Sunday, April 26, 2015

How to deal with your Financial Advisor or Planner. A primer for Investors

( Replug of an old article)

We do not shy away from paying our doctor, when it comes to a health issue. 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 person.
When it comes to our wealth, we do not think about engaging a professional. Perhaps, 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 advisers. Of course, some of the advisers 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 financial literacy. We simply get carried away by anecdotal evidence or advice which we do not question.
To me, a financial planner or an adviser has a key role in assisting us with our money. 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 products he advises us on. It should start with an assessment of where we are currently.
Often, I have seen people reluctant to share fin-ancial information with advisers. This is akin to not telling a doctor about your medical history. The first requirement is that before you go to a financial adviser 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 such as 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 which are unavoidable and those which 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:
n If I take zero risk with my money, what would be the outcome with my savings? After five years, 10 years or 20 years? This would be my first line of defence.
n How much of my money can be spared to invest in riskier assets like shares, real estate etc? What instruments are available for me?
n 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, 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 adviser 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 for, then he will be pushed to a corner and give you instruments that are highly risky and you will end up in a mess. It is best to fit your needs to what we have. That is the only way to sleep in peace.

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