Why Free Financial Advice is Not Really Free
Mr. Jaideep Lunial is a practising Certified Financial Planner (CFPCM) and is the Director of Wealth Gyan, Chandigarh.
Jaideep shares his thoughts on the need for a Financial Planner and much more…. Read on!
Why Should I pay for a Financial Planner?
Medicine and Financial Planning are similar. People visit a qualified doctor for a prescription to buy medicine to heal their ailments. The doctor tells them which medicine, what quantity and in what frequency to take it. There are great risks in taking medicine without knowing what it is for and the same applies in personal finance. People who buy financial products without knowing or understanding what they are getting into, are taking great risks with not just their savings but also their future and their life goals.
Can I get good financial advice from people who sell financial products in banks and insurance companies?
While it is very much possible to get good advice from such people, you also need to realize that often they don’t look at your whole financial picture and do not necessarily have your best interests in mind. They are more concerned with how much commission is offered by the products they are selling.
In December 2007, I was offered a mutual fund SIP account by a bank relationship manager when I wanted a 12 month Recurring Deposit scheme so that I could use it to pay my children’s school fees.
Had I taken the Mutual Fund SIP at that time, I would have found myself with just half the needed amount at the end of the year for the school fees. A mutual fund SIP is great for a long term investment but was not suitable for what I needed at that time. The person did not know my whole financial picture and did not even bother to ask. His main concern was the best sale for him, not for me.
I have also seen insurance companies selling ULIPs to retired persons who do not even require life insurance. They do so because the agent earns a commission as high as 50% of the first year’s premium. ULIP is an excellent product but must be sold to the right person. It is really insurance but is often mistakenly (or intentionally) sold as an investment. A mutual fund, which may be the best product for someone, by contrast, offers a commission of 2%. You can see how the seller’s view is affected if he doesn’t have an ethical commitment to the customer.
How are financial planners different?
We have a code of ethics to work for the client, and not for a mutual fund company or insurance company. We have a mission to educate so that people understand what they are buying. We look at the whole picture of someone’s financial situation to understand their goals, their income, their expenses and what they need at different moments of their life. We are bound by the code of ethics and only give written advice so that there is accountability for the advice given. Our aim is to save people’s money by getting them the financial products that they need to meet their goal.
Isn’t it cheaper for me to take the free advice that I get?
You can get free advice but it might cost more in the long term. There is no free lunch. If you take the wrong products that are sold to you for the wrong reasons, it will cost you more money in the long term than if you consult a financial planner. You cannot change the laws of nature. You either close your eyes and buy a product with a hidden price tag, eg. something not appropriate for you, or you open your eyes and pay the price for transparency.
Doesn’t the government regulate personal finance and protect me?
There are many regulators, such as for pensions, insurance, stock market, banking, mutual funds—these are working independently and without collaboration or interdependency. However, there are many gaps in them. Many financial products escape regulation completely, such as chit funds. Transparency laws are not well developed and hence you may not know much you are paying in commission and other fees.
How does a CFPCM differ?
CFPs, or Certified Financial Planners, have undergone a rigorous academic and practical training curriculum on all aspects of personal finance such as:
The CFPCM then must pass an intensive exam which has a pass rate of less than 50%. Finally they must accumulate 3 years of experience in the finance field before calling themselves a CFPCM. They are bound by frequent training on new products/laws/developments and a code of ethics which requires them to act in the customer’s interests.
In Summary, can you tell me why I should go with a financial planner, preferably a CFPCM?
Over the long term, you will spend less on the planner and earn more on your investments to achieve your goals.
You will work with someone adhering to a code of ethics to represent YOUR interests.
You gain all the knowledge, experience and training of a qualified finance professional
You would work with someone who has your complete financial picture in mind when considering each move.
Your risk as compared to return should be lower when you are working with products tailored to your needs. You can also manage your risk in the way in which you are comfortable. If you wish to take more risk in your investments and understand the possible consequences, your planner will help you. Less risk is also possible, depending on your risk appetite. Finally, a planner will help you with all of your insurance needs so that you can manage the risks of health, life, property and liability.
We hope this article was informative.
And as always, for all your queries and financial planning services, we are just a click away at firstname.lastname@example.org