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How investors can ensure their financial plans remain fail-safe

Sometimes, investors find providing for their goals too daunting and decide to leave it to their fate

August 31, 2020 / 12:07 PM IST

One year! That’s the time Naman, 41, took to implement his financial plan. Not because he didn’t have the savings but because he was never sure it will actually work. Naman is not alone. Many investors get financial plans made, but do not follow through. There are many reasons for this phenomenon.

Daunting investment requirements

A financial plan essentially details how much needs to be invested for various financial goals. In most cases, there is a big difference between the amount to be invested versus the sum available. This is where investors tend to falter, because they are required to figure out where to reduce, eliminate or postpone expenses or goals. Not the easiest of things to do considering the life of instant gratification that we lead. Nobody wants to limit his/her life.

Sometimes, investors find providing for the goals too daunting and decide to leave it to their fate or God! Or, they believe they will be able to catch up with investing for their goals as their incomes rise in the future. However, they forget that rising incomes also lead to rising expenses.

Naman’s main concern was not being able to understand fully what needs to be done to follow through on the plan. The ever-changing market situation, coupled with little time due to professional commitments, led to procrastination. Despite the financial planner providing Naman with a detailed plan on how funds were to be allocated, Naman didn’t do anything as he wasn’t sure of investing across asset classes. Naman’s investments before meeting the financial planner were primarily in fixed deposits, endowment plans, with small amounts in mutual funds and stocks, which had been picked up randomly. Obviously, when the financial planner suggested a complete overhaul(and rightly so), Naman was sceptical. Volatile markets added to the conundrum.

As a financial advisor, I have seen that investors want a fair degree of certainty in returns too. With financial plans, there are assumptions on returns and the risk of things not working as per plan weighs on the investor’s mind. This is unfounded since there is no surety of anything in life, but investors expect the same where their investments are  concerned.

The long wait for returns and goals to materialise can test the best investor’s patience.

How financial planners can help

While financial planners help in writing plans, they can play a key role in reducing the implementation gap in the following ways:

-Make easy-to-understand plans. I have seen financial plans that run to 40 pages with an incredible number of graphs, which clients don’t understand. I make a one-page plan, with goals and suggested plans, as it makes for easy reading. Clients also realise the actions required to be taken quicker.

-As advisors, we sometimes fail to understand that the anchoring bias runs very deep and whatever data one shows, investors’ mindset does not allow them to believe in the data. In Naman’s case, even though the planner felt exasperated at times, she engaged regularly with him by sending interesting articles and information on the suggested investments. There is only so much an advisor can do and if the client still does not implement well, the planner can present him/her with an alternative scenario using products the investor is comfortable with.

Investors can do the following to bridge the gap between planning and implementation:

-Work with a financial planner who understands your concerns and attitude to money and is willing to handhold you for a while. A planner who shares regular updates on the progress made and proactively advises when markets are headed downwards is preferred.

-To make the plan less daunting, follow a step-by-step approach. Have the comprehensive plan done but focus on those goals, which are most important. By breaking down the financial plan, you might find it easier to work towards implementing your plan.

-Have an open mindset on investment products. Traditional products will not help in reaching long-term financial goals since they do not beat inflation and are not tax efficient.

With Naman, a combination of regular updates and informative reading material along with breaking down of the plan into smaller versions, with limited goals,  helped in getting him to implement his financial plan.

Knowledge is not power. The implementation of knowledge is power.

(The writer is a Financial Educator, Money Mentor and Founder of Finsafe India)
first published: Aug 31, 2020 09:25 am