Three life insurance policies, SIPs in five mutual funds, and a high balance in the Provident Fund—Alok Ranjan always thought his finances were in a healthy condition. This was before the Mumbai-based software engineer met a professional financial planner and discovered how woefully underinsured he was. Ranjan, 39, also saw how his investments were not aligned to his financial goals and didn't match his risk profile. He wasn't really a case for the ICU, but he needed a financial doctor real fast.
So far, Ranjan has invested through agents and brokers who charge nothing for the advice they dole out. Now, he will pay about Rs 20,000 for a financial plan made by a professional. That's not all. He will follow it up with a Rs 15,000 renewal fee every year. Ranjan believes it is money well spent. "Only a qualified professional financial planner can guide me to the right investments by taking a holistic approach," he says.
Not many people see it this way. For most investors, paying for financial advice is still a no-no. Why should you have to pay money for something that financial experts are falling over each other to give you for free? Don't you already have an overload of it through TV channels, websites, magazines and newspapers such as the one you are reading?
Yes, and no. As it turns out, the free advice churned out by agents, brokers and other financial 'experts' often proves costlier than going to a financial planner. Listen to what your friendly insurance broker has to say and you might end up pouring good money into a low-yield endowment insurance policy. Go by the advice of the chirpy relationship manager at your bank and you may buy your third Ulip or your tenth mutual fund.
In comparison, a financial planner takes a holistic view of the individual's finances and accordingly suggests an asset mix that matches his profile.
"A professional adviser will take a detailed view of the client's financial status, his goals and expenses and then give the right advice," says Rajesh Bhojani, CEO, International College of Financial Planning.
This expert help comes with a price tag. Financial planners have different fee models for the services they render.
Some charge only a flat fee, others also earn from the commission on the investments, while still others get paid on the basis of the assets managed by them. Each arrangement suits a different wallet size and type of investor.
No charge, only commission
Of course, not everyone needs to hire a financial planner. If your finances are not complex and your portfolio size is not very large (Rs 2-3 lakh), you could get by without the help of a planner. A couple of well-chosen equity funds, a child Ulip and a term plan for insurance cover, and the PF and PPF for debt investments will be more than sufficient to meet your goals. For such investors, it still makes sense to take the agent-broker route and save on adviser fee.
The problem is that the financial adviser is often a salesperson in disguise. His basic aim is to sell you a product without correctly assessing whether you need it or not.
There is also a conflict of interest. The sales pitch is often driven by the commission he stands to earn on the product.
Now you know why an agent will try and sell you a Ulip when you should be buying a mutual fund.
Or why he won't suggest a term plan where the premium is very low, but get you to buy a money-back policy instead. Says Anil Chopra, CEO, Bajaj Capital: "If you are seeking advice from a commission-based agent, ask him to disclose his commission in the products and the logic behind the recommendation. This will keep him on his toes."
In the past few years, the commission structure of financial products has become a lot more transparent. The Irda has said that all benefit illustrations must also mention the commission that the agent is earning from the plan. But this has not helped in stamping out mis-selling. "The bigger problem is that if you buy an unsuitable product, it will adversely impact your financial goals," says Pankaaj Maalde, a Mumbai-based financial planner.
If the ticket size is larger, the investment portfolio becomes more complex and, therefore, requires expert handling. "There is so much information in bits and pieces. A financial planner integrates this information and offers customised solutions," says Rohit Sarin, a financial planner.
Pay a flat fee
One way to ensure that the financial adviser is not swayed by the commission income is by compensating him through a fee. Unlike commission-based advisers, an independent financial planner will charge you a fee for his services. This can be as high as Rs 15,000-30,000 for making a financial plan, which will serve as your investment guide map. The fee varies across planners and depends on the amount of work required and the complexity of the plan. "If a client has just started out, there's not too much work and analysis required. If he has already accumulated a lot of investments and needs a complete overhaul, it will take a considerably longer time and so the charges will be higher," says Neeraj Chauhan, a Delhi-based certified financial planner.
The financial plan will list out where and how much you need to invest to reach your financial goals. It might suggest names of products as well but the investor is free to buy these either through the planner or on his own. For instance, if the plan requires investments in diversified equity funds, the planner will list out 4-5 names of funds. This also ensures that the planner has no vested interest in suggesting a certain product.
Apart from the one-time fee for making the financial plan, there is also a renewal fee. If you want to renew the contract after a year, you need to pay an annual fee which can be 40-50% of the upfront charge. "The fee model is ideal, but even then it's important to know how competent the adviser is and the code of ethics that he follows," says Ranjeet Mudholkar, principal adviser, Financial Planning Standards Board India (FPSB). The FPSB is a self-regulatory body of certified financial planners. It has laid down a strict code of ethics for the planners affiliated with it.
Don't think that financial planning is only for the super-rich. Some companies, such as the Unicon group, offer financial planning for even those with an annual income of Rs 5 lakh.
The company does not charge any fee in the first year. From the second year onwards, it charges 2.5% of the assets under management per year or 0.2% per month.
"Our intention is to attract the younger set even though their income may not be very high right now," says Rajev B Sharma, country head, Wealth Management, Unicon.
Fee and commission
After a financial plan has been made, you need to execute it. If you invest through the planner, he also earns a commission. As we mentioned earlier, there is no compulsion for the investor to buy through the planner. However, if he chooses to do so, a planner will usually lower his charges.
If you are investing through your financial planner, he should mention how much commission he has earned from the investments. "It's up to the client to invest through us or on his own. We disclose how much commission we will earn on the investments upfront," says Suresh Sadagopan, a Mumbai-based certified financial planner.
The income from commissions is usually mentioned in the agreement signed between the client and the planner. It's important, therefore, to read and understand the agreement before signing it. "We insist that the client read the same in front of us," says Pankaj Mathpal, a certified financial planner.
Some investors insist on executing the plan themselves so that there is no chance of a conflict of interest. However, this can sometimes become a problem if the plan is not implemented in the proper way. "While we don't stop our clients from investing on their own, they tend to get carried away by the sales pitch of the seller who might recommend certain other products too. So it's best to get the advice and execution done through the same person," says Jayant Pai, vice-president, Parag Parikh Financial Advisory Services.
Fees as a percentage of assets
This model is followed by wealth management companies or portfolio management services of banks. It is usually meant for investors with deep pockets, with the ticket size starting at Rs 30 lakh. The payment is based on the assets being managed for the investor and ranges from 1.5% to 2.5% of the portfolio per annum. However, this is not the only way the wealth manager is earning off you. Since all the investments are made through the company, he also pockets the commission that comes from buying the products.
It is here that conflict of interest crops up. The more the wealth manager churns your portfolio, the more he burns your money. There have been instances of portfolio managers selling one fund to buy another just to earn a commission from the transaction. Ulips are purchased for short durations so that new ones can be bought to earn more commissions.
Whether you are paying a flat fee or as a percentage of assets, you must ensure that you are getting your money's worth. Is your financial adviser justifying the payment you make to him? An adviser's role doesn't end with the preparation of a financial plan alone. In fact, that is just the beginning. A financial planner should be accessible to you for any important consultation regarding the plan. "Financial planning is a kind of a relationship. Our clients can walk into our office if they have any query or need any consultation. In the first year, there are no charges for the same," says Sadagopan.
The planner should also be able to make mid-course corrections in the plan if there is a material change in the income or expenses of the client. A foreign posting, a windfall gain or even an accident can completely change your financial planning. The financial adviser should make the necessary changes in the plan and advise the client accordingly.
The agreement with the planner should also spell out how often the plan will be reviewed. Some planners do this at least once in a quarter or six months to ensure that the investments are on track. Others do it once in a year. During the review, the planner looks at the performance of the investments and whether they have fared as expected. However, this shouldn't have to wait till the review time. "A planner must have a research team that tracks the performance regularly and sends the updates to their clients in case of a major deviation to their clients and suggest the roadmap accordingly," says Anil Rego, a Bangalore-based planner.
Some planners use technology to keep their clients updated on the progress of their finances. Many financial planners allow their clients to access their portfolios on their websites. You can benchmark the performance of the recommended funds against the category and other funds.
This brings a lot of transparency into the relationship, where the planner empowers the client to judge his performance. It also helps justify the fee that the planner is charging the client.
What to expect from your financial adviser The quality of advice and the level of engagement depend on the type of adviser you approach and the money you are willing to pay. ET Wealth contacted three types of advisers for the same family. Here's what they had to say. Family comprising husband (35 years), wife (31 years), son (5 years) and daughter (3 years). Combined post-tax income: Rs 1 lakh per month
Agent or broker Wealth Management Firm Certified financial planner Charges He takes nothing from the client but earns commission on the product. 1.5-2.5% of the corpus being managed as well as the commission on products sold. Rs 15,000 for formulating a financial plan in the first year and a renewal fee of Rs 5,000 per annum for subsequent years. Investment advice Buy a guaranteed NAV Ulip.
Invest in diversified equity funds.
Invest in recurring deposit for children. Maintain an asset allocation of 70% in equities and 30% in debt based on the risk profile.
Invest in a mix of diversified equity and debt funds.
Also invest in bank fixed deposits and gold ETFs to diversify the risk. Raise life insurance cover from Rs 6 lakh to Rs 70 lakh and health floater cover from Rs 3 lakh to Rs 5 lakh.
Maintain a contingency fund, which can be accessed during emergencies.
Start investing in MIPs to save money for down payment of the house they plan to purchase in 2-3 years. Take another term plan when you take a loan to buy house.
EPF and PPF alone won't meet retirement needs. Invest additional Rs 7,500 a month in diversified funds.
For children's education, start SIPs of Rs 7,500 for son and Rs 6,000 for daughter in diversified equity funds.
For children's marriage, start SIPs of Rs 3,300 for son and Rs 3,700 for daughter in diversified equity funds.
Asset allocation is currently 29% in equity and 71% in debt. It should be 35% in debt and 65% in equity. Review and rebalance portfolio every year. Parameters taken into account Investible surplus. Investible surplus, risk profile and past investments. Age of all family members, investible surplus, risk profile, life and health insurance needs, short-term, mid-term and long-term financial goals, retirement needs, past investments. Our assessment Took a very narrow view, limiting the advice to investments. Basic intention was to sell. High probability of a conflict of interest because of the high commission structure for some products. A qualitative difference in the advice, but still limited to investment planning. Did not include crucial aspects such as insurance cover and timeline to achieve the financial goals of the family. The planner went beyond investments and looked at every aspect of the family's finances. The plan laid down a specific strategy for every financial goal. One should not see the upfront fees as an unnecessary expense. It could help you save lakhs of rupees by guiding you in the right direction.
We at SAMPARK gives you a better financial planning for your future, So contact us to be a first step towards a secure life.
~
Source : ET
So far, Ranjan has invested through agents and brokers who charge nothing for the advice they dole out. Now, he will pay about Rs 20,000 for a financial plan made by a professional. That's not all. He will follow it up with a Rs 15,000 renewal fee every year. Ranjan believes it is money well spent. "Only a qualified professional financial planner can guide me to the right investments by taking a holistic approach," he says.
Not many people see it this way. For most investors, paying for financial advice is still a no-no. Why should you have to pay money for something that financial experts are falling over each other to give you for free? Don't you already have an overload of it through TV channels, websites, magazines and newspapers such as the one you are reading?
Yes, and no. As it turns out, the free advice churned out by agents, brokers and other financial 'experts' often proves costlier than going to a financial planner. Listen to what your friendly insurance broker has to say and you might end up pouring good money into a low-yield endowment insurance policy. Go by the advice of the chirpy relationship manager at your bank and you may buy your third Ulip or your tenth mutual fund.
"A professional adviser will take a detailed view of the client's financial status, his goals and expenses and then give the right advice," says Rajesh Bhojani, CEO, International College of Financial Planning.
This expert help comes with a price tag. Financial planners have different fee models for the services they render.
Some charge only a flat fee, others also earn from the commission on the investments, while still others get paid on the basis of the assets managed by them. Each arrangement suits a different wallet size and type of investor.
No charge, only commission
Of course, not everyone needs to hire a financial planner. If your finances are not complex and your portfolio size is not very large (Rs 2-3 lakh), you could get by without the help of a planner. A couple of well-chosen equity funds, a child Ulip and a term plan for insurance cover, and the PF and PPF for debt investments will be more than sufficient to meet your goals. For such investors, it still makes sense to take the agent-broker route and save on adviser fee.
There is also a conflict of interest. The sales pitch is often driven by the commission he stands to earn on the product.
Now you know why an agent will try and sell you a Ulip when you should be buying a mutual fund.
Or why he won't suggest a term plan where the premium is very low, but get you to buy a money-back policy instead. Says Anil Chopra, CEO, Bajaj Capital: "If you are seeking advice from a commission-based agent, ask him to disclose his commission in the products and the logic behind the recommendation. This will keep him on his toes."
In the past few years, the commission structure of financial products has become a lot more transparent. The Irda has said that all benefit illustrations must also mention the commission that the agent is earning from the plan. But this has not helped in stamping out mis-selling. "The bigger problem is that if you buy an unsuitable product, it will adversely impact your financial goals," says Pankaaj Maalde, a Mumbai-based financial planner.
If the ticket size is larger, the investment portfolio becomes more complex and, therefore, requires expert handling. "There is so much information in bits and pieces. A financial planner integrates this information and offers customised solutions," says Rohit Sarin, a financial planner.
Pay a flat fee
One way to ensure that the financial adviser is not swayed by the commission income is by compensating him through a fee. Unlike commission-based advisers, an independent financial planner will charge you a fee for his services. This can be as high as Rs 15,000-30,000 for making a financial plan, which will serve as your investment guide map. The fee varies across planners and depends on the amount of work required and the complexity of the plan. "If a client has just started out, there's not too much work and analysis required. If he has already accumulated a lot of investments and needs a complete overhaul, it will take a considerably longer time and so the charges will be higher," says Neeraj Chauhan, a Delhi-based certified financial planner.
The financial plan will list out where and how much you need to invest to reach your financial goals. It might suggest names of products as well but the investor is free to buy these either through the planner or on his own. For instance, if the plan requires investments in diversified equity funds, the planner will list out 4-5 names of funds. This also ensures that the planner has no vested interest in suggesting a certain product.
Apart from the one-time fee for making the financial plan, there is also a renewal fee. If you want to renew the contract after a year, you need to pay an annual fee which can be 40-50% of the upfront charge. "The fee model is ideal, but even then it's important to know how competent the adviser is and the code of ethics that he follows," says Ranjeet Mudholkar, principal adviser, Financial Planning Standards Board India (FPSB). The FPSB is a self-regulatory body of certified financial planners. It has laid down a strict code of ethics for the planners affiliated with it.
The company does not charge any fee in the first year. From the second year onwards, it charges 2.5% of the assets under management per year or 0.2% per month.
"Our intention is to attract the younger set even though their income may not be very high right now," says Rajev B Sharma, country head, Wealth Management, Unicon.
Fee and commission
After a financial plan has been made, you need to execute it. If you invest through the planner, he also earns a commission. As we mentioned earlier, there is no compulsion for the investor to buy through the planner. However, if he chooses to do so, a planner will usually lower his charges.
If you are investing through your financial planner, he should mention how much commission he has earned from the investments. "It's up to the client to invest through us or on his own. We disclose how much commission we will earn on the investments upfront," says Suresh Sadagopan, a Mumbai-based certified financial planner.
The income from commissions is usually mentioned in the agreement signed between the client and the planner. It's important, therefore, to read and understand the agreement before signing it. "We insist that the client read the same in front of us," says Pankaj Mathpal, a certified financial planner.
Some investors insist on executing the plan themselves so that there is no chance of a conflict of interest. However, this can sometimes become a problem if the plan is not implemented in the proper way. "While we don't stop our clients from investing on their own, they tend to get carried away by the sales pitch of the seller who might recommend certain other products too. So it's best to get the advice and execution done through the same person," says Jayant Pai, vice-president, Parag Parikh Financial Advisory Services.
Fees as a percentage of assets
This model is followed by wealth management companies or portfolio management services of banks. It is usually meant for investors with deep pockets, with the ticket size starting at Rs 30 lakh. The payment is based on the assets being managed for the investor and ranges from 1.5% to 2.5% of the portfolio per annum. However, this is not the only way the wealth manager is earning off you. Since all the investments are made through the company, he also pockets the commission that comes from buying the products.
It is here that conflict of interest crops up. The more the wealth manager churns your portfolio, the more he burns your money. There have been instances of portfolio managers selling one fund to buy another just to earn a commission from the transaction. Ulips are purchased for short durations so that new ones can be bought to earn more commissions.
Whether you are paying a flat fee or as a percentage of assets, you must ensure that you are getting your money's worth. Is your financial adviser justifying the payment you make to him? An adviser's role doesn't end with the preparation of a financial plan alone. In fact, that is just the beginning. A financial planner should be accessible to you for any important consultation regarding the plan. "Financial planning is a kind of a relationship. Our clients can walk into our office if they have any query or need any consultation. In the first year, there are no charges for the same," says Sadagopan.
The planner should also be able to make mid-course corrections in the plan if there is a material change in the income or expenses of the client. A foreign posting, a windfall gain or even an accident can completely change your financial planning. The financial adviser should make the necessary changes in the plan and advise the client accordingly.
The agreement with the planner should also spell out how often the plan will be reviewed. Some planners do this at least once in a quarter or six months to ensure that the investments are on track. Others do it once in a year. During the review, the planner looks at the performance of the investments and whether they have fared as expected. However, this shouldn't have to wait till the review time. "A planner must have a research team that tracks the performance regularly and sends the updates to their clients in case of a major deviation to their clients and suggest the roadmap accordingly," says Anil Rego, a Bangalore-based planner.
Some planners use technology to keep their clients updated on the progress of their finances. Many financial planners allow their clients to access their portfolios on their websites. You can benchmark the performance of the recommended funds against the category and other funds.
This brings a lot of transparency into the relationship, where the planner empowers the client to judge his performance. It also helps justify the fee that the planner is charging the client.
What to expect from your financial adviser The quality of advice and the level of engagement depend on the type of adviser you approach and the money you are willing to pay. ET Wealth contacted three types of advisers for the same family. Here's what they had to say. Family comprising husband (35 years), wife (31 years), son (5 years) and daughter (3 years). Combined post-tax income: Rs 1 lakh per month
Agent or broker Wealth Management Firm Certified financial planner Charges He takes nothing from the client but earns commission on the product. 1.5-2.5% of the corpus being managed as well as the commission on products sold. Rs 15,000 for formulating a financial plan in the first year and a renewal fee of Rs 5,000 per annum for subsequent years. Investment advice Buy a guaranteed NAV Ulip.
Invest in diversified equity funds.
Invest in recurring deposit for children. Maintain an asset allocation of 70% in equities and 30% in debt based on the risk profile.
Invest in a mix of diversified equity and debt funds.
Also invest in bank fixed deposits and gold ETFs to diversify the risk. Raise life insurance cover from Rs 6 lakh to Rs 70 lakh and health floater cover from Rs 3 lakh to Rs 5 lakh.
Maintain a contingency fund, which can be accessed during emergencies.
Start investing in MIPs to save money for down payment of the house they plan to purchase in 2-3 years. Take another term plan when you take a loan to buy house.
EPF and PPF alone won't meet retirement needs. Invest additional Rs 7,500 a month in diversified funds.
For children's education, start SIPs of Rs 7,500 for son and Rs 6,000 for daughter in diversified equity funds.
For children's marriage, start SIPs of Rs 3,300 for son and Rs 3,700 for daughter in diversified equity funds.
Asset allocation is currently 29% in equity and 71% in debt. It should be 35% in debt and 65% in equity. Review and rebalance portfolio every year. Parameters taken into account Investible surplus. Investible surplus, risk profile and past investments. Age of all family members, investible surplus, risk profile, life and health insurance needs, short-term, mid-term and long-term financial goals, retirement needs, past investments. Our assessment Took a very narrow view, limiting the advice to investments. Basic intention was to sell. High probability of a conflict of interest because of the high commission structure for some products. A qualitative difference in the advice, but still limited to investment planning. Did not include crucial aspects such as insurance cover and timeline to achieve the financial goals of the family. The planner went beyond investments and looked at every aspect of the family's finances. The plan laid down a specific strategy for every financial goal. One should not see the upfront fees as an unnecessary expense. It could help you save lakhs of rupees by guiding you in the right direction.
We at SAMPARK gives you a better financial planning for your future, So contact us to be a first step towards a secure life.
~
Source : ET
No comments:
Post a Comment