Do you need a planner?

So you think you know it all—taxes, risk-reward trade-offs, technical analysis of stocks, inflation adjustments and so on. If all this is clear, why would you want to shell out a few thousand rupees on expert advice? Thirty-three-year-old Nagesh Kolluru, a senior manager in a pharmaceutical company, thought so too.

He started investing about five years ago and his portfolio was generating “very satisfactory” 25-30 per cent annual returns. Then the market crash happened and he woke up to the possibility of mistakes. “I want some validation of my decisions even as my control over the finances remains intact,” Kolluru explains. Moreover, as his responsibilities increase, he has realised that soon he will not have enough time to manage his portfolio. “In another 8-10 years, I will not be able to do without an adviser,” says this informed investor.

Kolluru is not the norm among investors. Most are unaware of the basic rules of financial planning. So, if such informed investors need help, it is clear that so do the majority of people. On an average, everyone will be better off seeking the information, expertise, experience and discipline provided by a financial adviser.

Making quality financial decisions requires a commitment to learn and research. Of course, the Internet’s easy access to information has made it possible for almost everyone to think they can outperform Warren Buffett, but the fact is that personal finance is a difficult area to navigate alone. This is why Delhi-based Rohin Kapoor may eventually realise that though he has the knack of picking high-yielding stocks, he needs a different strategy to counter market crises like the current one.

Think of it this way. You know that a desktop computer consists of a CPU, a monitor, a keyboard and a mouse. And that the CPU comes with a motherboard and assorted other doodads, the names of which you can’t remember offhand. You know all these elements are available in the open market—of good quality and at good prices. Does this mean that you can assemble a working desktop computer?

Doesn’t it make more sense, and isn’t it cheaper than going to a shop and picking up a computer that’s been put together by experts? No, it doesn’t because try as you may, you won’t be able to get it right.

It’s the same with your financial plan. Of course, you can buy stocks, mutual funds and life insurance policies without help. You can certainly take loans without someone holding your hand. You can even manage taxes on your own, buy a house or invest in real estate. But can you do all this without borrowing from one asset to fund another, and without running madly down the streets?

No. The time required to manage the intricacies of a financial plan will take away from the many joys of your life. Isn’t it better to hand over the reins to an expert and just keep checking to see if your money is working hard?

Thankfully, whatever be your requirement, there are professionals who can take care of it for you.

The next question is, who is the right adviser? Why do experts suggest a financial planner or adviser? Can’t you just go to a tax planner? Or an accountant?

Not if you want a holistic financial plan, say experts. This is because insurance agents, tax planners, stockbrokers and the like have a vested interest in selling specific products. What you should be looking for are certified financial planners (CFPs) or life underwriter training council fellows (LUTCFs) who are trained to understand the nuances of various financial instruments and can structure plans according to your financial needs, and not according to the commissions that they earn.

The graphic above illustrates what exactly a financial adviser can do for you—and you will understand why any other professional will not be able to provide the same depth and breadth of service.

We’ve concluded that a good adviser is a boon for your finances. But what’s the urgency to get one? After all, if you’re in your 20s or 30s, you don’t have much to plan with, do you? Like most things to do with money, it’s never too early to create a financial plan. And if you get it right the first time, you can have the benefit of seeing the power of compounding work on your savings and investments.

It’s one of the most common myths that financial advice is only meant for the wealthy or for those who invest in exotic products. Actually, anyone who wants to have a comfortable financial life should get professional advice. It is similar to having a family doctor— even if he is a general physician. He knows about your medical history and, in case of an emergency, would be able to advise you on the best course of action. We take a look at some of these events and see how expert help can ease things for you.

Death of a parent: You might be the executor of the estate, but now is not a good time to bone up on all the complexities involved in the distribution of assets. A professional should step in to handle the financial tangles while you do the same with your emotions.

Marriage: You’ve tied the knot and decided to combine your finances. Is it better to pool resources in a joint account or should they be kept separate? Should each spouse save for a different goal? Expert help is essential to ensure there are no ruffled feathers.

Divorce: What if the marriage breaks up? Do you still file taxes jointly this year? Can your former spouse claim benefits on the joint home loan? To answer several such questions, it’s best that a planner is on speed dial.

Investing in complex products: Will you really be able to make a choice between disability insurance, long-term care insurance or an umbrella liability policy? If not, then an expert who has done the requisite research is a must-have.

Real estate investment: Buying and selling a house or investing in an apartment are big-ticket decisions. Do you really want to risk getting caught in a blunder?

Estate planning: Who will manage the children’s inheritance should you die? How can you ensure that there is the least possibility of a dispute over your will? Consult the same planner who helped manage your parents’ estate.

Retirement: Four brokers have shown you different plans. Before you make a long-term commitment, an objective review of all four plans can prevent nasty surprises when it is too late.

Employee stock options: Are these always beneficial irrespective of the price of your company’s scrip? What are the tax implications of exercising the options? There are bigger things to worry about at work than ESOPS, so get an expert to deal with them.

It is clear that hiring the services of a financial planner will save you a whole lot of trouble. However, there is a caveat. Don’t assume that just because you have professional help you can leave the financial decisions totally to the planner.

Remember, the quality of advice you get is largely dependent on your interest in your own prosperity and your ability to check the correctness of the adviser’s decisions. Here’s what you should keep in mind:

Market conditions: If you’re the kind who buys when the bull is running and panics when the bears come out, you definitely need a planner to keep you on even keel. Also, keep an eye on the market and find out what your planner does at different stages.

Revisit goals: You might have created some ambitious goals a couple of years back—after which your investments went south. Does your planner tell you to revise those financial goals based on realistic expectations?

Risk appetite: Just because you’re in your 20s does not necessarily mean you can invest in 100 per cent equities, or that you can invest only in FDs in your 50s. Your planner must understand your risk appetite and structure your plan to keep up with the changes in your risk tolerance.

Rebalance your portfolio: Portfolio rebalancing is essential for every investor. Make sure the planner reviews your progress at least twice a year to keep your plan on track.

Insurance and estate planning: Many of us structure our life insurance packages to cover the gap between the lifestyles we want and what our portfolios will finance or we simply look at the income tax benefits of buying an insurance policy. If your assets and earning power declined during the economic slowdown, that gap may be wider, your needs from insurance greater. Also, there may be a better alternative to save tax. Make sure your adviser updates you about these issues.

So the bottom line is: Good financial advice is a boon. But only if it is backed with constant vigilance at your end. Be hands on, always.

Courtesy Money Today