How to Evaluate Performance of a Financial Planner?

By Karim Lakhani - CFP CM Chief Financial Planner & Managing Partner 3rd EYE Financial Planners LLP

              How to Evaluate Performance of a Financial Planner?

A lot of people these days are seeking professional Financial Planners advice as the benefits and importance of a Financial Planner’s advice over the traditional set of advisors has been realized. For all such people whether before they avail the service, or during or even at the conclusion of the service period the question arises as to “How to evaluate the performance of the financial planner”.

Most of the people try to evaluate the performance of a Financial Planner by comparing the returns generated by the planner on their portfolio. It is just like evaluating the quality of a 5 start hotel just on the basis of the taste of the food they cook, neglecting the hygiene they maintain, ambience, amenities and overall experience. One may even find the food cooked in a 5 star hotel tasteless or less tasty than compared to the road side food but one must not forget that a 5 star hotel’s food is cooked based on quality and their food is healthy as the Chefs are trained to cook healthy food. The fact is tasty food may not be healthy and healthy food may not be tasty always.    

                                   

Evaluating the performance of a Financial Planner is very different from investment portfolio. A portfolio can certainly be compared with the market returns, but a Financial Planner has a very wide range of service to offer, investment planning & portfolio management is a small part of the whole service offering.

A Financial Planners service includes many such qualitative benefits apart from quantitative benefits which at times becomes difficult to compare and evaluate.

To evaluate the performance of a Financial Planner, one has to first understand his roles and responsibilities and his involvement in shaping your finance. Let us discuss some of the important areas where a Financial Planner gives his/her inputs.

Budgeting:  A financial Planner helps in bringing discipline in ones expenses. A very famous quote I remember which says “A rupee saved is a rupee earned”. We strive hard to generate an extra percentage of return on investment but on the other hand we spend so much towards unnecessary expenses which has much bigger and negative impact on our finances. Once Financial Planner understand the need and scope of spending less, will help you do budgeting by reducing spend on discretionary and impulsive expenses.

Here the Financial Planner helps you spend less and save more resulting in more investments and high wealth creation.

Emergency Funding: It is been observed that people keep major junk of their money in cash and a  partial amount they invest from which they need the highest returns, but they don’t realize that the money kept in cash either at home or savings account can earn much higher returns if parked in proper instruments. At the same time there are cases where some people don’t maintain minimum required cash balance, this can cause liquidity issues at times of emergencies even leading them to use credit cards or borrow funds at very high interest rates.

Here the Financial Planner helps in optimum utilization of your funds and properly channelizing them in right instrument not allowing them sit ideal resulting in increased profits and returns on investment portfolio.

Debt Management: Loans can be good and can also be bad. Loans are suppose to reflect in Liability side of a Balance Sheet but some loans are such which are as good as Asset, in other words they help you create wealth or Assets for you. A Financial Planner helps one to decide which loan to go for, which type of loans to avoid, what is the maximum limit of loan he/she can afford to take, etc. This helps the clients shy from bad loans which could had proved to be disastrous had they opted for the same, because of high interest outflows, resulting in financial loss.

Here the Financial Planner helps you save your money from paying high interest and get rid of unwanted and unsuitable borrowings.

Goal Funding: A Financial Planner helps one identify all their life goals and also in understanding which goals are practically achievable and which are not. With this, one can very clearly understand his/her limitations and never over expect or under expect from life. Without the help a Financial Planner one would never be able to understand which goals are realistic and to be focused. Many a times a person may try to run behind such goals which looks achievable but may adversely affect any other future goals which may be more important and obligatory.

Here the Financial Planner will give a clear vision of future possibilities, saving your money from getting spend elsewhere.

Asset Allocation: A proper Financial Planning base is laid on the ground of investment and for investment a proper Asset Allocation is required. There is no such ideal Asset Allocation available which works for everyone. Also no thumb rule works in real life. How much Risk one should take in his investment portfolio and how secure the portfolio should be, this question can be answered by a Financial Planner. A Financial Planner does not run behind returns but try to design a portfolio as per the clients risk appetite so that the returns generated out of the portfolio are in line with the risk appetite and goals and in case there is a loss should be in range of your capacity to bare loss.

Here the Financial Planner guides you understand your risk exposure and saves your money to get over exposed or under exposed to any one particular asset class.

Tax Planning:  A Financial Planner helps you to save on tax by proper Tax Planning. Saving on tax does not only mean asking to invest under section 80C, there are many other avenues where tax can be saved. They not only try to save tax on current income, but also try to reduce future tax liabilities.

Here Financial Planner saves your money by reducing your tax liabilities, which is again a profit to you.

Estate Planning: Making sure that your wealth passes in the right hands after you, is something that a Financial Planner always works on. If a proper estate planning is not done then the diseased family may incur lot of cost to acquire assets which is deemed to be their own.

Here the Financial Planner prepares you, prevents your family from any such future litigation and saves lot of your families spending towards exhaustive process of estate transfer.

Investment: A Financial Planner has in dept knowledge of Financial Instrument and products, they help you select the right product. It is not about selecting the investment instruments which can give you the highest return when you compare it with other products in the market, but it is about selecting the best suitable product suiting your risk appetite and competent enough to help you achieve your goals.

Here the Financial Planner helps you in identify the right products and protects you from buying or investing in wrong products, which saves your money big time.

Review: Once you invest, there can be lot of ups and downs in the market and your portfolio may go heyvaya particularly when you have a good component of Equity or Equity related instruments in your portfolio. For this, on regular basis corrective steps has to be taken to make sure whether we are in line with the expectations and targets. At times without a Financial Planners advice you can take wrong decisions on your investments which may prove to be disastrous for you in future. A Financial Planner is one who will guide you even at times when you are unable to judge the situation, foresees the danger or an opportunity.

Here the Financial Planner helps you create an opportunity to increase your investment returns or saves you from danger reducing heavy losses and makes sure you achieve your investment objectives with peace of mind.   

Like wise there are many other Quantifiable and Unquantifiable benefits that a Financial Planner provides, all such benefits may not come at once but these are the benefits which is enjoyed by clients over a period of time. If you have benefited out of any of the above mentioned benefits, then the Financial Planner has done his job and is creating value in his/her services to you.

If you have already engaged a Financial Planner will now realize many such unquantifiable benefits that you must have got till date. For those who do not have engaged a Financial Planner will be able to understand the benefits only after engaging a Financial Planner.