5 Reasons Why You Should Work with a Financial Planner for Effective Financial Planning
Do you wonder whether you need to make a financial plan with a financial planner to achieve your life goals? Some individuals believe that saving regularly through bank recurring deposits or investing in mutual funds through SIPs qualifies as financial planning. However, such ad hoc allocation of savings and investments is insufficient to accomplish your financial goals and may result in inefficient utilisation of financial resources. If you want to become wealthy or achieve various life goals such as purchasing a dream home, going on a foreign vacation, or funding a child’s higher education, solely relying on salary or business income may not be enough. This is where financial planning becomes valuable. With a financial plan, you can create a roadmap to fulfil all your financial goals, including building a contingency fund for unexpected expenses. This article elucidates why financial planning is necessary and why you should work with a financial planner for effective financial planning.
What is Financial Planning & Why it is Necessary?
Financial planning is a process that assesses your current and future financial situation, enabling you to systematically achieve all of your goals. This process includes creating a roadmap to cover all of your expenses; both anticipated and unforeseen. To achieve this, financial planning involves budgeting your expenses, setting S.M.A.R.T. goals, selecting the appropriate asset allocation, creating a retirement plan, and more.
Even if you have savings, you need to have a financial plan because inflation can significantly erode the value of your money over time. Inflation refers to a general increase in the prices of goods and services over a period, which can reduce the purchasing power of your savings. For instance, a chocolate bar that costs Rs. 100 today could cost Rs. 110 tomorrow, and the cost will continue to rise over time. A financial plan can help you combat inflation by developing a sound investment strategy.
Financial planning also involves setting and achieving specific life goals, such as retirement, children’s education and/or wedding, purchasing a house, buying a car, and family vacations. Your planner will assess your cash flow and quantify your goals, creating a plan to allocate your funds towards achieving them in a systematic manner. Finally, the plan will recommend suitable investments, which may also include tax-saving investments.
Why Do You Need a Financial Planner to Manage Your Finances?
Now that we know why financial planning is necessary to achieve your life goals and create wealth in the long term, the question arises, how to start financial planning? Well, if you have been reading our articles, you might have come across several articles we published that are about how you can start financial planning by yourself. However, the majority of investors either lack the required knowledge to make a such crucial financial decision or do not have sufficient time to do the intensive research necessary to make informed financial decisions.
By sticking to the fundamentals, you can achieve your life goals. You might assume that if this is true, then there is no need to hire a financial planner and that financial planning is just another task you can handle on your own. However, that’s not entirely true.
A competent and honest financial planner can play a crucial role in helping you reach your financial objectives sooner than expected. With their guidance, the financial planning process can become much easier and more manageable.
However, having a trustworthy financial planner who always meets high fiduciary standards is very important. They should handle your money with care and responsibility, just as they would handle their own personal finances. Their recommendations should be based on research, and their approach should be unbiased. Nevertheless, there is a fee associated with this service that you would need to pay.
In India, financial planners operate under one of three revenue models:
1. Pure commission model – Financial planners are compensated based on the commission they receive from the financial products in which you invest.
2. Pure fee-based model – Financial planners are compensated solely by the fees you pay for their advice and services. They do not earn any commissions on the financial products in which you invest.
3. Fee + Commission model – Financial planners are compensated by both the fees you pay for their advice and services, as well as the commissions they earn on the financial products in which you invest.
Here Are 5 Reasons Why You Should Work with a Financial Planner for Effective Financial Planning:
1. Managing finances can get increasingly complex:
With time, managing finances can become more complex, even without major life changes. It can become overwhelming to keep track of your income, investments, insurance policies, debts, etc. This is where a financial planner comes into the picture. A competent financial planner will aim at optimising your investment returns while reducing your investment risk.
Managing money can be like having a second job that you may not have the time or desire to handle on your own. If you do not have time to research and monitor your investment portfolio, you can hire a financial planner to do it for you. He/she will take care of the tedious work, and you can get involved when it is time to make decisions.
Furthermore, you might not feel comfortable making financial decisions due to the confusing nature of investing. A good financial advisor can support sound decision-making and help educate you on best practices for money management.
2. The one-size-fits-all approach does not work in financial management:
Personal finance advice is often presented in an oversimplified manner, especially by conventional agents and commission-based planners who give the same investment advice to each of their clients. However, you need to realise that a particular financial strategy or recommendation may not be suitable for everyone. This is because we all have our unique objectives, aspirations, and challenges that require personalised financial solutions. Additionally, after the emergence of COVID-19, there has been a lot of instability in the markets. With the abundance of financial information available, it is easy to react impulsively to the news and the fluctuations in the value of our investments. Unfortunately, this can lead to unfavourable outcomes. Engaging the services of a financial planner can help you manage your finances from the right perspective.
3. You will receive unbiased financial advice:
If a financial planner is charging a fee for creating a financial plan without any obligation for you to invest in it, the advice they provide will likely be impartial and unbiased. However, if an agent or advisor is offering a free financial plan, you may need to be wary. There may be underlying motives for this free service, such as a desire to earn commissions from recommending certain financial products. As a result, the recommendations provided may not align with your investment objectives and financial goals.
It is essential to understand that nothing comes for free, and a free financial plan may pose a risk to your financial well-being. It is possible that the planner offering this service is pushing unsuitable financial products that are in their interest to sell, resulting in a disadvantage for you.
To ensure that commission income does not influence the advice provided, it is advisable to choose a fee-based financial planner. This will guarantee that the recommendations made are solely in your best interest.
4. A financial planner will maintain a professional relationship:
Our emotions often influence how we handle our finances, thus, leading to unconscious biases. A financial planner can make informed decisions based on rationale and prioritise our financial well-being.
In addition, financial planners are experts in their field. They have the necessary qualifications to handle financial problems and unexpected situations. Financial planning goes beyond simply investing in a few products. It’s like a test match in cricket, where patience is key and finances must be managed for the long term. You need to navigate short-term volatility, economic downturns, and favourable periods to build your wealth. Working with a professional who can manage your assets under different circumstances and variables is the best approach.
Financial planners guide and support you in the journey towards building wealth and improving your financial health. They uphold strong ethical standards and professionalism, which helps to establish trust in a time when it can be difficult to trust others. When you work with a fee-based financial planner, you can ask important questions and they will be happy to answer to the best of their ability, always keeping your best interests in mind. This can be challenging to do with friends or relatives, and there is also no emotional bias when working with a financial planner.
5. You will need guidance even after investing your money:
It is important to remember that investing is only the beginning – it is crucial to evaluate whether your financial planner offers reliable and sensible support after the initial investment.
Typically, a financial guardian who is readily available and guides you throughout the process of achieving your life objectives with the necessary care and understanding is the most favourable choice.
Finding a competent, experienced, and trustworthy financial planner may seem like a difficult and nearly impossible task. However, it is not. You just need to be patient and willing to take responsibility in the financial planning process. Before hiring a financial planner, ask for references and verify their credentials. Ask relevant questions about how they plan to help you achieve your goals, question their recommendations, and ask for alternatives and backup plans in case their plan fails to meet your expectations.
Furthermore, it’s important to stay actively involved in the investment process. While it’s important to have confidence in your financial planner’s abilities, it’s crucial not to blindly trust them. Always stay within the realm of confidence and avoid crossing over into blind faith.