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Archive for January 16th, 2012

CFP|CFP India|CFP Delhi|Financial Planning

– based on a survey conducted by Financial Planning Association& advisory firmAmeriprise Financial.

The dramatic events of the past few months have prompted many people to take equally dramatic steps: to get out of the stock market altogether, or to drastically alter their savings and investing plans. The same group, who were happily investing when the sensex was at 21000, are now selling when it is down at 8000 – 9000 levels booking huge losses, sometime more than 50%. Is this the smart thing to do? Many a time in past, we have seen that what may seem like a smart decision in the short run could end up having unexpected and unpleasant long-run consequences.  

So how do we tackle this scenario as a well meaning Financial Advisor of our clients, who are puzzled beyond their wit’s end. How do we play the old  record of “Don’t panic” which they have been listening so many times—from politicians, economists, CEOs—since the current financial crisis began. Not to panic is an excellent piece of advice, but it can be very tough to follow, especially when everyone else around you seems to be doing exactly that: panicking. But if there ever was a time to stay calm, cool, and collected—and to stick to a Financial Plan—that time is now.

Let’s look at the course of action we should adopt for our clients now, which may help to regain  their financial health and wealth.

Changing asset allocation

Before the client considers a major change in their asset allocation plans, ask them to take a hard look before they actually do anything dramatic. The first thing to do is to review their overall plan (if they are having any): This is a perfect time to answer questions like, What are my goals (short-term which is less than one year, medium-term defined as one to three years and long term beyond 3 years)? Do I have enough leeway to absorb the losses, which I have incurred? If not, do I need to change my goals?

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Answering these questions rationally will help to clear lot of confusion among their minds regarding their investing health.

Take the case of Mr. Amar, who is essentially investing for the purpose of building a corpus for his retirement which is 15 years from now. In that case he may still be on track. As in that in all probabilities recovery will surely come. It’s important to understand that fall like is part & parcel of the investing cycle.

On the contrary if Mr. Amar is only a year away from retirement and if he is sitting on a mountain of losses, the situation is far worse and needs a disaster management plan, where we may have to deal with scenarios like ‘earning more’, ‘saving more’, ‘spending less’, or ‘delaying retirement’. All these options have their pros and cons, which we need to figure out before taking a balanced decision.

The bottom-line here is that you should induce the client to ask himself, how much are the losses relative to his goals? Does he need to play defense, or can he stay invested and wait for the recovery? Thus by helping them to take an ownership of their financial decisions, you are making them more aware and more responsible towards achieving their financial health. This is the inherent benefit of quality Financial Planning.

Continuing the process of investing

In troubled time like this it’s easy for client’s to say, ‘It’s okay not to save aggressively because if I put money in any financial product, it would just go down anyway.’

This assumption can lead to a huge mistake and rather the opposite is true. If you’re sitting on heavy losses, the amount you need to save has actually gone up & when markets are down, a regular investment plan is even more important.

Having an Emergency Fund in place

Another form of savings that takes on enhanced importance during a downturn is an emergency fund. Having a fund on hand to deal with unexpected expenses provides peace of mind and can help keep the overall financial plan on track.

Ideally this emergency fund can be a pool of demand deposits, which can cover for 12 to 15 months minimum monthly expenses for the concerned person. Create this liquidity for a client only when you see that the regular source of income of your client may suffer in near future.

Creating a spending plan

There are other ways to bring more stability to unstable times. Take a look at the spending habit of your client and make sure they keep their spending under control by creating—and sticking to a budget. Most of them, if they belong to the young or upwardly mobile generation are used to spend, spend, spend.

Cutting down your credit

Mr. Khemka went to a nice restaurant for lunch. He ordered each of all the items on the menu. Food was delicious which he thoroughly enjoyed. He ate for almost two full hours and exhausted with the amount of intake was about to leave. Then came the Bill of Rs. 5000/- ; and he complained that he had only ordered for the food and not the bill.

The above incident seems to go a little overboard. But don’t you think, we also go overboard when we are on a spending trip & that credit card in our pocket makes us artificially rich. We need to tell our clients that they should control that urgency of buying ‘present’ with money, they will earn in ‘future’.

Creating a Financial Plan for your client

Your child needs a career plan; your boss needs a tour-plan; your company needs a media plan; if you need to start a venture – you need a business plan; if you want to build a house – you need a floor plan.

For every sphere of your life, you need a plan. This plans fixes the target for you and when you measure the actual achievement vs. the planned numbers, you know how far / near you are from this target. It helps you to become more disciplined in allocating your resources and give you a better grip on things around you.

If that is correct – then why don’t we actually write a Financial Plan for our client. The plan will talk about their goals, their risks, how to cover the risks, retirement needs, asset allocation plans, tax minimization scheme and detailed year to year cash flow & net worth studies.  

I started this article with the findings of the FPA survey – which shows that a client with a written plan will be much more balanced than a client, who doesn’t have one. I believe the clients are ready for their plan; the question is are we as Financial Planners ready to serve them?

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