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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Your questions, myths and my answers

Posted by Muthu on March 30, 2012

I wasn’t supposed to write till end of April:-) Just felt that I would write this piece alone before I get into the year end work. 

I get various questions from clients, some out of wanting to know, some other out of confusion etc. Though I’ve addressed these things individually, I felt that it is better to share with everyone.

What is the use of planning? Whether the planning would automatically take care of all the financial goals? Well planning is the new flourishing industry and planners’ give nicely printed thick books as your life’s blue print. As a planner, we all would say plans are must. This is as good as an astrologer saying that astrology is must or a Sastrigal (Purohit) saying rituals are must. It’s typically akin to asking a barber whether you need a hair cut. Even if your bald headed, he would still suggest some trimming at any given time.

A plan (oral or written one) is just a starting point to organize your financial life. A plan works on many assumptions. For example, in a plan I shared with you yesterday (done for a media house), there are assumptions regarding rate of inflation, how much a fixed income product would give in the long run, how much equities would give in the long run etc. These numbers are not random ones; still an assumption is only an assumption.

Nothing prevents the interest rate settling at 4% for a long period, sometime in distant future. Then the assumption that your retirement corpus would yield 8% income in perpetuity can completely go for a toss. Likewise interest rates need not always be above inflation. You can have more inflation and lesser interest rate too, which may all the more eat away your capital. If you are 40, we would have planned based on you working till 60. Nothing prevents you from getting redundant in the employment market at the age of 50 or some health condition prevents you from working all together. The plan would have taken the spouse’s income as well and she may have to quit the job due to change in domestic circumstances.

Life is not only about unpleasant surprises but pleasant ones as well. Your business may do much better in next 5 years than what is today. Your unique skill or expertise or even sheer luck:-) can take your salary into an all together different league. Your spouse who is currently not employed may start going for employment once the children grows up.

Life is unpredictable – both on the positive and negative side. So planning is not about excel or financial calculator projection but getting your approach, more so your emotions toward money, investment, savings, spending, risk etc. right.  

I repeat for nth time, ignore most of the thumb rules of money, media forecasts and accumulating more and more information on what is happening all over globe and how it is going to affect you. Let us assume a media report saying that the next 3 years is going to be strong bear market and it would go down by another 50%. For a moment assuming it is correct, what you should do? Take all your money out of equity and invest after three years, right? Well if you are in accumulation phase of life, it makes more sense buying as much as possible regularly because your acquisition cost tends to be lower, which is really good in the long run. If you are nearing retirement and is planning for a fixed income out of the corpus immediately, then you may be better off taking the money from the market. So the situation is same, but different approach for different people.

I don’t know who coined the term ‘personal finance’ but it is an apt one. It is personal; depending on your life and money situation, generic rules simply don’t apply. Whatever mention in media is always generic and many times absurd just to sensationlise or dramatise 🙂 

Generally what media would do is to get opinion from many different people in the industry on what Sensex would be at the end of this year. When you get very many forecasts, one or two would indeed match reality; law of probability. That alone would be highlighted at the end of the year saying how your favourite channel or magazine or newspaper is always right about the market and helps you take better decision.

You also get news letters as to how their stock recommendation multiplied by 10 times in last 5 years and what would be the next multibaggers; all for just 10K or 20K or 30K per annum. If each subscriber pays 10K and there are 1000 subscribers; that’s cool Rs.1 crore for preparing 12 reports a year and mailing the same to all subscribers. They would have been right in saying that a stock recommended by them in the last 5 years is a 10 bagger. What we fail to ask is what is the total number of stocks they recommended in the last 5 years (say 60) and if I’ve invested my corpus of Rs.30 lakhs equally for Rs.50,000/- over all these 60 stocks, how much return I would be sitting on now. Both they and we know what is a multi-bagger only at hindsight and not at the time of investing. If they would have known, they would have asked you to invest all the money in that stock alone.

There is nothing illegal in the above two examples; just some tricks of the trade:-)

And the other question of whether there is any conflict of interest and whether an advisor places your interest first and not his. The answer is structurally there is always a conflict of interest and only an enlightened soul would place your interest above his or her. To my knowledge, no Jnani has taken our profession as his career:-)

Let me explain. Some time ago we bought a LCD TV. First we went to Sony show room. The TV was good but we found the price to be expensive. The sales person said why Sony is better than all the other brands. That’s perfectly fine. You wouldn’t expect him to recommend a Samsung TV and loose his job:-) Then we want to a popular show room which has many brands displayed. Still there were some which were prominently displayed and the sales person was keener to sell the same. I saw a Panasonic TV somewhere non prominently without even a price tag! I asked for the features and its price. It was 20% cheaper than the one’s he suggested and 40% cheaper than Sony.

 By this time I’ve become friendly with the sales person (I talk a lot:-)) and asked him why he is not recommending Panasonic. Since he is only an employee, not a very loyal one to the employer:-), he said that the brands that are on prominent display have higher margins and they also have target based incentives, not only for the firm but employees too get gifts like mobile phone, motor bike etc. I ended up buying Panasonic at 5% discount; which is the discount limit allowed at the discretion of sales supervisor.

So conflict of interest cannot be avoided in any sales or services. A good advisor would not go for instant gratification but align his financial interest with that of yours over the long term; since usually these are long term relationships. We place your interest above ours is a good sales pitch. That’s it. It would be better and reliable if people serve you commercially based on their self interest and not out of benevolence. Ask the basic question what is the incentive for someone to grow your wealth if there is nothing in it for him. Nobody including me is doing you any favour and there is no free lunch (except at Palani and Srirangam as per CM’s latest announcement:-)).

If you ask me one category from whom you should never take any financial advice – it’s your banker – by whatever name he is called- relationship manager, private banker, investment advisor, Director- Wealth management, by any nomenclature as long as he works for a bank- foreign, private or PSUs. From what I read, hear and experience, mis-selling to the point of loot happens mostly in banks.

Typically in a ‘relationship’ role like mentioned above, some banks even allow you to fix your own salary. Whether they fix your salary or you fix it yourself, the income you’ve to bring to bank is usually 5 times the CTC. So if I’m a VP in Private banking and my CTC is Rs.50 lakhs, I need to bring income (not billing) of Rs.2.5 crores per annum. If I bring more than this, I get an excellent bonus too. I can never make this kind of money by offering you a non-toxic, low margin product which may be good for you but not for my promotion, appraisal or even keeping my job.

Bankers naturally enjoy people’s trust and they know every single movement of your money. These are two inherent structural advantages they exploit a lot. Now banks are going even more one step further. Everyone in a branch, even the innocent looking girl who smiles at you and provides cash in teller counter casually asks you as to what you are doing with your money and suggest meeting an expert in their branch. There is an incentive for her for lead conversion.

Many financial institutions (leading banks, broking houses, mutual fund houses etc.) offer exclusive PMS (Portfolio Management Services). You may be surprised to know that how easily people fall for this exclusivity- which is nothing but an ego massage. If you deposit Rs.1 crore, usually 4% may go as upfront fees. The annual expenses also may be  up to 4%. In the year of profits, you’ve to share 20% of the money made. In the year of losses, you only have to bear the same:-) Since you prefer constant updates and periodic activities, they do not mind churning more than what is required; the transactions usually carried out through their own broking affiliate:-) If a banker or I recommend you the above PMS, we get a good share in all the booty mentioned above. That’s why even if a PMS performs well; it is an excellent way to loose money:-)

There are structured products, complex derivative products which are again sold based on exclusivity. Most of these are innovative ones and in financial products innovations do more harm than good. Neither the seller would have an understanding of the product nor would the buyer’s ego allow him to expose his ignorance.

So when the wealth management firm or private banker offers you a ticker for IPL final, an excellent music concert- remember it would be much cheaper if you buy tickets directly. What is offered to you free is expensive; it is your own money plus a good amount of margin for the provider. There are no freebies or free lunches but we always find it difficult to believe otherwise when something is offered free on a platter.

You should go to banks only for 3 things – deposits, borrowing and custody of assets- demat, locker facilities etc.

If you are dealing directly in stocks, I would suggest that your DP (Depository Participant) be a bank; irrespective of whomsoever your broker is. I’m not saying broking DPs do some harm to you. But structural risks are more with a broking DP. A client of ours who has been holding a good number of shares in blue chip company suddenly found his holdings reduced in the demat statement. When he asked his broker who is also a DP, the branch manger informed that’s all his holdings are and he may be mistaken for a higher number. He being a senior citizen, who doesn’t use internet, asked me what to do. He is very diligent in filing all papers- necessary and unnecessary:-) So when he looked at an earlier statement, it showed the higher and correct balance. Armed with the statement, he went to the regional head of that broking house. The next day he got his balance shares credited and he didn’t find the branch manager any longer there. What might have happened is anyone’s guess:-)

Till 10 years ago I was having my demat account with a popular national broker. Since I’m the kind who goes through the statements I receive, I found many discrepancies. I’ve to chase with them with contract notes to have things corrected. It was very difficult to find out whether it is due to inefficiency of their back office or someone using my shares with a malefic intent. I don’t have any problems after I moved my demat account to a bank.

People working in banks can also get crooked. But the plus point is that in case of any malpractice, there is higher probability of the bank making you good again than a broking outfit. Banks have deeper pockets than broking houses and have better reputation to maintain too:-) As a custodian, a banker is more reliable. See I’ve good words to say about banks too:-)

Never ever give custody of your assets or POA (Power of Attorney) to any advisor including me. It is not the question of whether an advisor is good or bad; structurally you are putting yourself to a lot of risk which is not worth it.

Well I think I’ve to write one or two more pieces to cover what all I wanted to share. I would try to do it sooner or later:-)

I do not want our relationship to be based on your ignorance (i.e.) I know everything and you know nothing and you blindly depend upon me. Even as you get knowledgeable and learn to handle your personal finance well; I hope there would still be a professional need for my role as we all want to talk to someone outside the family about monetary issues with whom we are comfortable with, can be trusted upon and have reasonable knowledge. Hope I fit the bill. If you choose to become like me (I never had any advisor in my life,  but keep learning from many) I would keep the shop open for new set of people to come in. What else to do:-)

3 Responses to “Your questions, myths and my answers”

  1. mangesh said

    Hi Muthu,

    your article helped me to resolved couple of my queries.
    thanks for this…

    keep writing and god bless you sir!


  2. Amit said

    I am maintaining my MF & Equity portfolio with brokerage firm of Leading private Bank. It is 3 in1 account i.e trading A/C,Demat A/C & Bank of same group is interlinked. is it OK? I was thinking to for change as their brokerage fee is high as compared to other Brokerage house who does not belong to Banking group. Please advice.

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