Got yourself a smart, savvy financial advisor who chases every penny? Call it quits

Anubhav is my youngest client but perhaps the financially savviest. He is an engineer with two years' shop floor experience plus an MBA from an IIM. He has a fancy job with very bright prospects. He has chosen to engage a fee-based financial planner in the very first year of his professional career when the investment potential is still relatively modest.

He is extremely well read and keeps me on my toes with his well-directed questions. Unlike a lot of other clients, he always keeps track of his investments and the status of his bank accounts. He is the kind of retail investor who actually invests one Rs lakh of temporary surplus fund in a liquid fund on Friday and redeems them on Monday morning.

Hence, I was surprised to learn that all SIP instructions in March had been returned unpaid by his bank due to shortage of funds. I asked him about that when he met me recently. He sheepishly explained, "At the beginning of the year when I filed my tax declaration with my HR department I had declared a rather large amount as deductible on account of interest on education loan. I could not provide proof for the payment of this interest, and hence, the salary amount paid in March was very small after a large sum was deducted as tax at source." This seemed a surprising oversight by him since he had cleared off the education loan completely at the beginning of the year after consulting me. I asked him if he had forgotten to file a revised declaration with the HR department when he cleared the loan. He said, "I deliberately did not file a revised declaration in May when I paid off the education loan as I wanted to enjoy the increased monthly salary for the time being. I thought I will revise the declaration in December. That way, I could enjoy the interest on the float generated by deferring my tax payment by a few months. There was no cost of such deferral and I got a kick out of the fact that I was able to save money at the cost of the government. I ended up spending the float money, and unfortunately, I also forgot to file the revised declaration in December as I had planned. I missed the SIP investments in March as a result".

This frank admission by Anubhav set me thinking. Here was a super-smart individual who actually made a spreadsheet to calculate the benefit from the (seemingly) without cost interest savings on the deferment of tax. But eventually, a cost was paid in terms of spending away the float as well as bank charges and loss of investment opportunity in March.

I was reminded of another incident that too place about a decade ago. I was on a TV show which had showcased an individual who funded the working capital for his business by using a dozen credit cards and switching amounts from one card to the another without interest every 3 months. He had successfully managed to use a couple of lakhs without paying any interest at all. On the surface, it sounded like a very smart thing to do until I asked him how he managed all the juggling. He told me that one person in his office spent substantial time every month in making sure that the shifts from one credit card to another happened in time. Even he agreed that the salary of that individual attributable to this activity was probably more than the interest he was saving. He also agreed about the substantial risk of delay in receiving the money from one credit card company to another with the consequential huge interest cost and late payment charges. All in all, it was hardly an example worth emulating and thankfully died a natural death.

The need to follow a "smart" strategy to maximise benefits can lead to significant losses sometimes as, like Anubhav, one underestimates the time and effort required to make the smart strategy work and even the initial "benefits" are frittered away. This tendency is visible in many people who obsess about calculation accuracy at the cost of missing the big picture. This tendency is not restricted only to quantitatively oriented clients. The need to appear "smart" and save pennies is prevalent among financial advisors as well. All I can say is that as an investor you should try and guard against this tendency in yourself but definitely stay away from advisors who display these tendencies.

The writer is a chartered accountant and Sebi-registered investment advisor