What Financial Planning is and what it is not?
Financial planning is still evolving in our country. As with any new profession, it is therefore liable to fall prey to many misconceptions. It is convenient for investors like you to try and bracket it into a known and familiar service. Here are some of the aspects you must clarify about what financial planning is and is not.
- Financial planning is not an annual tax saving exercise
Many investors consider investments only as an annual tax saving exercise. You need to understand that tax planning is only a small component of financial planning. Financial planning is all about meeting life goals through management of finances. It takes into account the person present situation, their future goals and what they might need in the future. It is a life goal setting strategy from a financial perspective. In contrast, an investment or tax savings scheme is just one step in the financial plan that one can do to meet their life goals.
- Financial planning is not just investment advice
It is important to not to think financial planner merely as an investment advisor. When an investor looks at an investment advisor, his expectations are focused on returns on an annual basis. A financial planner does not hold out any promise about maximising annual returns from an investment portfolio. He focuses on the journey required to enable the client to meet his life goals.
A potential example is the difference between an annual performance ratings review and a mentoring program at the workplace. Every year, employees are given a performance review and a rating. The goal is to improve their work quality in the immediate future and to reward them for work well done. It has a shorter-time focus whereas a mentoring program often involves a senior colleague looking at the individual track record and asking where they would like to be in their career five to ten years from now and mentoring the individual on how to reach those goals within the company. Financial planning is mentoring for an individual financial goals for their life while investment advice is more like an annual performance review with its immediate present focus.
Many young earners tend to think of financial planning as retirement planning and therefore relevant only to middle aged earners. Many young earners also believe that planning is needed only once you have substantial assets to plan for – which means that financial planning may be relevant for them only after a few years.
Please appreciate that as long as you have goals, those need to be planned for. You may be more focused right now on buying a car, buying a house and so on – which in your mind does not qualify as long term financial investments in stocks and bonds. However, these are goals, and these goals need to be planned for and saved for, to enable them to be fulfilled.
Goals evolve with life stages. At different times, different goals become more important – but it does not mean that other goals are not relevant. So, while buying a home may be the most proximate goal for a young family, it does not mean that they do not need to even think about retirement. At a later stage, planning for children education becomes a priority – but that again does not mean that retirement is not relevant.
Financial Planner job is to help you articulate all your life goals as you see them now, help them prioritize them so that available resources can be gainfully directed to the right goals and work with them through their journey of ever evolving life goals and plans to meet these goals.
Set realistic expectations
Alongside understanding what financial planning is and is not, you also need to understad what you can expect from Financial Planner and what you should not. Setting expectations upfront is arguably the most important stepping stone to building a lasting relationship. Its better to disagree upfront and part ways rather than avoid these tough conversations initially and then have them blow up in your face later, when the gulf between the expectations of you and your Financial Planners becomes painfully clear to both.
There are different advisors with different models. You need to understand what are these model and where your financial Planners competencies lie. There are advisors who pride themselves in their ability to think independently on markets and take tactical asset allocation and sectoral calls to add value in client portfolios. Most financial planners do not see that as their core objective, as they believe in long term strategic asset allocation aligned with well articulated life goals and believe that their core value is in ensuring that clients stick to plans through turbulent markets.
When it comes to fund selection, it is important again to understand how financial planner evaluate funds and what is the outcome you expect from your chosen funds. If your financial planners selection focuses on picking funds which you believe can deliver healthy alpha over multiple market cycles while you are looking at evaluating your fund selection against annual league tables, its best that this conversation be had upfront.
To conclude
The much cliched saying that a building is only as strong as its foundations is equally true for every financial planning relationship you commence with understanding each other. Pay enough attention to laying the foundation – do not take short cuts, do not avoid uncomfortable conversations. Spell out what you do and what you do not – and then leave it to your client to decide whether this is what he wants or not.
Adapted from WealthForum Article…