Financial planners charge clients a fee for their services. The fee represents the price of the financial planning service. But what represents the value that justifies the price? Most clients think that it comes from the investment products the planner recommends to them. They think it comes from the 'superior' returns the planner helps them generate. But is that really all that a planner has to offer their clients? This article is an attempt to answer this question.
The belief that planners would be able to identify the best performing products and generate better returns for clients is not new. It is born because the role of a financial planner is perceived to be that of an investment manager. But such a perception is stereotypical and one dimensional. Investment management is an isolated aspect of financial planning. The two are not synonymous. Financial planning is a lot more broad based and holistic. This is borne out in the graphic given below.
How then do financial planners add value to their clients? To understand this, we must first understand the core nature of financial planning services. Financial planning aims to help clients build a sound structure and framework for their finances. To do this planners look at the entire financial picture of the client, not just their investment portfolios.
Competent planners therefore first understand the client’s mindset when it comes to money. They help clients articulate their financial needs. They then help clients understand and define their financial goals. This involves quantifying each goal in terms of realistic rupee amounts and time frames. This gives clients clarity on where they are and where they want to go with their money.
Most people would think that the next step is to start building the framework and fill it with products. But a strong foundation is an essential prerequisite to building anything. In the context of financial planning, the foundation is education. Competent planners therefore educate clients on money management over the course of a financial planning engagement.
This is done by teaching the client certain fundamental principles and philosophies of money management. They are designed to empower clients with the knowledge and skills required for clients to manage money on their own. This makes clients Independent with regard to their finances over a period of time. At that point engaging the planner becomes an option for the client. It no longer remains a necessity. Educating clients also makes it easier for them to embrace the money management approach of their planners.
On the face of it, educating clients seems easy enough. But it is actually one of the toughest challenges for planners during an engagement. Clients can be broadly classified into 3 categories on the basis of their knowledge of money management at the start of an engagement. These are :
First time investors with no understanding of money management
2. Do It Yourself (DIY) investors with a workable, but not holistic understanding of money management
3. DIY investors who have a holistic understanding of money management.
Educating clients who fall under categories 1 and 3 is relatively easier. Those in category 1 are usually eager to learn. This means they would be more receptive to the knowledge that is imparted to them. Those in category 3 would already have a holistic understanding of money management. Therefore they would not require much additional education.
But most clients planners work with fall under category 2. These clients usually have a half baked understanding of money management at the start of an engagement. Planners therefore have to first identify gaps in the client’s understanding. They must weed out misconceptions in the client’s mind regarding money management.
It is only then that planners can think about passing on the right information and insights to such clients. This process obviously involves a lot of unlearning and relearning from clients. They sometimes have to let go of beliefs they have held onto for a long time. This may therefore be met with resistance by clients. Managing this resistance and then educating such clients is a significant challenge for any planner.
The education imparted by the planner is next moulded into a clear but simple investment process. This provides a framework within which clients can make their financial decisions. Conceptual clarity and a clear framework must precede recommendations made as part of the financial plan. Otherwise, the recommendations would lack context. The investment process designed for the client must help them answer most or all of the questions given below.
Once this much is in place, product recommendations come into the picture. Recommending the best performing products of the future requires planners to predict the future correctly and consistently. This obviously is beyond the power of any human being. All planners can do is to recommend simple, purposeful products that are easy to understand. This increases the chances of clients sticking to their portfolios for long periods without churning products.
Moreover planners are not paid for their clairvoyance or wizardry. They are paid for inducing the right behaviour and results for clients. Both of these require time, effort and effective risk management. The role of a financial planner is therefore not that of a wealth manager. It is that of a financial coach or mentor. They help clients avoid errors that could be injurious or even near fatal to their financial health.
Sustainable and satisfactory returns are simply a byproduct of avoiding errors and maintaining discipline over time. This shows that a planner's worth is not defined by the products they recommend. Nor is it defined by the returns they generate for clients. Instead, it is defined by their ability to provide clients the following with regard to their finances :
Clarity
Education
Structure and simplicity
And that should be the central takeaway from this article.
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