One of my colleagues has hired a financial planner. I was surprised to know that the planner will charge him a fee of Rs 20,000 for the first year and Rs 5,000 to do a review next year onwards. Are the high fees worth for receiving mutual fund advice? Is there anything additional that financial planners do?
Advising you on mutual funds is just one of the responsibilities of a financial advisor. The basic idea is that they will help you invest your money to reach your financial goals. These goals could include retirement, saving for child's education, purchasing a house, minimizing tax burden, health/life insurance, budgeting, debt reduction, loan transfer to reduce interest or generating income. To further complicate matters, all sorts of terms are used to describe advisors – financial planner, money manager, wealth manager, retirement planner, and so on.
In addition to helping achieve your goals, a financial advisor should help you understand the strategies behind these investment decisions so you are better informed. Let me break the process down into smaller steps:
This will include analysing your current income, expenses and determine how well you are covered for financial emergencies like serious illness or temporary job loss. The advisor would recommend life style changes which you can take to reduce your expenses and increase your investible income. If you don't have a health or life insurance, very often the first thing that your advisor would do is to convince you about the need to have insurance. This step also determines the size of your emergency fund.
In this step advisors gauge how you would react to the ups and downs of the market. Meaningful wealth building happens over the longer term (> 10 years), the short term journey could be emotionally demanding. Your portfolio needs to be customized to your risk appetite.
Did you panic during September 2018 and sell all of your stocks? Or get overconfident in Jan 2018 and take too much risk leading into the September sell off? An advisor should counsel you through difficult times and help set expectations for your portfolio.
Goal-based investing emphasizes on investing with the objective of attaining specific life goals. Eg. purchasing a house or car, children's education, wedding, retirement corpus etc. The key difference being the time required to achieve them. Time changes the asset allocation and the amount of risk that you can take.
For example, if a person retires in 5 years, they need to be conservative and cannot afford to lose even 10% of their portfolio. A person who retires in 20 years can make riskier investments, which can give a higher return in the long term.
Your advisor will understand your future plans and design goal-oriented SIPs.
Your investment plan should have a clearly defined structure (“allocation” in advisor-speak), in which your assets are diversified into different types of investments like debt, equity, FDs, real estate etc. This helps reduce the risk that your portfolio will decline in value if one sector of the market sours. The plan should also be inline with your risk appetite and goals.
Advisors would help/guide you with doing the documentation for account opening, starting the SIPs, purchasing insurance etc. Not all advisors help you with the documentation. It is best to check with your advisor before agreeing to work with them.
Periodic review is a vital component in the financial planning process. Usually performed annually, the purpose is to ensure that your plan is working as desired. Financial planning is an ongoing process so it is important to reassess your goals and ensure you continue on the appropriate financial path.
New investment opportunities, portfolio rebalancing, changing SIP amounts etc are some of the outcomes of a review.
Many individuals, if they have simple financial situations and a sound knowledge of investments, would likely be just fine on their own if they take a simple, low cost approach of using direct mutual fund platforms.
Many people who contact advisors on Dhanwise are intelligent enough to manage their own investments. However, most of them recognize the value of good financial advice, and for many, their time is better spent on business or personal endeavors.
An advisor can help avoid mistakes, find opportunities that you miss, help you stick to your plan in times of stress, and manage risk in a tax-smart way to protect and grow your assets. Working with a professional advisor can add value when compared to a “do-it-yourself” approach.
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Sachin Shah is a 30 year old Senior Software Engineer, working at an IT services company in Bengaluru. He and his wife want to plan for their retirement and also want to save for their child's education, wedding and for buying a car.View Case Study