not qualified; nor the brokerage houses nor the banks nor can you.

Enter the financial planner.

Your financial planner is your financial holistic manager

Making financial decisions requires knowledge and research on all the aspects of financial planning – investments, insurance, retirement and tax. These 4 pillars should not be planned for separately.

Only a financial planner is well educated enough to connect these and fit it in a plan that suits a investor’s profile. The time required to manage your finances can be huge and take a toll on your personal and professional life if you begin to get deeper into it.

Some decisions can best be driven by planners, for example, the critical decision of borrowing from one investment class to fund another – this cannot be done by you.

A financial planner :

• helps you set your financial goals in life (marriage of children, retirement among many others)
• allocates your asset across different asset classes keeping diversification in mind
• manages year on year cash flow till you are alive
• helps you insure everything dear to you
• selects the right products and executes the financial plan for you.

As far as we Indian investors are concerned, we never want to pay for advisory services – we would gladly buy a insurance policy from our father’s best friend who happens to be an LIC agent; we would walk into a bank and get peddled with a ULIP and pay high entry charges, but we would not pay a financial planner to plan for our finances – little do we realize that the amount we pay the planner is  usually less than the money we lose annually when we purchase products in an ad hoc manner from product sellers  who sell only to meet their sale targets. Now that’s an irony investors need to change.

A fee based financial planner advises you for a flat amount of money you give him for his advice.  He does not earn by commissions on products as he does not sell products.

As soon as this fee based model moves to a commission based model in which the product seller earns on the basis of products sold to the investor, mis-selling begins to occur. Since the fee based financial planner will not earn via commissions, he will offer you advice which is purely for your benefit.

Remember, brokers ask you to buy and sell shares because they earn commissions when you do so; an insurance agent slips you an insurance product that will earn him the most in the form of commissions; banks will cross sell products which meet their targets and sales – none of these folks care a dime about the investors money. They care about their sales and their commissions and not your hard earned money.

The only way you can get the best advice is by hiring a fee based financial planner. We cannot get the best things in life for free.

If you have understood this concept, you have made half your financial life simpler.

Before your financial life is over, get hold of a fee based financial planner.  It would go down in history as the best decision you ever made.

My 5 minutes are up.

This article is one from the series from Readers Requests, in response to a query from Manjusha, a reader of www.TheWealthWisher.com, on the importance of financial planners.