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  • Writer's pictureAkshay Nayak

Advisory Insights That Make A Difference

When working with a professional financial advisor or planner, there are a number of default principles and thumb rules that are applied by most advisors or planners universally across clients. But, these principles and thumb rules actually do very little by themselves to make it easier for clients to manage their finances. The thing that makes a genuine difference to clients and their finances is the advisor's ability to go beyond prescribing principles and provide client specific insight with regard to each of these rules or principles. Therefore, in today’s post I’m going to throw light on some of the most popular money management and financial planning principles prescribed by advisors, the insights that clients must be given with regard to each of those rules and how those insights would help clients manage their money better.

The foundational aspect from where any financial planning exercise begins is with a look at the client’s current monthly savings rate. The savings rate that is usually prescribed for most individuals is at least 10% of monthly take home income, which can further increase to say 20%, 30% or more with time. But it may not be possible for every client to maintain such savings rates consistently. For example, some clients may have a significant quantum of essential monthly expenses since they have a number of dependants to provide for. On the other hand, some clients may never have cultivated the habit of saving for various reasons. Others may not save because they lack clarity on what their financial goals are. Asking such clients to follow a strict savings regimen all of a sudden may not sit well with them. The most likely result of this would be that they do not follow the advice given to them and they may see no value in the advisory engagement. Therefore, it would be best to explore various strategies for saving in consultation with clients and decide on a particular strategy which the client is most comfortable with. The client can then be asked to follow the chosen strategy and gradually increase their monthly savings rate until it reaches the intended level.

Another very widely propagated thumb rule is that of maintaining 6-18 months' worth of monthly expenses in liquid or near liquid investment avenues such as cash, savings deposits, fixed deposits and so on to serve as a contingency fund to meet financial emergencies. While asking clients to do this is definitely a good idea, it is of no use unless clients have perfect clarity as to the circumstances under which they must dip into their contingency fund. Without this clarity they may dip into their contingency fund for all the wrong reasons. Therefore, it is important for advisors to effectively communicate the purpose of a contingency fund to their clients. They can do this by working with each client to understand and define every major situation that could constitute a financial emergency for that particular client. It is important to do this because the situations that constitute a financial emergency may be different for each client. For example, a job loss may constitute a financial emergency for a client who is an employee in the early part of their career. But the same would not be true for a client who is an industrialist running a well established business and a sizeable, well diversified investment portfolio. Instead, having to meet a significantly high medical bill at short notice may be worthy of being considered a financial emergency in the industrialist's case. The important takeaway here is, when advisors help clients gain clarity on the situations under which to dip into the contingency fund, they are much more likely to make effective use of it.

Estimating and providing for the insurance needs of a client is another area where the right advisory insights can make a world of difference. But this is an area where there is very little room for error. The costs associated with having inadequate or excessive insurance cover are significant and can bring down the overall efficacy of the broader financial plan. A term insurance policy and a comprehensive individual or family floater health insurance policy is usually considered to be enough to cater to insurance needs. While this is true in a broad sense, the exercise must be a lot more nuanced when it is carried out at a client specific level. Along with recommending insurance products, the individual's income profile and financial situation also need to be assessed while ascertaining the quantum of life insurance required. Care needs to be taken to provide for future growth in the client’s income and the current asset base of the client so that the amount of life insurance required can be adjusted accordingly. Also, given that income stoppage can also occur in the event of permanent disability, disability and accident insurance may also need to be provided for. This is especially true where there is a single breadwinner in the household. Where clients have outstanding liabilities to be settled, credit insurance and liability insurance need to be provided for until the client is free of all debts and liabilities. As far as health insurance needs are concerned, a critical insurance cover may also need to be provided for based on the lifestyle choices and conditions of clients and their families. Moreover, in today’s times where the COVID-19 pandemic is a prevalent threat, providing specifically for the associated threats needs to be looked at.

When advisors assess and evaluate the insurance needs of clients effectively, it ensures that the insurance needs of clients are holistically met as part of a comprehensive one stop solution.

With regard to portfolio construction and management for clients, advisors and their insights would once again have multiple roles to play. This is an exercise that is not simply about asking clients what their financial goals are and then suggesting investment products to help them achieve those goals. In fact, any approach to imparting investment advice that is predominantly centered around a product centric construct is more than likely to be insipid and ineffective in the long run. Rather, advisors must first focus on assessing each of their clients' financial goals and help them understand which ones would genuinely add value to their lives and hence are worth achieving. If some financial goals are blatantly impractical and unrealistic, advisors must also be honest with clients and let them know of the same. From there, advisors must help clients conceptualise an asset allocation strategy for each of their goals based on the time horizon for each goal and the risk profile of each individual client. Then comes the selection of investment products where advisors would have a role to play in terms of selecting the most suitable products across asset classes for each goal. Giving clients the right education with regard to the risks associated with each product and the tax implications that come with them is also of paramount importance. When working towards long term goals like retirement, children’s education, marriage and so on, advisors must also play the role of a coach and see to it that planning for such goals begins at the right time. They must also help clients see to it that investments for such goals are paced optimally over the course designed to achieve such goals. Finally, advisors must also remain proactive and help clients rebalance their portfolios regularly and suggest changes to the asset allocation strategies for each goal as and when required.

All of this should make it clear that when investment advice is imparted with the right kind and right amount of insights to support the advice, it promotes the creation and maintenance of healthy and lasting relationships between clients and advisors. Clients are much more likely to take advice on board and follow it religiously when three conditions are met. Firstly, clients need to have sufficient assurance of the fact that the advice being given to them is genuine and well thought out. Secondly, clients must clearly be able to understand how the advice given to them improves their financial wellbeing. And finally, the advice must come from someone they completely trust. And supporting investment advice with the right insights goes a long way to achieve all of these requirements. And the fact that such advice is much more palatable to clients automatically promotes a mutually beneficial relationship for both parties involved in the engagement, which is what all advisors aim to ultimately achieve with every single one of their clients.

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