A doctor for your financial health

These days all financial advisors have started calling themselves financial planners.

However, financial planners have a different approach to that of other investment providers. Bankers, stock brokers, real estate agents, insurance agents and finance brokers, all have one thing in common — they start their process at the investment product point. For eg, real estate agents will only recommend real estate as an investment — they hope all prospective clients will buy real estate.

The investment process followed by investment providers is:

• Selection: What to buy/sell
• Implementation: How to buy/sell
• Timing: When to buy/sell

Financial planners on the other hand select investment strategies towards achieving the end of a comprehensive process, which starts by considering each client and their needs, objectives and resources. They are akin to the medical general practitioners, who nurture the client’s financial health to help his achieve his goals.

A financial planner’s work begins with consultation with the client, from whom he obtains information on the client’s finances and financial goals. He then develops a comprehensive financial plan that identifies the problem areas, makes recommendations for improvement, and selects appropriate investments compatible with the client’s goals, attitude towards risk, and expectations of returns on the investment.

Once the financial planner decides on the most appropriate mix of investments across the various asset classes, the next decision is to select the investment option within each class.

For this he analyses the different variables

• Growth
• Income
• Taxation
• Risk
• Liquidity
• Manageability
• Asset Allocation
• Costs

Let’s take the case study of Naman Shah a director of an MNC firm.

The present position

Shah, 45, would be retiring at the age of 55. He has current total assets of Rs 1025.30 lakh and no total outstanding liability of. This makes his networth Rs 1025.3 lakh. His current gross income is Rs 100 lakh and his expenditure is Rs 12 lakh which gives him surplus income of Rs 88 lakh

Objectives

• Provide Rs 1 crore at current value for the higher education of his children and their marriage over the next 5 years (save Rs 20 lakh each year)
• Provide Rs 9 lakh per annum to acquire sufficient capital at retirement

PLANNERS’ ANALYSIS

Current status

• Shah’s current net worth is Rs 1025.30 lakh.

Education and marriage of children: A lump sum investment of Rs 86.58 lakh is to be made at 6.66% real rate to provide for Rs 20 lakh every year for the next 5 years. Alternatively, you need to save regularly Rs 20.92 lakh and invest it in an investment product which gives you a real rate of return of 6.66% (12% investment return & 5% inflation) for the next 5 years.

Retirement planning: Shah would need a corpus of Rs 1.76 crore at the time of retirement to enjoy the same lifestyle for another 25 years (till 80 yrs — life expectancy). This is considering inflation of 5%, and today’s estimated monthly expenses of Rs 75,000 per month. His retirement planning is sufficient to enjoy the same lifestyle.

Personal financial advisors, also called fnancial planners or financial consultants, use their knowledge of investments, tax laws, and insurance to recommend financial options to individuals in accordance with the individual’s short-term and long-term goals. Some of the issues that planners address are retirement and estate planning, funding for college, and general investment options.

While most planners offer advice on a wide range of topics, some specialise in areas such as retirement and estate planning or risk management

myplan@fpsbindia.org