PERSONAL FINANCE | 5 MIN READ

The substantial benefits of hiring a good fee-only financial planner in India

Written by Sahas Gulati

From generating good returns to mitigating investment risk to clarifying the rationale behind your financial decisions, a qualified financial planner can play a pivotal role in financially securing your future.

Fee-only financial planning places the interest of the customer ahead of any commercial consideration.

A good financial planner will create a plan that generates good returns, and also caps the risk at a level appropriate for the investor.

A professional financial planner also adds value by clearly explaining the rationale behind the investment portfolio and other recommendations.

By helping associate your savings and investments with tangible future outcomes, professional financial planning prevents speculative behaviour.

If the very thought of long-term financial planning fills you with anxiety, you are not alone. Financial products are complex, and much of the fine print is often beyond the comprehension of the average investor. However, this does not mean that you have the liberty of not planning your finances; planning for financial goals, saving for the future, and investing prudently are essential ingredients of a financially secure life.

In fact, a recent study demonstrated “. . . that perceived financial well-being is a key predictor of overall well-being and comparable in magnitude to the combined effect of other life domains (job satisfaction, physical health assessment, and relationship support satisfaction).”

Therefore, the impact of professional financial planning, on both your finances and overall well-being, could be transformative. But before we explore these benefits any further, let us clarify that we are categorically referring to goal-based financial planning, delivered on a fee-only basis.

A fee-only financial planner is an individual or organization that is compensated for its services by the customer alone, and earns no sales commissions or other indirect remuneration. Fee-only financial planners adhere to the fiduciary standard; i.e. they place the interest of the customer ahead of any commercial or other consideration. The financial planning fee could either be structured as fixed (irrespective of the investable assets of the customer) or as a percentage of the investable assets. In either case, the fee structure is transparently disclosed to the customer, along with any potential conflicts of interest.

In India, all financial planners are regulated under the SEBI (Investment Advisers) Regulations, 2013, and must necessarily be registered with SEBI. A SEBI registration requires adequate professional qualifications, certifications from the National Institute of Securities Markets (NISM), and other prerequisites to ensure that the customer receives dependable financial advice.

As per these SEBI regulations, “An investment adviser shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise. He shall act honestly, fairly and in the best interests of its clients and in the integrity of the market. He shall maintain an arms-length relationship between his activities as an investment adviser and other activities.”

What, then, are the benefits of getting professional help in planning your finances?

You invest according to your risk capacity and risk appetite

 

Before making any recommendation, a professional financial planner would conduct a comprehensive evaluation of your risk capacity and risk appetite, i.e. not just your financial capacity to withstand short term losses in your portfolio, but also your emotional capacity to weather portfolio volatility. As a result, a risk averse customer will be recommended a somewhat conservative investment portfolio.

This is important because investing on a fixed schedule and sticking to the investment plan are essential pre-conditions for compounding to work its magic in growing your wealth over time. If your investments are riskier than what you are comfortable with, you are unlikely to be consistent with your investment plan, especially during bouts of chaos in the market.

You are clearly explained the thinking behind your financial plan

 

All good financial plans are built on a firm understanding of a few core financial concepts (compounding, diversification, rupee cost averaging, among others), certain assumptions about investment returns and inflation, and suitability, in terms of complexity and risk, of certain products for the customer. A good financial planner will make sure that the customer has clarity on the thinking behind her financial plan, and enjoys the peace of mind that comes with this clarity.

Risk is managed through a combination of asset allocation and insurance

 

When investing for a long-term goal, short-term volatility (or risk) is of little consequence if the investment, on average, is growing in value over time. But where short-term goals are concerned, there usually isn’t sufficient time for the fluctuation to average out; your portfolio could end up going down in value just as you need the money.

A good financial planner would create a separate portfolio for each financial goal - an aggressive portfolio with high potential returns and correspondingly high volatility for a long-term goal, and a conservative portfolio with low volatility and correspondingly low potential returns for a short-term goal. Moreover, the planner would also give you the option of creating conservative portfolios for high-priority goals like a higher education fund for your children, while retaining aggressive portfolios for good-to-have goals like a luxury vacation or a vehicle upgrade.

Moreover, a comprehensive financial plan also includes sufficient provision for emergency funds, recommendations on health and life insurance in accordance with the lifestyle, financial goals, and the needs of the dependents of the investor.

You don’t end up speculating

 

One of the biggest benefits of a professionally created financial plan is that it is firmly rooted in your future financial goals. As such, the financial plan has little to do with returns for returns’ sake, which reduces your chances of slipping into speculative behaviour. The performance tracking that follows is focused more on the progress towards your financial goals, and less on beating benchmark returns. Moreover, by associating your savings with a tangible outcome in the future you are more likely to stick to the budget you create.

Complex concepts are explained in simple terms

 

Albert Einstein is said to have remarked, “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

 

If we could accommodate a few more wonders, diversification and rupee cost averaging too, would occupy the pride of place. What's curious about these financial concepts is that they may not always be intuitive, but once you get around to making an effort, they are remarkably easy to understand. A good financial planner would make sure that you have a reasonable understanding of these concepts and insights, so that, over time, your financial decisions become somewhat easier to navigate.

At Clarified, it is our constant endeavour to deliver the above benefits to more and more investors. Our decisions to price well below the market, to include a 1-on-1 consultation as standard, and to facilitate investments in direct plans of mutual funds via the Mutual Fund Utility, are just few of the examples of how we’ve remained true to that promise.

Published on: October 16, 2018

Blog › Personal Finance › The substantial benefits of hiring a good fee-only financial planner in India

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