In this article, SEBI-registered fee-only financial planner Swapnil Kendhe explains why he believes good financial planning advice does not scale.
About the author: Swapnil is a SEBI Registered Investment Advisor and part of my fee-only financial planners’ list. You can learn more about him and his service via his website, Vivektaru. In the recently conducted survey of readers working with fee-only advisers, Swapnil has received excellent feedback from clients: Are clients happy with fee-only financial advisors: Survey Results. His story: Becoming a competent & capable financial advisor: My journey so far.
As a regular contributor here, he is a familiar name to regular readers. His approach to risk and returns are similar to mine, and I love the fact that he continually pushes himself to become better, as you see from his articles:
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Before we go further, let us first make it clear that we are talking about good quality financial planning advice in this article, not the robo++ model of financial planning. If collecting client data and preparing a financial plan document is financial planning, one can set up a financial plan production line; put clients’ data on one side and take out financial plan documents on the other. There is no limit to how much volume a financial planner can handle if this is what financial planning means. A planner can keep adding new employees to handle more and more volume of business.
There is more to financial planning than collecting data from clients and sending them financial plan documents. Let us discuss the different steps involved in the financial planning process and the time required for them when done right. I won’t discuss things financial planners can delegate or automate.
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Introductory calls
For financial planning engagement to work well, the financial planner must take introductory calls with prospective clients seriously. Every financial planner has a style and personality of his own and no matter how good a job he does, he cannot make engagement work with all types of prospective clients.
When a prospective client contacts a financial planner, he doesn’t have a clear idea of what to expect from the financial planning engagement. It is the introductory call where the planner must provide a brief about the work he does and the process he follows, and set right expectations from the engagement. He shouldn’t enter an engagement where the prospective client’s expectations don’t match his style of advice.
It is also the job of the financial planner to check if he can add more value to the prospective client than the fee he charges. There is no point entering an engagement where the client won’t significantly gain from the engagement or where a part of the advice could fall outside the planner’s circle of competence; unless revenue/number of clients is all planner cares to optimize and takes pride in.
An introductory call when done right takes at least 20 minutes. But the planner must set aside 1 hour because at times it takes longer. An introductory call also means one less financial planning session that the planner could have otherwise scheduled.
Established financial planners get requests for introductory calls almost daily. There comes a time when the planner has more backlog of work than what he can complete in a month. At this stage he must say no to new introductory calls. If he doesn’t, it starts affecting the quality of work he can do as a financial planner. He won’t have enough time and mental stamina to handle introductory calls well, either.
If the planner doesn’t even do the introductory calls with prospective clients, let alone the financial planning, he is using his brand to attract business, which is then handled by his employees. Such a planner has clearly compromised the quality of advice to handle a higher volume of business.
Data collection
A financial planner can have an assistant collect data from the client, get it ready in the form he wants, and proceed to prepare the financial plan. But even after having all the required data, the planner must discuss it with the client to get a better understanding of the client’s life situation, financial situation, financial goals and aspirations and see if the data has failed to capture important details. A client’s parents may not have adequate assets for their own retirement or a sibling could be financially dependent on him or her, or the financial responsibility of some close relative may come in the future. The client or his spouse could be thinking of taking a break from the job. There could be health issues that may affect future cash flows. Potential inheritance could change whole financial planning calculations.
Most investors have little idea about their affordability for goals like car purchase, house purchase, higher education and marriage of their kids. Many times the planner has to bring down goal amounts the client puts in the datasheet. You don’t want your clients to spend more on less priority goals and have their retirement underfinanced.
The risk tolerance questionnaire does not reveal the real risk tolerance of the client. It is only when the planner talks with his client he gets some insights about his mental makeup and the ability to handle equity volatility. The planner cannot recommend aggressive equity allocation just because the client is young, or ask a client to tone down his equity allocation just because he is closer to retirement or is already retired. There are many factors that influence asset allocation decisions that a datasheet doesn’t capture.
A financial planner should ideally ask clients about investing and personal finance books they have read, blogs and youtubers they are following, and try to get an idea about clients’ understanding of money management. A planner should know his client as well as he can.
All this takes at least 40 minutes of discussion with the client. The planner also needs to do his own homework before he sits down for data discussion with the client. Otherwise, he won’t have the right questions in mind to ask the client and risks missing an important detail.
Improving client’s understanding of money management
The problem with financial advice is that it doesn’t stick. The financial industry constantly bombards investors with all kinds of smart-sounding strategies and fancy products. There is no way clients can stick to a planner’s recommendations unless they are financially literate and understand the rationale and background behind his advice.
Therefore, before giving recommendations, there is an important step in the financial planning exercise, which is educating clients about how they should manage their money. There are a few important concepts every investor must understand if he wants to manage his money well, whether he works with or without an adviser. It is a financial planner’s job to discuss these concepts with clients and construct an investment framework for them to follow. This requires an investment of time and effort on part of the financial planner.
This reduces clients’ dependence on the financial planner. They may not need to renew the engagement every year. An established financial planner has a good enough flow of new business to worry about clients not renewing their engagement every year. An insecure or less ethical planner would rather have clients dependent on him than try to make them capable DIY investors.
Realignment of the existing portfolio and Financial Planning
An investor who wants to manage his money well must construct an investment philosophy and a set of rules to follow. If he doesn’t, he would always be confused, and the number of products would keep on increasing in his portfolio. He would not be able to experience the peace of mind and a sense of control good money management gives.
Therefore, an important part of financial planning is constructing an investment philosophy. A client should know what his core equity portfolio is going to be, which products he is going to use on the debt side, and what asset allocation he is going to target. Everything outside can be slowly brought to this core portfolio.
Most clients come to financial planners with badly constructed stock portfolios and a long list of mutual fund schemes and insurance policies. The planner cannot simply ask clients to redeem money from their existing products and invest in his recommended products. Realignment of the portfolio attracts tax liability, exit loads, and surrender charges. The planner must check and see how much realignment of the portfolio makes mathematical sense in the current financial year. This requires time and effort. A planner who is in a hurry to complete financial plans and reviews would not help clients clean up their portfolios.
A financial planner can automate the financial plan preparation, but automation comes with a cost. When you manually construct a plan, you gain a better understanding, can explore different options, and learn a few things in the process which make you a better planner. The financial planning recommendations also have to be discussed with the client and make adjustments where required.
There is a better way of doing financial planning. Instead of sitting down in the office, making arbitrary decisions for the client, putting them in a pdf document, and mailing it; the planner can involve the client in constructing the action plan. Let every action point be an agreed-upon action point. The client would have far more confidence in the action plan and stay disciplined longer if this is done. I prefer this approach.
How good a job a financial planner does in the financial planning and review session depends on how well he does his homework before the session. Better the preparation, better the performance. This is akin to preparing for an exam. No matter how good your knowledge of the subject is, if you don’t prepare well before the exam, you won’t feel as confident and that would affect your performance.
The planner should ensure that he doesn’t over-schedule work on the day he has financial planning or review sessions. He needs time to think and prepare well. The increasing volume of business shrinks the time planner gets between two client sessions. The planner’s ability to handle a higher volume of business increases as he gets more and more fluent in his work. He can also engineer some efficiency in his process. But he can reduce the time spent on individual engagement by only as much.
After a certain volume of business, to increase the volume, a financial planner must compromise the quality of advice and the quality of interaction with clients. He can add employees to handle the higher volume, but clients won’t get as good advice. Financial planning is a skill planner gains over the years. His employees cannot do as good a job at financial planning as he himself does. Only rarely can a planner find a paraplanner as capable as he is. But there is also a limit to how much volume this paraplanner can handle.
Ongoing support for need-based consultation
A financial planner’s job doesn’t end after he delivers the financial planning recommendations. He also needs to be available for the client throughout the duration of the engagement for the need-based consultation. Many clients keep contacting financial planners between annual reviews or after the financial planning action plan is arrived at. The planner doesn’t carry data of all his clients in his brain all the time. It takes time to check a client’s data and get a hang of the story before he can reply to the client. At times, the planner has to do some reading and research before he can reply to clients’ emails and messages. All this takes time.
Final thoughts
A financial planner can easily know the volume of business he can handle in a year from the time it takes for him to work on an average new plan, average renewal case, and the time he spends on introductory calls. This optimum volume could be different for different planners, but the fact remains that there is a limit on how much business financial planners can handle without compromising the quality of advice and service. A financial planner can either optimize revenue or the quality of advice and service; not both.
When the planner does a mediocre job by his own standards, clients won’t know, but the planner would certainly know. When a higher volume of business starts affecting the quality of interaction with clients, it is time for the planner to put a break on accepting new business until the backlog of work is under control.
But “a useful trade is a mine of gold”. A well-established and well-known financial planner is always in demand. It is difficult for him to put a limit on the volume of business he accepts; because the higher the volume, the more his income; the more his income, the more income he wants to earn. It is easy for a financial planner to go past the stage where he accepts more business than he can handle without deteriorating the quality of advice and service.
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