Advisor Speak 12th December 2014
Is financial planning really the best retail solution?
Ashish and Manish Goel, Vista Wealth, New Delhi

imgbd Financial planning has long been regarded as the holy grail - the nirvana solution for distributors to embrace, as they move from a product oriented approach to an investor centric one. Ashish and Manish Goel of Vista Wealth - one of Northern India's largest retail distribution firms - challenge this notion, after having seen how a goal based approach is actually being implemented in the market. If financial planning is not the nirvana solution, at least in the retail world, what then is an ideal investor centric approach that retail distributors should consider adopting? Read on, as Ashish discusses their learnings and their solution, and why they emphasize that for a typical retail saver in our country, empowering his means is far more important than putting a number to his aspirations.

The question in the title of this article may sound controversial to some industry participants. After all, ever since 2009, since distributors began seriously strengthening their customer propositions in the aftermath of the market crash and regulatory changes, one thing that all of us have been told by all experts is this : your route to success in the new era is financial planning. Adopt financial planning fully - with your heart and mind - and you will succeed in any environment. So much so, that it has become a widely held belief now that if you are not offering financial planning, your chances of long term success are bleak.

Financial planning is great - the question is its relevance in retail distribution

I have nothing against financial planning - I think it has a wonderful place in the overall financial intermediation business. I am only asking a simple question in this article : is financial planning really the best way forward for retail distributors? And, I am asking this, after adopting financial planning and goal based sales for the last few years, and after seeing its implementation not just in my firm, but also in several other retail centric firms of other DFDA members as well. At DFDA, we discuss practice issues and opportunities at length, and we have within DFDA several members who are CFPs and are actively practicing financial planning. A lot of what I have put together in this article is a result of intense discussions we have at DFDA on various issues relating to practice management.

Why will a retail distributor consider adopting financial planning?

There are two simple reasons:

  1. He believes this will strengthen his customer proposition, and

  2. the strength of this stronger proposition, he will be able to scale up his business.

I have seen many of my IFA friends earnestly embracing financial planning as their core customer proposition, with both these objectives in mind. And, after a couple of years of trying to implement financial planning, I see many of them struggling with various aspects of this proposition. On the basis of what I have seen practically happening, here are some of my observations on what's going wrong with implementing a true financial planning proposition, and why I am now raising this question as to whether financial planning is really the nirvana solution for retail distributors.

1. Collecting cheque is simpler than collecting data

In our business, many distributors have come to a conclusion that collecting a cheque for a new transaction is far simpler than collecting data to complete a financial plan. Many clients are more than willing to discuss the best investment avenues for their present savings, and less willing to sit down and share voluminous data of all their holdings and policies and discuss all their dreams and aspirations - both of which are necessary for a financial plan to be constructed. When faced with a choice between easy cheque vs difficult data, no prizes for guessing what wins.

2. To teach first or take business first

There are two conflicting dilemmas for many distributors. For one set of distributors, there is a clear feeling that the more you teach, the more independent you are making your client, the more you are pushing him to go direct. Is teaching your clients a business driver or a business destroyer - that's a question on many distributors' minds.

On the other hand, we have some distributors who are very passionate about financial planning and they make every effort to teach clients about the financial planning process in full detail before commencing a business relationship. Often, the client is more interested in getting simple things done like completing his tax investments for the year - and may not have the inclination to go through a learning curve on financial planning, at least at the outset.

How to strike the right balance based on client priorities and your priorities is a challenge that many distributors struggle with.

3. Are clients really "owning" their goals?

Picture this typical situation. Client comes to the distributor looking for investment avenues for the additional 50,000 to be invested in 80C instruments. After the discussion is over and a decision has been made by the client on the 50,000 investment, the distributor broaches the subject of goal based planning. Client says, why not! The distributor then enthusiastically starts allocating the existing portfolio into various goals and updates his software accordingly. The distributor now starts diligently tracking this goal based portfolio, but the client very often has little clue about these goals. The client agreed when the suggestion was made, as it seemed a nice thing to do, and agreed to marking his portfolio to various goals as the distributor suggested. That's very different from actually articulating a goal, determining the financial obligation, determining a plan to meet this obligation and then committing to an investment discipline to meet this obligation. If you don't go through such an elaborate process, the chances of your client owing these goals is slim. It will be a case of a distributor owning the client's goals, which the client goes on blissfully oblivious to the "plan" made by his distributor.

4. Wrong timing

Consider this situation : in a country where majority of retail savers are still very hesitant about equity markets and mutual funds, here is somebody who says he will draw up a financial plan and at the end of the planning process, for every goal, he suggests mutual funds, and that too equity mutual funds! So, from a situation where the client is hesitatingly considering a small allocation to mutual funds within his overall savings, he now has a plan which says start 5 SIPs - all of them in equity funds, and allocate your entire savings to mutual funds. Why wouldn't a retail saver be a little hesitant to jump into such a solution?

We need to understand that our first task is to get clients comfortable with us, then gradually with mutual funds, and only after they have experienced a relationship with us and mutual funds as products, we should venture into discussions on their goals and financial plans for their goals. Going headlong into financial planning with an average retail saver could well be putting cart before horse.

5. Are we expecting too much from our clients?

As a corollary to the previous point, lets also keep in mind that at the end of preparing a plan for a client, we are not only expecting him to sign up for 5 SIPs for 5 goals, but also expect him to take a term plan to cover life risk, take up a health cover and perhaps also property and householders insurance policies. Stop and think from a client's perspective : how much are we expecting him to do, as a consequence of one plan? If clients get a little overawed and defer implementation, its completely understandable, from their point of view.

6. Insufficient tools to monitor implementation

Many distributors begin the financial planning process enthusiastically, but start faltering down the road as they lack sufficient tools to track and monitor. A proposition like Shubhchintak should hopefully address this gap - the point is, without comprehensive software to monitor all aspects of execution, very often a plan remains only on our computers - and does not get actioned in reality.

7. Scale challenges

If you get the right kind of clients who embrace financial planning fully and you have adequate software to assist you, then another problem crops up : that of scalability. I have met a number of seasoned financial planners who tell me that it is not possible to practically offer financial planning services to more than 100 clients per advisor. If you are the only advisor in your firm, that means your capacity is now down to 100 clients. And, if you are a retail centric player, you will have only 100 retail clients as your maximum capacity. As we all know, this scale is just not sufficient for ambitious growth focused distributors. It also means you are forsaking a huge market opportunity, for the sake of one particular type of financial intermediation. If growth is on your mind, I wonder whether this is the proposition that will fuel your growth.

So, what is a good retail solution?

Again, I must stress that I am not pointing a finger at the concept of financial planning. It is a very relevant concept, and has a lot of value. I also believe financial planning will grow rapidly in the years ahead, perhaps much faster than we have seen so far. I am only suggesting that there are many practical hurdles that come in the way of efficient implementation in the retail world, and I am wondering whether this is what will help you build scale.

So, the question is what is the proposition that addresses both the issues we discussed in the beginning : strengthening your customer proposition and building scale on the back of this proposition? To my mind, the starting point should be what is a proposition that is fully scalable in our retail context? For that, we need to first understand what a typical retail saver is all about, in our country.

Let's understand a typical aam aadmi - a retail saver

In our country, at this point of time, a retail saver - the aam aadmi, is one who has many aspirations, whose aspirations are soaring, but whose means are insufficient to meet these aspirations. As he discovers more means (through higher earnings, jumping to a better job, getting high bonuses due to great performance etc), his aspirations go to the next level. There are so many aspirations that are bottled up because they cannot be fulfilled, that whenever income increases, one of these bottled up aspirations springs to life and becomes a necessity. Our aam aadmi spends his entire life constantly trying to upgrade his lifestyle in accordance with what his means permit him to.

If we understand this basic reality, what follows as the most important value we can add in their lives is to give as much power to their savings as we possibly can - so that the means rise faster and aspirations can be achieved quicker. This means that we need to encourage every retail saver to do only two things:

1. Save wisely

We have observed that most financial plans made for typical retail savers give scary figures to clients, which they are supposed to invest, in order to meet their high aspirations. Many clients get bogged down by these high figures, which leads to total inaction.

A more sensible and practical way forward is to start the relationship, build trust and confidence and then educate clients on the impact on long term wealth by making a few sacrifices today to save up for tomorrow. Innovative methods need to be employed by us to show clients the trade off between discretionary spending today versus saving for meeting bigger aspirations. The need to save wisely and start early cannot be overemphasized.

We shouldn't start with a first question : how much is your present monthly savings? We must learn to engage clients in meaningful conversations on whether they are saving wisely or whether there is scope for saving more, without unduly compromising lifestyle. If we help clients first save wisely, half the battle is won. Only then comes the task of investing wisely.

2. Invest to create wealth

Our biggest challenge is move the needle from invest safely to invest wisely - invest to create wealth. Invest safely is a mantra that runs in our blood. Invest safely often means destroying purchasing power of our savings over the long term - but the tragedy is that so few of our retail savers even know that they are steadily eroding the purchasing power of their savings by being too safety conscious. Every investor who we are able to teach the merits of investing for wealth creation as opposed to investing for safety, is one who is well on the road to meeting many unfulfilled aspirations in his life's journey. There is an intensive effort involved for us to get clients to understand how we can help them truly create long term wealth through disciplined investing in equity funds. But, each time we make that effort and succeed, we have added huge value in the life of that client.

In this context, I have seen many planners arriving at high figures of future obligations to convince clients that only a higher rate of return can get them to their destination and therefore equity is the only option. I am not sure this is the right approach, because you are not really building conviction in equity in such clients - you are perhaps pushing an unwilling client more towards equity than he really wants to go to. We need to work more on building conviction in equity rather than presenting it as the only way out for him, whether he likes it or not.

Empower their means - rather than putting a number to their aspirations

Trust me, if you get your clients to move from a recurring deposit mentality to an equity SIP mentality, that's really all you need to do to get them to where they aspire to be. More than drawing up financial plans and monitoring them and constantly changing them as their needs keep evolving, I believe if you give them the tools to create long term wealth, you are rendering a much better service for them. As their means increase, so will their aspirations. Focus on empowering their means - not in putting a number to their aspirations. And guess what - you don't need to be a CFP to do this !

Stronger proposition and scalable too

Lets go back to where we began : distributors need a stronger customer proposition to win more clients and build sticky relationships and we need this proposition to be scalable. If our proposition is all about empowering them to aspire for more, I think we should have many Indian retail savers excited about the journey we are proposing. And, once you have got your act together on how you will present this journey to prospective clients in a balanced and responsible manner, you have a scalable client acquisition model working for you. And, lastly, if you propose this kind of an approach and get clients to buy into it fully, you can reach out to many more clients, you can serve many more clients and realize your full potential.

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