What is the real purpose of a Financial Plan?

What is the objective behind creating a  financial plan? Who is it meant for?  Do young earners or DIY investors need the services of a fee-only financial planner to create a professional plan? In this guest post, Vikram Krishnamoorthy,  SEBI registered fee-only financial planner tackles these questions and discusses the real purpose of creating a financial plan and common misconceptions associated with it.

Vikram is a member of fee-only India (FOI)* and part of the freefincal fee-only planner list. He is an MBA in Finance and a Post Graduate in Financial Planning from Canada. He provides fee-only financial planning and investment advisory services for individuals and families from all over India and NRIs. His website is: insightful.in

Who is a fee-only financial planner? (this is the freefincal and fee-only India definition)

  • Someone who does not get any commissions from anyone. Someone who works only for you, the client.
  • Someone who does not shift commissions to a relative or friend (there are huge networks of financial planner which practice and advise such tactics – stay clear of them)
  • A person who is registered with SEBI as an individual  investment advisor (other registration types such as corporate or LLC should be avoided by investors)
  • A person who preferably charges a flat fee from investors and not a fee that is a percentage of investor assets.

Please note: Fee-only advisory does not depend on the location of the planner. All members of fee-only India work with clients from all parts of the world.

* Fee-only India, a coming-together of SEBI registered fee-only financial planners. We met on Sep 24th 2017 at Mumbai. More details with a photo of all planners here: Fee-only India: launch of a movement to serve investors and advisors

Freefincal is committed to promoting fee-only advisory and has featured guest posts from such planners in the past. More will follow. Please note that neither I nor Ashal (FB group: Asan Ideas For Wealth) receive any kind of monetary compensation for promoting fee-only advisory.

Now over to Vikram.

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To begin with, I would like to thank dear Pattu for inviting me to write this post. It is an honour to contribute my bit to this blog.

Practicing as a financial planner and helping many clients with their advisory needs, I have come to understand and hear from them, the real value of having a clear, structured financial plan.

To start with, most people assume that it is all about money and investments, and confuse it with an ‘investment plan’. But later they realize that it is more about life. A good plan helps you understand the relationship between your money and your life.We sometimes get lost in the numbers game and forget that investments and returns mean nothing on their own, if it is not going to add value to what you want to achieve in your life.

The real purpose of a financial plan

Financial freedom:

Financial freedom does not necessarily depend on the amount of wealth or income one has, but in how you structure your finances.

There are two things that drive us to get up every morning to go to work or do a business.

Fear – that we will not have money for our basic needs and goals.

Desire – to have a better car, house, vacation, etc.

If you are always going to work for your fears, you may not be financially free, irrespective of how much wealth you have. You achieve financial freedom when you no longer work for your fears and you have a passive income to take care of your basic needs. You can work for as long as you wish to, but that should be only for your desires.

Financial freedom is achieved when you have the OPTION to work rather than being COMPELLED to work. A good plan helps you focus your resources towards achieving this faster.

Investing in the best mutual funds or getting the best return does not necessarily equate to financial freedom. Some people have enough wealth to achieve financial freedom but don’t realize it. Some others don’t have enough but think they do. Both are equally bad. In either case, a plan gives you clarity and a good understanding of where exactly you stand and how to start moving in the right direction.

Meaningful wealth:

There are people who have a lot of wealth, but in the form of empty lands and don’t have money to send their children to college next year. What good is that if you cannot use it for the things that matter the most?

Blindly focusing on wealth creation does not guarantee a financially free life. Yes, you may achieve your goal of creating more wealth, but what is its purpose? There is no point in being the richest person in the graveyard, having lived until the last day with financial fears.

Meaningful wealth is one that works for you, not something that just looks good on your net worth statement. Financial planning is about putting your hard-earned wealth to optimal use so that you don’t work for money all your life, rather you make money work for you.

Common misconceptions about Financial Planning

Financial Planning is only for the wealthy. I will plan once I have a lot of money.

In fact, it is the other way around. In order to be financially free and create meaningful wealth, financial planning is crucial. You need a roadmap before you start a journey, to reach the destination in an optimal way. You will get clarity as to what needs to be done to achieve your goals.

I can’t identify all my goals now, so I will start planning later.

This is common, especially among youngsters. You may not be able to identify all your future goals immediately, but that is not a reason to not start moving in the right direction. Most people are not able to foresee every detail about their future goals irrespective of their age. The most important thing is to get started with whatever you can think of, and understand that every small decision you make today will impact your long-term financial future.

Financial planning is only about where to invest and how to get the best returns.

Investments are only a small part of financial planning.It is more about helping you understand the relationship between your money and your life and what steps you need to take to achieve your life’s goals. Money and investments only act as tools to help you. It is pointless to chase returns and focus on multiplying wealth without channelling it towards achieving financial freedom.

Conclusion

Financial Planning is about getting clarity, having peace of mind and knowing where you stand exactly, rather than being confused about your future. It helps you understand the cause and effect of each of your financial decisions, big or small, helping you make fully informed decisions. It puts your resources to optimal use and focuses everything towards your goals and your financial freedom.

I work with many DIY investors who have invested on their own, and a lot of times quite well. But sometimes they need validation, better structure, and a third person’s perspective. They work with a financial planner not to learn which mutual fund is better than another, rather ensure that they have considered everything, and to have confidence that they have validated it by a professional.

So go ahead, create your own financial plan with all the wonderful DIY tools available on Freefincal. Reach out to a fee-only financial planner if you are not able to do it yourself or want to validate what you already have.

To reach out to Vikram, you can write to vikram [at] insightful.in or via his website: insightful.in

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6 thoughts on “What is the real purpose of a Financial Plan?

  1. Though I am a fee-only RIA and charge a flat fee from clients, I have serious doubts over the long term viability of this model.
    Good luck to you (Vikram), Melvin, Pattu and the Fee-only India members. Wish that you achieve the desired objective.
    Perhaps, one day, I will request Pattu to add my name to the list.

    1. I believe at least few people from fee-only India have already achieved their desired objective or pretty close to it, thanks to the support of freefincal readers and aifw members. The rest are steadfast in their resolve. You know very well about the list of fee-only planners I have been maintaining for the last 3Y. But I am glad that you did not want to be added to that list earlier as you do not have conviction in your own business model.

  2. This is a very insightful article and I am surprised by the lack of comments. I really wish this article had been written a few decades back when I would have benefited more. Vikram: please do keep writing.

  3. How do I validate is if an advisor is registered with SEBI? Is there any portal where I can check?
    Why should be he registered as individual?

    1. Good question! Most SEBI registrants will display their registration number. You can use this or their name to check in the directory that SEBI maintains.
      Why should be he registered as an individual? Because such persons are not legally allowed to get commissions directly. They may still do so indirectly, so one should be wary of that as well.

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