Financial Planning
The right way to begin your financial planning relationship


Saturday School begins a new series of educational articles on a theme that is critical for distributors and advisors to imbibe and practice: financial planning. Financial planning goes far beyond goal based SIP sales, which has become a popular and welcome mode of retail client engagement. In this series of articles, we will explore financial planning - not from a bookish perspective, but from a practitioner's perspective.

The first set of articles delve into the gospel of financial planners - the universally accepted six stage process that defines what financial planning is all about. In this piece, we take a closer look at the first stage of these six stages and examine why it is so important to being on the right note.

The first thing you learn in any text book on financial planning is the universally accepted six-step process for financial planning. It is this six step process that differentiates financial planning from investment advisory services.


The first step of the six step process is "Establish and define relationship with the client." To any distributor or advisor, the first step seems obvious but it isn't necessarily so. Why? There are two key issues that you need to resolve in this all important first step, to begin your relationship on the right note:

  1. Clarify what financial planning is not

  2. Set realistic expectations

Clarify what financial planning is not

Financial planning is still evolving in our country. As with any new profession, it is therefore liable to fall prey to many misconceptions. It is convenient for investors to try and bracket it into a known and familiar service. Here are some of the aspects you must clarify to prospects about what financial planning is and is not.

1. Financial planning is not an annual tax saving exercise

Many investors consider investments only as an annual tax saving exercise. You need to help investors understand that tax planning is only a small component of financial planning. Financial planning is all about meeting life goals through management of finances. It takes into account the person's present situation, their future goals and what they might need in the future. It is a life goal setting strategy from a financial perspective. In contrast, an investment or tax savings scheme is just one step in the financial plan that one can do to meet their life goals.

2. Financial planning is not just investment advice

In order to establish the right relationship with the client, a financial planner should explain to the client the exact purpose of financial planning, the role of financial planner and his/her professional competencies. It is important the client does not think of the financial planner merely as an investment advisor. When an investor looks at an investment advisor, his expectations are focused on returns on an annual basis. A financial planner does not hold out any promise about maximising annual returns from an investment portfolio. He focuses on the journey required to enable the client to meet his life goals.

A potential example that can be used especially for clients who are employed in large organisations, is the difference between an annual performance ratings review and a mentoring program at the workplace. Every year, employees are given a performance review and a rating. The goal is to improve their work quality in the immediate future and to reward them for work well done. It has a shorter-time focus whereas a mentoring program often involves a senior colleague looking at the individual's track record and asking where they would like to be in their career five to ten years from now and mentoring the individual on how to reach those goals within the company. Financial planning is mentoring for an individual's financial goals for their life while investment advice is more like an annual performance review with its immediate present focus.

3. Financial planning is not just retirement planning

Many young earners tend to think of financial planning as retirement planning and therefore relevant only to middle aged earners. Many young earners also believe that planning is needed only once you have substantial assets to plan for - which means that financial planning may be relevant for them only after a few years.

As a planner, you need to help such investors to appreciate that as long as they have goals, those need to be planned for. They may be more focused right now on buying a car, buying a house and so on - which in their mind does not qualify as long term financial investments in stocks and bonds. However, these are goals, and these goals need to be planned for and saved for, to enable them to be fulfilled. Goals evolve with life stages. At different times, different goals become more important - but it does not mean that other goals are not relevant. So, while buying a home may be the most proximate goal for a young family, it does not mean that they don't need to even think about retirement. At a later stage, planning for children's education becomes a priority - but that again does not mean that retirement is not relevant.

You need to explain to your clients that your job is to help them articulate all their life goals as they see them now, help them prioritize them so that available resources can be gainfully directed to the right goals and work with them through their journey of ever evolving life goals and plans to meet these goals.

Set realistic expectations

Alongside explaining what financial planning is and is not, you also need to help clients have realistic notions on what they can expect from you and what they should not. Setting expectations upfront is arguably the most important stepping stone to building a lasting client relationship. Its better to disagree upfront and part ways rather than avoid these tough conversations initially and then have them blow up in your face later, when the gulf between the expectations of you and your clients becomes painfully clear to both.

There are different advisors with different models. Your job is to clarify what your model is and where your competencies lie. There are advisors who pride themselves in their ability to think independently on markets and take tactical asset allocation and sectoral calls to add value in client portfolios. Most financial planners don't see that as their core objective, as they believe in long term strategic asset allocation aligned with well articulated life goals and believe that their core value is in ensuring that clients stick to plans through turbulent markets. Helping clients prevent costly blunders is a core proposition that most planners offer. It is important for you to clarify to your clients what you offer and what you don't.

When it comes to fund selection, it is important again to clarify how you evaluate funds and what is the outcome you expect from your chosen funds. If your selection focuses on picking funds which you believe can deliver healthy alpha over multiple market cycles while your client is looking at evaluating your fund selection against annual league tables, its best that this conversation be had upfront.

To conclude

The much cliched saying that a building is only as strong as its foundations is equally true for every financial planning relationship you commence with clients. Ensuring that the foundation is right is your responsibility - not your client's. Pay enough attention to laying the foundation - don't take short cuts, don't avoid uncomfortable conversations. Spell out what you do and what you don't - and then leave it to your client to decide whether this is what he wants or not.

When you make a transition from being a distributor to a financial planner, its important for you to internalize that you are now holding out to be a specialist. You don't find a heart surgeon taking on a kidney transplant case, you don't find a property lawyer plunging into a criminal murder case. Clients have come to understand the various specializations over time in these professions. It is for you to help them understand in the financial world, what your specialization is, what you offer in your field of speciality, and what you don't.

Share your thoughts and perspectives

Do you have any observations or insights or perspectives to share on this issue? Did this help you understand the topic better? Do you disagree with some of the observations? Please post your comments in the box below ..... it's YOUR forum !

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