Posted tagged ‘financial planner’

Doctors and wealth creation self help

July 29, 2008

Doctors can create wealth. A lot of wealth. However, it may or may not happen from their earnings alone. It can happen only with good wealth management techniques. Ha, the word wealth may mean different things to different people. When we talk of wealth we mean an amount of money which will let doctors do what they wish to do rather than what they must do. When Dr. Sunil Balinge and Dr. Dhavale decide to charge Rs. 5 for every patient in a slum in the suburbs of Mumbai, they are putting their wealth to good use.

The distinction is easy to understand – when Mr. Azim Premji, Mr. Ratan Tata and Mr. Rahul Bajaj work at their age of 70, it is by choice. When a 70 year old vegetable vendor or a taxi driver works hard, it is by force.

Wealth creation is largely for 3 purposes – one to support a good life style, second to help you in your non-earning times and very importantly to do charities.

There are enough books and magazines on wealth management, on real estate, on commodities – really that can get you active without earning a dime! Here I am creating a blog which is in the nature of a help for creating, preserving and giving away wealth.

Doctors as a group have a high IQ, they have undergone a lot of training and understand the advantages of discipline. All these are very, very useful ingredients for being a good wealth manager too. Surprisingly (or maybe not surprisingly?) creating wealth and managing wealth is a lot like managing health. Doctors only need to be re-introduced to some simple concepts like starting early, compounding, investing regularly, and some such concepts in investing.

If doctors understand that a gynecologist cannot attend to your tooth and an anasthesist cannot perform a brain surgery, surely they will understand that a broker, a chartered accountant, a financial planner and a fund manager have different roles. Won’t they?

A doctor understands the compulsion of a chemist – he cannot charge for time spent, but a doctor can charge for time spent. This is the difference between a financial planner and a product seller. Simple is it not?

Investing is not really rocket science. Wealth management is not as difficult as say brain surgery. However the skills required are not frivolous either. Nor can it be learnt by watching television or reading a generic pink daily.

So here we are empowering you to manage your wealth. You manage lives. This magazine will help you manage your life-style. Empower you to learn about risk, about retirement, about how to listen to your financial consultant, about how to document your assets, about how to plan for your kids’ education, how to set up a charitable trust and such other topics. I wish doctors keep reading my blog and giving me a feed-back about what they would like to see here.

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Doctors need insurance! – Life and general insurance

July 22, 2008

Insurance is mandatory if you have a car!

If your car is worth insuring what about other assets ? What about your practice? Your Dentist’s chair? Your hospital?

Most doctors need at least some insurance to be in place as part of their overall financial plan.

The question is how do you work out what insurances you need, how much and what for?

And which is your most valuable asset?  If you have insured your house, car, your life, should you not have some insurance for your medical needs and your life too?

Think through what would happen to even the best laid financial plan if the doctor, at age 40, suffered a health trauma and was not able to work again. It would not matter what other strategies had been put in place, almost certainly the plan will fail and the doctor, and his or her family, would be in dire financial straits. Barring generous relatives, the financial future would look dim indeed. On the other hand, insurances are a bet you are most likely to lose.  The insured, i.e. the doctor, pays a premium to the insurer (the insurance company) in return for the insurer promising to pay an agreed amount to the insured if a specified event occurs. The process of the insurance company considering the risk and evaluating the risk is called “underwriting”, then the pricing is arrived at by the “actuaries”. The “price” so arrived at is called “premium” – which is a risk transfer fee. The probabilities are that the specified event will not occur. And the premium is calculated to be sufficient to pay out to those insured who do suffer the event, cover the insurer’s administration and selling costs, and then leave a profit for the insurer. Most of the insureds will end up paying more in premiums than they will receive back as benefits.

That is, most of the insureds will lose the bet. And I guess we are all happy losing this bet!

So some balance is needed when considering insurances. The advisors tend to be salesmen who talk up the need for insurance and the sums that should be insured. It is not uncommon for doctors to be over-insured and wasting money.

The key steps when evaluating any insurance proposal are:

(i) Identify the risk, i.e. what is the event you wish to insure against? – It could be theft, illness, disablement, death, malpractice suit, etc.

(ii) Ask what is the probability of that event occurring? – the probability of illness is far greater than death, hence a critical illness insurance which covers say 20 diseases will cost much more than a pure death (or life!) insurance

(iii) Ask what are the economic consequences of the insured event occurring? The cost of losing a mobile is negligible whereas the cost of a dentist’s chair breaking down could be much higher and more critical.

(iv) Ask what is the proposed cost of insuring against that risk and those consequences?  And

(v) To then decide if the cost worth the benefit?

This is the most difficult part. Most people do not know the cost of their family being on the roads if they are not around. Hence they think the premium being asked for is high. Only when you know the cost of “not having” a product can you compare the cost of “having” that product. A competent financial planner will guide a doctor through these key steps as part of your financial planning process. This requires a consideration of a many subjective factors and attitudes.

But it all gets down to risk management: understanding risk and being comfortable with it. Indeed a financial planner has to consider risk management when preparing a financial plan for a doctor.

This is so even if the doctor has asked the planner not to: the plan should on its face contain a statement that risk management advice has been declined. This is because a financial planner can be negligent and in breach of contract if they fail to advise on insurances.

What should the sum insured be? A basic principle in insurance is that the sum insured must be connected to the expected loss from the insured event occurring.

Choosing the financial adviser..

June 30, 2008

This is arguably the most important financial decision in your life you will ever make! Not too long ago life was simple. You wanted a bank account, you went to a bank. If you wanted to buy shares, you went to a sub-broker (a broker was out of reach till about 15 years back). If you wanted a life insurance, a LIC agent sold you some policy which you hoped was good.

Today you find bankers who actively discourage you from coming to a bank. Insurance agents who sell you anything buy a life insurance product. Bankers who sell you mutual funds, life insurance, broking accounts, and real estate!

And the companies that sell you financial products are dime a dozen – Reliance (Mukesh) has a loyalty card, Reliance (anil) has a credit card. A call from Reliance Money says “Reliance Bank” and offers you a loan! Airtel offers you money transfer, cell phones can be used for paying utility bills. Why do I need a bank, a cheque book, a relationship manager? I do not know!

Now into this mess comes in a financial adviser. He should tell you the difference between information and noise. He should encourage you to write down your goals. He should be able to understand the difference between a 3 month track record of a scheme and a 3 year performance. He should be able to FORCE you to buy life insurance MUCH BEFORE you need it. Your pension plans and medical insurance plans should be in place when you CAN rather than when you must. He should be able to help you prioritise your goals. He should have the guts to tell you that your goals make sense only when you allocate resources for the same.

HOWEVER, he should not sell any products to you EVEN if it is a zero load mutual fund. Because then, he loses credibility. It is like a rep of a pharma company – I cannot trust him like i trust my family doctor. Sorry, I know this is an old world view.

Financial advisor or product salesman?

June 23, 2008

One newspaper in Mumbai has this headlined in one of their news items. It is an article on page 3 of the paper – telling people not to self medicate. It warns people of malaria, gastro, and generally saying if you have fever please go to a doctor.

However, a few pages later there is a chemist who runs a column on whether you should buy life insurance or no! Sorry I have no clue about the author. However, in India there is no clear line between a “financial planner”, “financial adviser” a “certified financial consultant” or a financial product salesman or what have you!

So you do not know whether you are dealing with a chemist or a doctor. At least medically speaking I know I am running the risk of going to a chemist (not recommended) instead of going to a doctor (recommended)! In case of a medical emergency at least my body will throw up some symptoms which will make me revisit my decision of going to a chemist.

In case of a financial decision my choice of going to a chemist maybe a bad decision, but I may not get the signals that it is a bad decision for a long time.

Say I find out that my decision to put money in a medical insurance or a pension plan was WRONG at the age of 55 years, maybe I cannot do anything about it. That would be a tragedy.

Financial planner’s qualifications should be…

June 22, 2008

There is a complete alphabet soup as far as financial planner’s qualifications go! CFA, CFP, CA, ICWA, MBA, LLB, Bcom, Amfi pass, IRDA qualified, ….and still more.

Does it really matter?

Well your financial planner should know about you (perhaps most important), equity markets, debt markets, compounding, etc.

Surely if you are looking for a qualification you can get carried away by any of the high sounding qualifications, if he/she does not care enough to know about your goals, your risk profile, your attitude towards risk – i.e. the willingness to take risk vs. the ability to take risk vs. the need to take risk! It is not just a simple word document with lots of ticks!

Currently in India financial planners are difficult (if not impossible) to find – most “planners” are articulate salesmen. Be careful. The difference is like going to a doctor who has a pharma shop and a diagnostic center attached. He will be tempted to recommend unnecessary tests, some glucose shots, …etc.

I think it will be difficult for a doc attached to a diagnostic center and a pharma shop to say “Just loosen your belt, have a soda and do a jog around the block” your stomach ache will vanish. He is more likely to say “get a sonography done, or a lapro or……and take abcmycin, amdmycin, ….and we will check up next week”…

that is called a corporate sales guys predicament. He cannot decide.

Do I need to do any personal financial planning?

February 21, 2008

 Do I Need Personal Financial Planning?

Planning for a secure financial future is a must! It can be done, and is not easy.

  • Maybe you’re saving to buy your first home.
  • Perhaps starting your own business is a dream.
  • The costs of a college education have spiraled and you may wonder how you will pay for your child’s education.
  • You will probably live longer. Additional years after retirement can cost more than originally planned.
  • Your company pension plan may not be enough to maintain your standard of living after retirement.
  • Complex financial marketplace and changing tax laws make it difficult to understand your financial picture.

Everyone needs to plan for tomorrow. At every income level, there are steps you can take to make more efficient use of your assets and to ensure a secure financial future. It makes sense to develop well-defined goals and to map out appropriate strategies to turn your dreams into reality. To help you get started, below are some frequently asked questions about personal financial planning.  

What is personal financial planning?

Personal financial planning is a process, not a product. It is an organized, well-planned system of developing strategies for using your financial resources to achieve both short- and long-term goals. You may think of the process as helping you to answer three straightforward questions:

  • Where am I?
  • Where do I want to go?
  • How do I get there?

When should I start planning?

It is important to start planning as soon as you can. Time passes quickly – it is never too soon to start planning for tomorrow. Nor is it too late to start a plan. 

Who should prepare my personal financial plan?

A well-qualified financial adviser should work with you to prepare your plan. A CA financial planner combines the objectivity and trust long associated with the CA profession and the years of experience and expertise in personal financial planning. However, if he does not do this for a profession (most of them do not), look for a financial planner who is a full time professional.   

 What should it include?

A comprehensive financial plan – one that addresses your entire financial picture – should include a review of your net worth, goals and objectives, property and other assets, liabilities, cash flow, investments, retirement planning, estate planning, tax planning and insurance needs, as well as a plan for implementing your goals. 

 I don’t have a lot of money. Do I need a full-scale financial plan?

You may not. You can seek out different levels of financial planning advice, from counseling on a particular issue to comprehensive planning. Speak to the advisers you are considering and discuss with them your requirements. You should be able to find one who meets your needs.  

 What role does goal-setting play in financial planning?

It is important to list both short- and long-term financial goals on paper. You can then rank the importance of the goals. If you are saving toward something tangible, instead of just saving, it may be easier. These goals could include: available cash for emergencies, education for children, care for family members, retirement, a nest egg to permit a career change, acquiring or selling a business, estate planning, financial independence or personal objectives such as a special vacation or second home.  

How do I know how much I am worth?

One of the first things that you should do in reviewing your financial situation is to determine your net worth. Many people are surprised to find out how much they are really worth. First, estimate the value of your assets. If you have owned your home for a number of years, you may be sitting on a nice nest egg. Several different real estate appraisals will help you determine its worth. Organize bank, mutual funds, insurance policies and brokerage statements and record their value. List your liabilities such as housing loan, car loans or credit card debt. Subtract your liabilities from your assets and you will have a good estimate of net worth.  

 How can I plan for tomorrow when I can barely pay for today?

Create a budget. Determine what you actually spend each month. It is easy to keep track of large expenses such as mortgage and car payments. The variable items such as food, clothing and entertainment are often what get away from us. Write your expenses in a diary or an excel sheet – it is far more efficient than the human memory. The human memory is selective in remembering. Excel and diary are not  

 How much should I be saving?

It is hard to apply a rule of thumb toward savings, because it varies with age and income level. Ten percent of CTC is a good start. If that amount is too high for you, do not let that deter you. You can start by putting a little money aside each month and slowly increasing it.     

How does insurance fit in to the process?

Evaluating your insurance needs is part of personal financial planning. The insurance industry has changed a great deal over the past few years and there is a wide array of new products. Some of them may be better options than your current coverage.  

Do I need a will?

Everyone needs a will. Whether you are single or married, you need a will. No one but you knows how you want your estate divided after your death. It is especially important if you have children. If you do not have a will and both you and your spouse die, the court will appoint a guardian for your children. Maybe you would have chosen someone else.  

What type of advice can I expect from a financial planner?

You can expect objective financial advice that is tailored to meet your financial goals and objectives, as well as the level of risk with which you are comfortable. Depending on your unique situation and goals, your financial planner may confer with your lawyer, stockbroker, insurance agent and other investment advisers to achieve the best plan for you. 

 After a plan is developed, what happens next?

The best plan is useless unless put into action. A financial planner can advise you how to implement the plan and can put you in touch with other financial experts as needed.  

How often should I update the plan?

It is good to review the plan when there is a significant life event such as marriage, birth, death or divorce. Any change in financial position should be evaluated as well. Many people have an annual update that reviews how the plan is being implemented. The review also considers changing goals and circumstances.

  

Financial Planner – do you need one at all?

January 14, 2008

Uma Kannan is a good friend and an ex- blue blooded MNC banker. Here she is taking potshots at her own ilk. She says when she was with the bank, she was a “rogue deal seeker” but she felt good in calling herself a relationship manager, investment adviser, associate director…and various other nice names which HR faithfully found her!

A small investor should never invest on her/his own. S/he should choose a mutual fund. But is it easy to

choose a mutual fund? Heck no. S/he needs a financial planner to tell her/him whether s/he should

put money in a mutual fund, a structured product, a unit linked plan, a classic endowment plan,

a pension plan, real estate, or what have you.

And what will a financial planner do for you? S/he will structure your portfolio, s/he will suggest that you file your income tax return through a particular CA, ask you to invest in a particular mutual fund, buy a particular insurance, suggest that you make a will, check your nominations etc.

Then you go to a CA to file your return, a bank to make your deposits, a mutual fund agent to buy you mutual funds, a life insurance agent to buy life insurance, a lawyer to make your will and the story goes on.

Ha ha, now how many ‘professionals’ do you deal with? Here’s a small list. You ca add your own to this at leisure.

Professional

Her/his fees per annum
A financial planner Rs 25,000
A CA to file your IT returns Rs 10,000 (assuming 2-3 returns in a year)
A mutual fund cost approximately 3 per cent as asset management charges
A life insurance company cost same as a mutual fund in the long run
A portfolio manager for your shares 4 per cent charges
A broker + banker 2.5 per cent charges

To keep all of them happy you need a portfolio in excess of at least Rs 1 crore to start with! And all these guys (or gals) smart, sophisticated, nicely attired and perfumed cannot stand each other. So you need to find them all on your own.

Let us say you do have a handsome amount of Rs 3 crores and you employ the above orchestra to play for you. Let us see how much it will cost you.

Also, let us assume that this orchestra helps you earn 13 per cent return on your Rs 3-crore investments, which amounts to Rs 39 lakhs per annum. Then this is how your expense cookie will crumble:

Expenses

Financial planner        Rs 25,000
CA Rs 10,000
Mutual fund Rs 90,000
Insurance premium Rs 90,000
Portfolio Manager Rs 1,17,000
Banker Rs 1,00,000
Total costs Rs 4,32,000

At a portfolio of Rs 3 crores this amounts to ALMOST 10 per cent of the return that you received. After all this, they will tell you the following:

“We are paid on efforts basis; we cannot guarantee results. Mutual funds are subject to market risks”

Past performance is not a guarantee of future performance — or like Sehwag should we say “past non-performance is not a guarantee of future non-performance”?

Interestingly, if instead of this whole orchestra you were to put your money in PPF, a long-term bond fund and an indexed fund and earn a little less than 13 per cent per annum, you may still be better off.

But, I do have a financial planner who says that I need the fellow professionals to help me. What do I do?

Well, er, if your financial planner was selling car loans, home loans, mutual funds, life insurance and s/he has suddenly turned from a larva to a butterfly, well s/he still wears some of those hats. So surely out of the 10 per cent charges that this client is paying some of the money goes back to her/him.

Let’s look at this conversation between the client and his financial planner:

Client: Hi I heard you are a financial planner, can you plan my finances?

Planner: Yes of course, I can and will.

Client: Will you promise returns superior to the market?

Planner: Oh no! I can help you set your financial goals, risk profiling, finding you a lawyer who will make a will for you, a CA who will file your returns etc. But for selecting which mutual fund to invest and such other questions you should be asking a Portfolio Manager.

Client: And how much will you charge me for this service of yours?

Planner: Well I charge Rs 25,000 or 1 per cent of your assets whichever is higher.

Client: Thank you. Now I will meet the portfolio manager.

Client: Hello, Mr P M, will you manage my portfolio please? Of course, I know you will but what I want to know is how much will you charge me for doing this?

PM: Of course I will, and I will charge you about 3-4 per cent of the assets under management.

Client: Well, that’s too high but will you promise me a return greater than the average return in the market for the fees that you charge?

PM: Well I will actually decide on how much money to keep in debt instruments, how much in cash and how much in equities. I hope your financial planner has taken care of your life insurance. By the way, you will be glad to know that I am also a life insurance agent.

Client: Oh yes. My planner has asked me to buy a very low up front charge based unit linked life insurance plan.

PM: Oh this life insurance? Their initial charges are low, but their asset management charges are quite steep. Why did you choose this plan?

Client: I thought my planner was keeping my interest in mind.

PM: Of course, of course s/he must have thought of you. By the way I think you should invest 30 per cent in RBI bonds, 20 per cent in a unit linked pension plan which is equity based, 30 per cent in a classic endowment plan, and keep about 20 per cent in cash.

Client: In which mutual fund do you think I should invest?

PM: Here are some mutual funds with an excellent track record for the past 3 years — they all have given about 45 per cent return and I think they will do well in the next few years.

(After a few days)

Client: Mr Planner out of the money that I gave you for life insurance only 70 percent has been invested? Why?

FP: Sir I did tell you that it is low front end loaded unit linked life insurance�.

Client: But 30 per cent charge on such an insurance plan cannot be low, can it be?

FP: Of course it is low. There are some schemes which have 70 per cent load, comparatively this is low; is it not?

Client: Oh I see. And the endowment plan which the PM recommended to me. In that case I do not know how much the charges are. Correct?

FP: Yes, Sir.

Client: the mutual fund has also charged me about 2 per cent. That is very low is it not? Is it not lower than the 3 per cent that you told me?

FP: Yes sir. However, I have to tell you upfront — in keeping with the best practices — annually the mutual fund is allowed to take 2.5 per cent charges. You see they have to pay the trustees, the fund management company, the distributor’s trail, the audit fees, custodian, the registrar and transfer agent, the bank, etc.

Client: Oh I see. I hope these are the only charges that are levied.

FP: Yes of course, but for some small brokerage that actually gets added to the cost of the shares and is hidden from you by the mutual fund.  

Client: But I am happy to see that my RBI bonds got invested fully.

By the way it is nice to see that my planner, my portfolio manager, my broker, the trustee, the auditor, my CA who files my return, my lawyer who makes my will, the custodian, the asset management company, the distributor, the auditor of the schemes, the registrar and the banker will all make money. I really feel good.

By the way, will I make money�er, do I have guarantees?

FP: In this whole investment cycle which you saw, did I ever tell you to do any work?

Madam/Sir it is a very fair world — those who work hard make money.

The client goes away — to watch television which will tell her/him how easy it is for the common man to make money using futures and options. But then that is another story all together.