In a country where event managers are paid for organizing weddings and nutritionists are paid for making diet plans, financial advisors struggle to make a case for earning a fee. Only a small segment has managed to break through the resistance. Investors continue to save, invest, and borrow without any framework or process in place and assume they can manage their money. Why does one need a financial advisor at all?
There was a time when getting a job meant meeting "commitments." There were siblings who needed college education; there were marriage expenses; and, there were elderly parents to take care of. Today, a young earner begins financial life on a firm footing - a regular surplus income. He acquires a bank account and a debit card with the job. By the end of his first year of earning, he has bought some tax saving products and applied for loans. He has not engaged a financial advisor, yet.
If the earning class wants to focus on enhancing its income, it needs someone to take care of its surplus and keep its financial life in order. Engaging a financial advisor is not a felt need when the power to be able to spend keeps one confident and fearless about the future. But, soon enough, our young earner begins to default on that education loan, does not file tax returns in time, does not know where his tax-saving policies are, and finds himself locked into a house at a location where he is no longer working. It is rare to find earners with well-ordered financial lives. This is why anyone who earns, needs a financial advisor. Someone who will walk with you and work for you, and ensure that your finances are in order. Let me list a few simple things an advisor can enable every earner to do.
First, they should be encouraged to save a portion of their earnings. Just as a personal trainer will motivate you to hit the gym every day, a financial advisor will ensure that you have set aside a portion of your income for yourself. Many earners believe that they can do it themselves, and see this as too simple a task for an advisor. Many advisors think that unless they get a complete account of all income and all expenses, including the electricity bills and payments at restaurants, they cannot determine the earner's saving potential. A simple engagement that asks a percentage of the income to be saved is a good starting point.
Second, earners should have a default choice to convert their savings into investments. Many of us save regularly in our Provident Fund (PF) and are not even aware that a fixed amount from our salary goes into a basket of fixed income investments. Earners need to realize that such default choices help them in the long run. Advisors tend to think they can make investment plans only after a comprehensive financial planning exercise — and get caught in the web of information and analytics they like to collect about the investor — before beginning to talk about a products.If 12 percent of the salary is already saved in the PF, setting up another 12 percent in a diversified equity mutual fund would do no harm. A monthly SIP (Systematic Investment Plan) into two such funds, chosen at the start of the year and, reviewed every year, is adequate for most purposes. The earner needs an advisor so that this allocation happens after careful consideration of choices, and so that a good fund is selected.
Third, they need tools to deal with the unexpected. There are times when unexpected expenses hit the family budget; there are times when unexpected income comes in the form of bonus and gifts. Borrowings hurt the saving ability; poorly allocated funds may end up in losses. An advisor should be the first port of call, when taking such important financial decisions. But, investors think they need not involve the advisor since it amounts to discussing private details, and advisors keep away assuming that investors will be reluctant to let them in. Unless the advisory relationship extends beyond investment advice, its ability to deliver value will get compromised. Over a period of time, the advisor should be able to evaluate loans, manage repayment crises, and arrange liquidity as needed by the client, and smooth out contingencies for him.
Fourth, earners fail to see the impact of life cycle changes on their finances. Many believe that as long as they accumulate assets, they are doing fine. Over a period of time, their incomes, expenses, and their needs change. Without providing for these changes, a household would have to compromise on goals such as higher education and retirement. The biggest contribution of the financial advisor to a client is advice on asset allocation. It is the advisor who is able to orient the savings and investments of the earner towards specified financial goals and aspirations.
While DIY (Do-it-Yourself) is tempting, earners are likely to find themselves locked into property and Gold, when what they need might be assets that are more divisible and liquid. An advisor is an asset allocation specialist who should help you align your assets to your goals.
Fifth, earners are prone to errors that they are loath to admit. Investing in the next big thing; booking out of an investment from fear; buying a share based on a tip; being taken in by a sales pitch; leaving money idle in the savings account; failing to sell off what is not working; and, choosing the easy over the optimal are all routine mistakes investors make. A combination of inertia, lack of time, lack of information, need for control and overestimation of abilities, leads to a situation where investors manage their money inefficiently. Bringing an advisor is worth it, just to ensure that someone is in charge and is accountable.
If earners begin by describing what they want and, are willing to hold their advisors accountable, we will see the beginning of a process of engagement. Investors see advisors as sellers; advisors see investors as transaction-oriented. With one side being secretive and the other being scheming, we have dissatisfaction as the outcome. In the interest of their own long-term wealth, earners-investors should demand a process for their financial well-being and, advisors who lay it down and implement it, would have earned their fee.
This is an article written by UMA SHASHIKANT on June 9,2014 Published by The Economics Times