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Financial planning – Myths & Reality

, September 26, 2012, 0 Comments

‘Financial Planning’ is the new buzzword in the current financial services landscape in India. We tend to hear a lot about financial planning these days. The buzzword is used in all sorts of context creating confusion in the minds of people. It is used by insurance agents, mutual fund distributors, banks and other intermediaries, but ‘True’ financial planning is not what these people would have you believe.

Let us dispel the common myths and misconceptions about financial planning.

Myth 1: Financial Planning is same as Investment Advice

The most common misunderstanding about financial planning is that it is all about investing, but they actually mean two different things. Investing is only a part of financial planning – which is a comprehensive and holistic method. Financial planning is the process of creating strategies to help you manage your financial affairs efficiently and meet your financial goals. Investment advice comes at the end of financial planning after a complete DNA check of your financial aspects is done, like financial needs, financial responsibilities, current assets and liability situation, cash flow analysis and risk profile. So, financial planning is a broader concept and includes not only investment planning but also tax planning, retirement planning, insurance and estate planning.

Myth 2: Financial Planning is only for the Rich

Another major misconception about financial planning is that it is meant for the wealthy alone. In fact, the reverse is truer and people who are not wealthy need financial planning more to efficiently manage their limited financial resources in order to attain their financial goals. In the present uncertain economy, financial planning has become increasingly important. With growing options as well as complexity of savings and investment products, managing your finances can be difficult and that’s why many middle-class families are now opting for financial planning services. So, financial planning is for everyone, regardless of age and economic status.

Myth 3: Financial Planning is to be done at a Certain Age

Many professionals today say “I’m too young for financial planning.” Remember, if you are young, you are at the right stage to start financial planning because the time is at your side. Get the power of compounding work for you in achieving your financial goals. And if you are no longer young, it’s even more important to go for financial planning. If you are nearing your retirement, you need clarity on different sources of retirement income and how much each will contribute? For how long will they last?  What effect will inflation have on your retirement corpus? So, financial planning is worthwhile at any age, though it is true that the younger you start planning the more beneficial the process will be.

Myth 4: Financial Planning is a One-Time Activity

Many people feel “What is the need for annual review of financial plan when everything is going to remain same in coming years?” Well your goals might remain the same, but the economic environment changes constantly and you need to adapt to the changed scenario to make your financial goals a reality. For instance there can be changes in your income levels, taxation policy and prevailing interest rates in the market. Also portfolio rebalancing is a regular exercise and must for long-term wealth creation as well as wealth protection. So, financial Planning is not a one- time activity triggered by some financial crisis in life. Rather it is an ongoing process and has to be periodically reviewed.

Myth 5: Financial Planning is Free

A lot of people ask this question after witnessing many relatives, friends and insurance agents offering investment advice for free. Remember the adage: “There are no free lunches in life.” What they were offering as a free advice was being made with the simple reason of getting maximum commission. Financial planning is a professional service and needs to be compensated like any other professional service say legal or medical advice. Consider financial planner as your family doctor who takes care of the financial health of you and your family. In matters related to your physical health, would you ever visit a doctor who advises for free? Remember, you always pay – directly or indirectly. Isn’t it a better option is to pay a financial planner in advance so that he can offer you unbiased advice keeping your interest as foremost?

Myth 6: Financial Planning means Losing Control on Your Finances

Some people think that engaging a financial planner will result in losing control on their finances to the financial planner. This fear is uncalled for as the financial planner is more of a financial friend to guide you and assist you in making informed financial decisions. The ownership and control on your money will still be yours, only the advice will be of financial planner.

Myth 7: Financial Planning is a new way of Selling Products

Few informed investors think that financial planning is a new way of selling (or mis-selling) financial products. This feeling is not totally wrong as we can see a lot of financial planners mushrooming all over the country. Many existing financial institutions have also started to cash on the name ‘Financial Planning’ and are pushing their own products now in the name of financial planning. With many commission earning IFAs turning into Fee-based Financial Planners, the transition is tough and at times there can be a conflict of interest. Remember, the choice to engage an unbiased financial planner lies with you and the next point will help you in choosing one.

Myth 8: Everyone can be a Financial Planner

Financial planners come with a variety of titles and credentials. Most people think that all financial planners are certified, but this isn’t true. In the absence of any Financial Regulations with respect to financial planning in India, anyone can call himself or herself a financial planner, whether certified or not. However, there are certain professional designations that require extensive training and experience. CFPCM (Certified Financial Planner) Certification is the highest level of certification worldwide in the field of financial planning. Be careful of non-certified financial planners who may only be interested in selling high-commission products or are under their job pressure to meet targets.

To conclude, we hope that now you are clear of all the myths of financial planning and understand what ‘true’ financial planning is all about. Comprehensive financial planning helps you in achieving financial goals and fulfilling your future obligations through a road map which is created for you after taking into account your current and future needs, your individual risk profile and your cash flows. So, financial planning not only offers financial freedom but also brings you peace of mind that comes from knowing that your financial life is on track.






About author
Dr Naveen J Sirohi is a Ph.D. in Commerce from CCS University and a Certified Financial Planner. Currently he is Assistant Professor (Finance) in the Department of Management at BCIPS, New Delhi. He has more than 10 year of experience including HDFC Bank and Corporation Bank. His domain expertise include Personal Finance, Financial Management, Risk Analysis & Insurance Planning, Retirement Planning, Taxation, Security Analysis & Portfolio Management and Financial Statement Analysis. Dr. Naveen also runs a Consultancy firm, PRUDENT ADVICE, providing Financial Planning services assisting clients achieve financial freedom. ...more