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Why people are cynical when it comes to financial planning?

Dec 18 2012, 12:48   |   By Moneycontrol.com

Ronak Morjaria, Research Analyst, Apnapaisa.com

Nowadays people have started seeking professional advice to have road map of their financial future. They prefer to pay professional fee for the preparation of their financial plan to reach their financial goals in future. At the start of the exercise of financial planning, clients provide all necessary details required for preparing the financial plan and do not hesitate much while disclosing the facts. When the plan is presented to them, they are satisfied with the plan prepared and presented to them. But we as financial planners have noticed that they are reluctant to implement the recommendations of the financial plan. Sometimes they are just not ready for that.

So what stops them from implementation?

Emotional attachment:

There are several instances and situations where some clients have been recommended to sell their second house / property to repay existing home loan of their new house due to shortfall of funds for other major financial goal. The clients are not ready to sell that second house due to emotional attachment if it is their first house, which is well understood,  but sometimes we need to keep our emotions aside and think practically that it is better to sell the second home and pre-repay the existing home loan; and use the savings made in EMI for building a better corpus for to meet some other major financial goal.

Loss aversion:

Clients tend to be more risk averse when faced with potential losses and less risk averse when faced with potential gains. They dislike losses more than they like gains of equal amount. For example, an investor likes a gain of Rs.50,000 in a certain investment, but dislikes a loss of Rs.50,000 more than the gain. So, if recommended a loss making investment to sell, the client is loss averse and is unwilling to sell the investment and bear the loss. They are willing to realize gains but are unwilling to realize loss.

The same applies when recommended to surrender a traditional or unit-linked insurance policy. They are not ready to surrender policies, whose surrender value is less than the total premiums paid till date. They continue paying premiums, and do not realize that the same premium invested in some other instrument will earn more returns than the their loss incurring insurance policy.

Speculation

Clients speculate interest rates changes and equity market movement; so much so that they try to time the market. When they are recommended to sell equity shares or equity mutual funds, they expect the market to be bullish and hold on the securities and wait for the market to rise and earn higher gains. Few clients also stop their SIPs when the equity markets are falling as they find their returns in negative in their mutual fund portfolio statement. Even after educating and explaining them that it is the best time to accumulate units when markets are falling and hence they should continue with their SIPs.

Such kind of investor behavior and psychology do not allow them to implement the recommendations. Clients should not think emotionally all the time while taking financial decisions and should consider the recommendations of the financial planner, which are given in for their (clients) benefit.

ApnaPaisa is India's leading Online market place for financial products such as loans, credit cards and insurance plans. Author can be reached at www.facebook.com/apnapaisa.


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