A camel is a horse designed by a committee

My father-in-law often tells me—if you have one watch, you know the time. If you have two watches, you don’t know the time.  And that is exactly what I told a prospective client recently when he asked me if he could take my recommendation as well as those of other advisers on TV channels and then decide which recommendation to go with. I politely refused his proposal.

A committee of “experts” telling you what to do with your money is not financial advice. It’s financial compromise. You are compromising the advice of a specialist whose aim is to meet your life’s specific goals with someone who knows nothing about your financial circumstance, and yet recommends a one-size-fits-all product.

People should realize that a financial planner’s job is not limited to doling out product recommendations or picking investments that deliver highest returns. That is the job of a salesperson. Neither is an adviser’s job about creating a portfolio that beats benchmark returns. That is the job of a portfolio manager or a fund manager.

The main objective in a goal-based plan is to assign a value to the goal, and then create a portfolio that attains that value in the given time frame. Unlike relative returns where a portfolio manager tries to beat a benchmark, a financial planner aims for absolute returns to meet a goal.

A financial planner looks into a person’s aspirations, risk appetite, current assets and future goals and creates a road map to get him to his goals in a predictable and consistent manner. She then chooses instruments to meet those goals, and hence those instruments become the means to an end and not the end itself.

The operative words here are “predictable” and “consistent”. To meet goals, a planner determines the right asset allocation and creates a portfolio which will meet both short- and long-term goals in a consistent manner. Asset allocation is critical. Too much of any one asset can compromise either the safety or the returns in the portfolio and hence the right balance must always be maintained. Towards this purpose, she may assign predictable but possible conservative returns on different assets. She also constantly rebalances the portfolio to stay within the required asset allocation.

Let’s say you are planning to fund your children’s education, the cost of which is Rs50 lakh today. If the goal were 12 years away, the same education will cost about Rs1.6 crore in 2030 (assuming education inflation at 10%). The planner’s goal will then be to build close to Rs1.6 crore in 10 years, assuming a 10% annualized return on the portfolio. This may be done by investing in equity for the first 10 years and then switching to safer investments in the last two years to avoid market volatilities. It’s important to note here that the financial planner is trying to secure a goal, not beat the market.

Financial planning is about managing your money in line with what is best for you even if it means investing in a product that generates lower returns, but which is in line with your required asset allocation and risk appetite.

Similarly, a planner may invest a lump sum amount through systematic transfer plans (STPs) instead of investing it upfront in the markets. She does this to ensure rupee cost averaging. It could well be that the markets move up steadily during the STP period, in which case you would have been better off investing in a lump sum. However, if the markets had fallen during that time, you would have been sitting on a loss. You would then have made more money in the long run through the STP route than without. It is the planner’s job to exercise caution and do what is right for the investor.

A planner’s responsibility is to handhold you through every money decision—be it about investing, taking career breaks, retiring early, increasing your monthly budget, selling your employee stock options, or reducing your liabilities.

Most importantly, an adviser’s job is not only about giving you the right money advice, but also about ensuring that you act on that advice. You are probably intelligent enough to do the research and make your own money decisions. But will you have the time to do this consistently month on month? Will you keep your emotions in check when the markets are volatile? Will you stand firm against the constant nagging of a relative forcing you to buy yet another endowment policy? If not, then you need to enlist the services of a financial planner.

In personal finance, remember that time is money. Don’t be caught in a situation where you don’t know the time, or worse still, where you have run out of time.

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