The Financial Planner- Get to Know one- Do your homework in advance
We do not shy away from paying our doctor (where we do not even worry or wonder about the fee he is going to charge, whether the medicines he has prescribed are the best or if there are other alternative medicines at a lower or higher cost and efficacy available) when it comes to a health issue. However, when it comes to our wealth issue, our attitudes are very different. Same is the case for many of the services we use, whether it is a plumber or an electrician or the mobile repair fellow.
However, when it comes to our wealth, we do not think about engaging a professional. Maybe, we have suffered losses on our investments as we thoughtlessly bought products without asking all the questions and tried to fit a square peg in a round hole. As a result, we have developed a generic mistrust of financial advisors. Of course some of the advisors are also to blame, as they pushed products that gave them the highest commission, without considering its suitability for you.
To my mind, most of us lack in financial literacy. We simply get carried away by anecdotal evidence or advice which we do not question.
To me, a financial planner or an advisor has a key role to play in assisting us with our money. However, the important thing to note is that his task should be confined to taking our present financial condition and explaining the risk in each of the product he advises us of. It should start with an assessment of where we are currently. Often, I have seen people reluctant to share financial information with advisors. This is akin to not telling a doctor about your medical history. The first requirement is that before you go to a financial advisor write down everything about what you have and what you owe. This has to be the starting point.
The next step is obviously to write down what you make every month and how much you could put aside every month for the future. Also try and visualise what big expenditures (college admission, marriage, car, house or whatever you think are going to be big and non routine expenditures that you can anticipate). Now you are ready to talk to a financial planner.
Now you have two sets of planned expenditure- those that are unavoidable and those that depend on how much you can save. In life, often our large expenditures have to be tailored to meet what we have. We may desire a three bedroom apartment, but what we could afford could be smaller.
Once you decide to go to a financial planner, the first approach should be to evaluate what is clearly possible with your savings. This would obviously vary. If you already own a loan free home, a vehicle and other comforts, your only concern could be your children and your retirement needs.
So each problem is unique. The first answer I would seek from a financial planner is to ask him:
i) If I take zero risk with my money, what would be the outcome with my savings? After five years, ten years or twenty years? Obviously, the instruments available would include things like my provident fund, PPF, bank deposits etc. This would be my first line of defence.;
ii) How much of my money can be spared to invest in riskier assets like shares, real estate etc?
iii) What instruments are available for me?
iv) For each instrument, I want to know the risk – Who is going to repay? When? and what are the price risks? Can I liquidate when I want and if so, what are the consequences? Do not be shy of asking as many questions as you can.
Once I get these basics, then it is up to me to choose an appropriate mix of risk. If I already have all the basics paid for (house, car, children’s education etc) then I can take higher risk. If not, I have to opt for a lower risk.
The important thing is to understand that you should NOT push the financial advisor saying that this is what I need at different points in my life and give me a plan to get there, with what I can spare. If your needs are more than what your savings can provide, then he will be pushed in to a corner and give you instruments that are highly risky and you will end up in a mess. It is best to fit needs to what we have. That is the only way to peaceful sleep.