Consumers do not understand what financial planning is and, due to which, they don't value it

Interview: How financial planning is gaining importance in today's world April 10, 2012 Noel Maye, CEO, Financial Planning Standards Board, USA, talks to Tanvi Varma about the intricacies of financial planning in India and current standards of the advisory industry.

Source – Money Today

What are your views on the current state of awareness on financial planning in India? Do you see a rise in awareness levels with a rise in the wealth quotient? 

Awareness of financial planning in India is low, but this is pretty consistent with the state of awareness in a lot of other countries where we have our programs. Consumers do not understand what financial planning is and, due to which, they don't value it. 

The key element to a financial planning certification is financial literacy, which makes it important to improve overall literacy levels. As wealth increases it tends to change the mindset. When consumers are in a state of subsistence, wherein they live on a day-to-day basis, it is hard to plan your finances. As wealth increases you have something you need to protect or multiply.

While awareness levels are currently low, we are seeing an improvement globally, including in India. Consumers are living longer and in retirement than as part of the work force. Regulators and governments are pulling away from guaranteed pensions and employers are pulling away from offering lifetime employment. Consumers now need to take on the responsibility (of creating wealth).

Do you think that the need for financial planning in India is different compared with other countries, especially the developed world? 

Culturally, in India, the structure of a family is usually strong and extended. This means it is not uncommon for Indians to be involved in taking care of their parents, grandparents, their children's education or marriage and so on. 

To accomplish this, one needs to have an extended financial plan. This adds a measure of complexity and needs to be factored in by a financial planner, unlike in western culture or anywhere else where the planner only deals with a particular client's individual issues.

Typically, problems and approaches are common everywhere and markets tend to evolve. Markets that were focused on transaction or product selling, where individuals went to different people for different needs, are now seeing a shift to wanting a one-stop solution provider, someone who can plan your whole life and give you a solution in its entirety. Increased responsibility and complexity leads to this change.

Things are better when you have professional help. In 2008, people lost a lot of their wealth and realised they did not want to undertake this journey (of planning their finances) on their own. During this period, certified financial planners (CFPs) gave feedback that their clients stayed the course that had planned for them. 

Education and trust helps in developing this. Investors understand that volatility will come and that risk exists but they still want to stay invested, now more than ever. India was known to be a saving country. 

Earlier investors wanted tangibility, to be able to invest into things they could see and so they invested in gold, real estate etc. Now, there has been a shift in mindset to investing in stocks, bonds, mutual funds and so on.

Do you feel there is a need to strengthen long-term financial security of in India? 

Yes, it is very important to create retirement funds. Because India does not have social security in place yet, you are in a better position to understand financial planning (for retirement). 

Europe has a very solid social security system in place and yet, with governments going into debt, what has been telegraphed to consumers is that they may not be able to fulfill all obligations. The US has also indicated that while social security is there and the government will pay a small part of retirement income, they might need something more for financial security.

Even with such systems in place, these have not been designed to cover all your needs or designed to protect you from impoverishment. People want to maintain a lifestyle during retirement - commensurate or better than what they have had during their working life. Whatever the social security structure, it is never enough; you must take care of yourself.

If we look at the Australian model they have superannuation, while in America it is called the 401K. Individuals, while they are earning steadily, contribute to their retirement with pre-tax dollars and there is a matching investment made by their employers. The notion of letting people save pre tax for retirement is what motivates them. 

In the US and Australia, it is money that was never part of their salary that is being put into the retirement fund and so they won't miss it (while they are working). Given the opportunity to save pre tax and with access to financial advice, one can improve one's financial well being.

Since the primary role of the board is to raise standards of financial planning, how important do you think is the need for the board to work in tandem with financial regulators in India? 

There already is a relationship between FPSB and regulators. The whole of United Kingdom has one regulator, the Financial Services Authority, while India has five or six dominant regulators and the United States has about 200, which includes state securities regulators, state insurance regulators and federal regulators.

The regulator's function is straightforward, to set a barrier that people must pass to get into the financial advisory space, but it is set sufficiently low so that you don't deny people livelihood. 

FPSB sets professional standards for those who wish to practice at a higher level with more experience and qualification. Regulators are here to see that people follow the norms. We have seen a shift in approach by regulators globally. In the past it used to be a rule-based approach and then there was a shift to a principles-based approach, where they will give you general guidance but trust you to get it right. 

However, post the global financial crisis, the pendulum has swung. Regulators are back with consumer protection-whether consumers are protected, how they are protected, are advisors competent and assessed, is the remuneration adequately disclosed etc. So while we create standards for profession, regulators create barriers to entry and other norms.

Are certification standards different in different parts of the world? 

All our CFP certifications have the same standards and frameworks. FPSB India, for instance, takes global frameworks and localizes it so that it covers Indian products, laws and regulations and delivers financial planning within that context. So, we have global standards but local programmes.

Why do you think there is a greater need for financial planning for women, who are increasingly entering the workforce? 

Yes, (reports show that) women live longer than men and so statistically she will need retirement income for a longer time. This makes financial planning for retirement more important for women. Also, women usually have to leave the workforce to have children, which means they are bound to miss promotion opportunities. Hence, at the same age, they're earning comparatively lower than men. This means they are at a different position and have different pension benefits on retirement.

Do you feel that entry norms to act as independent financial advisors or brokers should be strengthened to reduce mis-selling? 

We have an exam for entry, which tests competency and also a registration process. Several of our affiliates have been approached by governments to manage the examination process and registration for the broad advisory community. 

We need to know who is in the field, whether they are qualified and if there is someone who can hold them accountable. We are one of the few organisations the CFP certification can be taken away.

There is a lot of contention on the appropriate pricing structure for providing financial planning services. What is your opinion? 

People have always paid for financial advice and products, they just didn't know it. Commissions and charges were built in. People will not pay for something they don't value and they will always pay for value. If consumers believe that the financial planner's advice will be useful in securing their finances, why wouldn't they pay for it? 

It is like going to a doctor for professional advice, you go to him because he is qualified to practice medicine and can give you a diagnosis that addresses your ailment. You are willing to pay for this advice as you see value in it.

Once investors start seeing financial planning as a professional engagement and an advisor as someone offering a service of value, they will pay. Of course, pricing will differ based on the advisor's experience, qualification, the levels of service and so on.

ELSS better investment option than PPF, NSC: Crisil

Source - Moneycontrol

Investments in an Equity-Linked Savings Scheme (ELSS) of a mutual fund have yielded higher returns compared to other instruments like PPF and NSC in the last few years, a report by Crisil has said.

"Our analysis shows that ELSS gave 26% and 22% annualised returns over three and 10 years, respectively, vis-a-vis 8-9% offered by traditional tax saving investment products such as public provident fund (PPF) and national savings certificates (NSC)," Crisil said.

Crisil added that interest on employees provident fund (EPF) for 2011-12 was slashed to 8.25% from 9.5% in the previous year and thus ELSS can act as a strong alternative to investors.

Though the traditional debt products are considered to be relatively safer bet as they are not affected by volatility, they are unable to generate higher inflation-adjusted returns in the long run.

The PPF accounts fetched 8.12% over the last 10 years and in the similar period, the NSC gave an interest of 9.10%. The average inflation over the past 10 years stood at 6.05%.

"ELSS is not only an attractive option to save tax, but also helps create wealth over the long run. ELSS as a category has outperformed the Nifty 500 across three and 10 years. With average inflation around 7% over the past three years, top Crisil-ranked ELSS gave an inflation adjusted return of 14%, which is significantly higher than returns offered by other tax saving products," Crisil's senior director Mukesh Agarwal said.

The rating agency, however, cautioned that the ELSS investment requires some amount of market risk and had to cherry pick those schemes which have performed consistently well.

"Since investments in ELSS are subject to market risks, investors must take into consideration their age and risk-taking abilities. The investment horizon should be more than five years for higher inflation-adjusted returns.

Further, investors must choose funds that have performed well both in good and bad times," Crisil head for Funds and Fixed Income Research Jiju Vidyadharan said.

It said ELSS is not eligible for tax benefits under the DTC, but since the implementation of the new tax regime has been postponed, investors can park their funds in these equity schemes for now.

Media & Stock broker– your friend or enemy

Source – Bullsbook.com

The era of news channels, news papers, and news magazines is gone. Now is the time of views channels, views papers & views magazines! Yes, that’s the case wherever we go. Not just in India, but in any corner in the world.

Let’s understand the basic business model of media. It’s a simple equation. More viewership for TV channels & more readership for newspapers, magazines & websites; means more advertisements at higher rates. More the viewership/readership, higher the rates of advertising & more is the number of advertisers. Now, to increase viewership/readership; they need to have a lot of fresh content. Fresh like a fish! Else, people will simply unlike it. Now there are two things, either the content has to be originally fresh or they have to make it look like fresh. This is done in the name of breaking news, exclusive stories, rumours/insider information from sources etc. In simple words, they need to keep you busy watching/reading their content for maximum possible time; Irrespective of your requirements & needs. And one must admit, media has been doing it successfully. After all, smart business people are there to work for them! Truly, we can call them business channels, business magazines & business newspapers! They are simply doing their business, and making profits.

On this drive to increase or maintain their following, media needs to cater to maximum possible segments. Just like a big mall or shopping complex, where you get everything. But do you actually need to buy everything every time? No. You just buy what you want and get out of the building. But it’s the need of that mall or shopping complex to have everything available for sale, since they need to serve not just you but everyone else. Same is the case here. Today’s business channels, newspapers, websites, magazines need to deliver everyone. A long term investor, intraday trader, short term trader, futures & options traders, commodity trader, currency trader, economists, businessmen, students, car & bike lovers, sports lovers; everyone gets what they want here. Even if you want a trading/investment advice, mutual fund advice, real estate advice, advice on which car you should buy; yes they have it. Just like a movie channel which has everything for everyone, right from comedy, drama, tragedy to science fiction, cartoon and action! This is how business channels get the content to run the show all day & print media, websites, and magazines to make all their pages full.

Sometimes, parties/individual/companies with vested interest will join hands with media or use media to spread rumours, to intentionally leak the developments to get advantage of stock price fluctuations due to public participation, to propagate specific agenda etc. So, think before you act on any news. Not every piece of information is genuine; there may be a hidden motive. It has happened in the past that, many managements floated bullish stories about their business prospects in media through inflated reports, independent analysts etc., and investors have paid heavy price for acting on them.

The funniest thing most people try to do is to REACT to the news flashing on the TV screens or appearing on other mediums. Common sense tells us that, how can you benefit from an exclusive information which is being watched or read by millions of people at the same time? By the time this exclusive or insider information reaches you, everyone else knows it & many has already traded on it.

No one can deny the fact that, some of the most respected people in the financial world give their views through media. These people are independent investors, businessmen & entrepreneurs. And their views are worth to be taken into consideration. But there are many others who keep on popping up every hour & every day. Giving views on number of stocks, sectors & economies! And everyone has their own theories, propaganda’s, targets & logics. Majority of these experts, independent analysts are there for two reasons.  First is to represent their company in media & let it’s presence be felt in the markets. And the second type of experts, i.e. independent analysts is there to advertise or to spread awareness about the services they provide.

Talking about anchors on business channels & editors of print/digital media, we see no difference between them & cricket commentators. It’s their job to sound excited & surprised on everything! If a player hits the ball for a six, it’s their job to shout; “oh! What a shot”. And if the player gets bowled out on the very next ball; “oh! What a ball.” They simply don’t know what is going to be the result of the cricket match, but they have to speak till it’s not over. Ultimately, it’s the players on the field who need to play the game. Players don’t even need to know what the commentators are saying by sitting in their air conditioned press box. Same way, YOU are the player here in this game of stock markets. You don’t need to listen to commentators & many other experts’ opinion. You have to develop your own technique & strategies to play well and win the game.

The point to be taken here is, media is absolutely necessary for each one of us to remain updated about the current developments. You should be selective, and should not believe everything blindly. Take what you want, and leave aside what is un-necessary. After all it’s you who has to think for yourself. No one is going to do it for you. It is important to get the news & not the views.

Media is doing their business & they are doing it excellently. They have nothing to do with your success or failure, and why should they? It’s time to mind your own business with equal excellence. There is a simple way of doing it. Keep the business channels mute during market hours & read the pink papers after the market closes!

Same is the case with stock brokers. They need to cater needs of every individual. So they have to offer various services & solutions. It’s a simple business model again. More you trade & leverage, more profits for your stock broker. No wonder, they manage to find out one multi-bagger stock everyday, many hot trading ideas every hour. It’s their job to provide fresh food to whoever walks in! And to communicate these hot tips, they have a strong network of so called graduate/postgraduate relationship managers, dealers (we call them volume managers) who have no idea about what’s happening in the market. Whenever you speak to them, “The market is at a very important technical level / crucial level and anything can happen” is the standard reply you will probably get!

If a person buys shares worth 1 lac rupees, holds them for 3 years and sells those shares at 10 lac rupees; the broker makes very little money. But if you are an intraday or short term trader, you trade with that 1 lac rupees with all the possible leverage and even if you don’t make any money or lose some money after making several trades; the broker earns more. Then you are a good client for them!

One thing we need to understand here is, stock brokers job is to do broking and not of doing research or investment advice. But due to their business requirement, they need to have this department. It is obvious, they have to maintain a balance between your & their profitability.

Next time your stock broker, dealer or relationship managers gives you a hot tip, question it. Analyze it and only then make a decision. After all, the trade or investment is going to be executed by using YOUR money, not theirs.

The process of buying & selling shares is transparent like never before. Today’s stock broking is a new age broking with lot of handful tools & services at your doorstep. Many stock brokers provide the tools to analyze the markets & stocks, guides to investing on their websites, journals etc. And investors should make good use of them.

Both media & stock brokers have their own roles to play to make profits for themselves. Not everything they do is helpful or harmful for you. If you think for yourself and act smartly, you can be friends with them and use them for your benefit. If not, you may end up in hurting your financial health! Just like many investors have done it in the past, by blindly following the ‘Experts’ in media.

The choice is yours!!!

I-Strategy – a No brainer investment idea (ABCIL)

Team CrawFin/ Harshal Jawale, CFP^CM

This article is in response to my previous article “The ABC of SIP” (http://crawfin.blogspot.com/2011/09/abc-of-sip-systematic-investment-plan.html) where I discussed about simple investing strategies with very small sum, including Sachin Tendulkar case study. Feedback that I received was even though it seems interesting but the theory is told when things are already done. Investor cannot rely on making future investments on the basis of such stories when previous data is analyzed.

I am here putting forward my own theory of investment just to check whether such no brainer yet regular investment will yield decent returns or not. I do not advocate investments with the theory mentioned and it should be taken as a test to check if such things work or not.

Theory – We will consider investing a small sum into 5 stocks, each on one day of week for such 10 weeks. In total it will make 10 installments in each stock, 50 in grand total. We will keep purchasing stock at the opening price of the day. This will average our purchase price over 10 weeks. Since it is a no brainer we will not worry about picking smaller companies, no changes in the amount of investment etc. We will pick only domestic stories with strong and clean management record and only from nifty fifty stocks.

My picks for such theory are as follows (ABCIL), you may pick your own. Some negatives are given which your relationship manager must be giving you since index has risen more than 10% in two weeks. When we talk about systematic investment we should not be worried about top-bottom and 5-10% variation in price.

Axis Bank

Saving rate deregulation, increasing NPA, new banking license etc will affect banks

Axis Bank is already up 17% from its 1 month low, results are out

Bajaj Auto

Higher interest rates, lower auto sales, many competitors

Bajaj Auto is already up 14% from its 1 month low, richly valued at 1720. Results out

Coal India

Mining bill affect its profitability, coal supply issues

Coal India is close to its monthly low today, result awaiting

ITC

Rich valuations of the sector, high inflation meaning high raw material costs

ITC already up by 10% from 1 month low, trading at life-time high valuations. Result out

Larsen & Toubro

High interest rates affecting order book, declining sales and profit, down 40% from year peak

Trading at year low, result out

Points to note –

1. Assuming total amount is INR 1lakh, 50 equal installments everyday
2. Stocks are purchased at opening price of the day
3. Investments will start from this week i.e. 31^st Oct 2011; Have no intention to wait for market to find its bottom.
4. One or all stocks may be in loss or profit depending upon the market trend, test is not to counter the trend but to minimize its effect
5. Actual investments into stocks selected is not advisable at current level
6. Stocks are selected largely on the basis of combination of good/bad result, good/bad projected outlook, strong and clean management, long term India shining story.
7. Since it is a no brainer, I am keeping things away from any good/bad news, or any other happenings in the market. Whatever happens I am suppose to follow code of conduct. That’s what a retail investor expected to do without the help of expert.

This article, blog is created and dedicated to creating awareness about financial products/services/ strategies to help individuals manage their personal finance. I do not endorse stock TIP ideas; if only I knew which one would do best today I would have taken a bet in that stock rather than writing a blog. I am simply a strong believer of investment strategies that has earned decent returns over the years. Understanding of equity as a asset class is more important than asking hot tip for the day.

Disclaimer – It is safe to assume that I or my clients may have vested interest into stocks discussed above.

Wealthy investment needs healthy methods!!!