MANY of you want all the comforts in life and for all these you are often ready to shell out a fancy price as well. But you are not this passionate when it comes to managing your personal finances.
Ask yourself whether you have paid a respectable sum to a financial planner to draw a financial plan and secure your future? I'm quite sure the answer is no. You may say, "I get all such financial planning services free on various website and through financial advisors. Why should I pay?" Well, I beg to differ, as there are no free lunches. Let us consider the case of a 45 year-old Atul with retirement age of 60 years and life expectancy of 80 years having a current expense of Rs 3,00,000 per annum. His financial goals are retirement and insurance planning. He has been approached by two companies for financial planning. The first company ABC gives free financial planning services but has `compulsory product buying' clause attached. The second company XYZ charges Rs 20,000 as financial planning fees and there is no compulsory product buying clause.
Based on the data provided by him total corpus required at retirement is Rs 1,51,75,840; the monthly savings required to achieve that amount is Rs 30,076 and the insurance requirement at retirement is Rs 90,03,775 assuming that inflation is at 7 per cent. Pre-retire tion is at 7 per cent. Pre-retirement returns are at 12 per cent and postretirement returns are at 8 per cent.
In order to accumulate his retirement corpus he requires investing approximately Rs 30,000 per month till his retirement at 12 per cent per annum.
Now based on his requirement the two different companies have recommended him following products.
Recommendations of ABC: Invest Rs 2,000 per month in a Ulip for your retirement planning which will give you approximately Rs 10,00,000 at retirement assuming 12 per cent pa return on investment.
Buy an endowment plan for next 15 years by paying Rs 6,50,000 pa for an insurance cover of Rs 90,00,000 to fulfill your insurance planning requirement. It will also give you maturity amount of Rs 1.41 crore.
Recommendations of XYZ: Invest Rs 30,000 pm in a large cap mutual fund for your retirement planning which will fulfil your retirement requirement of Rs 1.51 crore assuming 12 per pa return on investment.
Buy a term plan for next 15 years by paying Rs 59,000 pa for an insurance cover of Rs 90,00,000 to fulfill your insurance planning requirement.
Comparison: Now, if we evaluate the earnings of both the companies, even though company ABC is not at all charging Atul for making a financial plan, then too it is able to generate Rs 1,64,420 by way of commissions whereas, company XYZ's total earnings even after charging fees for a financial plan works out to be Rs 36,550 only, assuming that he buys the recommended products from company XYZ.
While XYZ provided recommendations on the basis of client's requirement, company ABC provided recommendation on the basis of high commissions products.
Total earning of company XYZ is less than company ABC by Rs 1,27,870. According to recommendations by company XYZ, Atul is investing Rs 2,55,000 pa less compared to recommendations by company ABC.
Paying fees for financial planning will mean recommendations are on the basis of his requirement and not on the basis of company's requirement.
Any company or any practicing financial planner who is making a financial plan for you will charge you in some or the other way for making a financial plan.
A paid advice is a more responsible, professional and an unbiased one, but the final decision rests with you to decide whether you want to make a financial plan for free or want to pay nominal fees for making it.
