Financial planning, a term least understood and most abused

You would have heard the phrase ‘financial planning’. Do you really know what it means?

This is a term least understood and most abused. Every bank, mutual fund and insurance company claims to offer ‘financial planning’, when all they are doing really is setting you up to buy one or more of their products. Most distributors/ advisors too will use the word ‘planning’ when they explain the merits of their products and how these will prove useful to you.
What they are doing is called selling.

Financial planning is a blueprint or framework that helps you achieve your life goals through appropriate financial management.

Most product sellers talk about specific goals like retirement, child education and the like and show you a scheme that will address that.

That is fine, but you still need to know what happens when all these goals are taken together and your money needs to be allocated. Which goals will be achieved? Which ones will have to be left out? What will be the deficit? Will a goal be achieved, given more time? For instance, if you can’t buy a house in two years, will you be in a position to buy it after five? These are the things that a financial plan will address.

A financial plan is created only after first understanding the client’s goals, needs and responsibilities. Financial details such as income, expenses, assets, liabilities, investments and insurance are sought. A complete plan emerges after all the pieces in the puzzle are taken into account — cash flows are examined, insurance requirements assessed and appropriate allocation levels established for available money. Past investments are scanned to decide their suitability.

Recommendations come in last. Thus, recommendations in a financial plan are a by-product of the entire plan workout and are customised to the needs of the client.

This is an individualised and customised offering, just like a personal trainer at a gymnasium might guide you in laying down an exercise and diet regimen to achieve good health in the soonest possible way.

Most people tend to think finance is an area they know. To be sure, a lot of them do. About 10-20% of people may not require professional help. For all others, it would be necessary to take professional help.

The problem is that most people assume that they belong to that 10-20% of the population that knows financial planning. But taking decisions based on half-knowledge can prove to be disastrous. Many take shortcuts such as doing what a better-informed friend is doing, or following ‘expert comments’ to take decisions. Unfortunately, since everyone’s goals and resources are different, what works for one person may not necessarily work for another.
Thus, you should take care that the decisions you are taking are suited toward your situation and will benefit you.

We all go to the doctor when sick, meet our lawyers for legal recourse, hire an architect to design our home, even visit the CA when filing tax returns. Yet, when it comes to our investments and financial planning, most of us want to deal with them it ourselves.
Most investment decisions are done piecemeal; insurance — a long-term product — is bought to save tax, mutual funds investments are often ‘clubbed’ with insurance and Ulips end up being bought!

Any road is right when you don’t know where you are going. Do you want to know where you are going? A financial planner would do a world of good.

The writer is a certified financial planner who runs Ladder 7 Financial advisories and can be contacted at ladder7@gmail.com