India has a population of over 120 Crores. But there are hardly a penny percentage of people who care about financial planning. In fact a lot of people don’t even know about this concept. And the people who realized the importance of financial planning & wealth management are able to make Crores of wealth in the form of house, mutual funds, & other tangible assets. If you don’t believe, let’s see the proof of wealth management:
A person who has invested Rs 100000 in Sensex in 1990 is Rs 20 Lakhs (figures rounded off) today in 2012 which is a span of 22 years. But if you had invested in Mutual funds in 1995 & that too in selective mutual funds, there are funds that if a investor has invested Rs 1 Lakh in a particular mutual fund, his money had become 50 Lakhs in 2010. I think by now you must have realized the importance of hiring a financial planner or a wealth manager or having a sound financial plan which suits your need, age & very importantly your risk appetite
Difference between an Insurance Advisor & a Financial Planner
Who is a Insurance Agent
In simple words for a layman, like any other businessman, an insurance agent is more interested in his quantum of commissions in various schemes of Insurance & other policies & would suggest you the plan which is most pocket friendly for him. There is nothing wrong on his part as this is his business. So don’t blame him, rather blame his profession. An Insurance agent would review your whole financial situation in parts & would ideally suggest you an Insurance policy which is 10-12 times your Annual take home salary including your spouse salary which she is earning. They don’t have any idea about
- Tax Planning
- Various clauses of taxation while going for home loan or auto loan or child education loan
- Insurance Planning
- Wealth management
- Understanding key long term and short term goals of an investor
How Much Does Insurance Agent Earn From Commissions
As per the Insurance Act, the insurance companies can pay a maximum commission of 40% out of the first year premium paid by insured, 7.5% of the premium paid by the insured in the second year and 5% from third year onwards. So if you are taking a policy with an annual premium of Rs 30,000, your agent would earn Rs 12,000 (maximum limit) from your first year premium, Rs 2250 from second year premium (maximum limit considered) and Rs 1500 from the third year onwards. Traditional Endowment plans usually carry high commissions and agents try to sell them
How does an Insurance Advisor Try to act Like a Financial Planner
I want to discuss this in this article because I have seen this scene in reality. Insurance advisors would come to your office and would ask you the following questions and act themselves like financial planners:
- Your age, number of dependents in the family
- Age of your children
- Ask you about your projected age of retirement
- Ask you about your current income
And then come up with the conclusion
“Sir, after analysing all your needs, this endowment plan or this money back policy is best for your retirement needs and this has performed well in the past and would give excellent returns in the future” and you think you are getting a financial planning service almost free of cost and most of people buy that insurance product on his advice and later on repent after 2-3 years when they actually understand their product or when it doesn’t perform
All these insurance cum investment products which are sold by insurance agents give not more than 4-6% returns in the long run which means your money gets double in 10 years.
Who is a Financial Planner
On the other hand, Financial Planners would charge you not for selling his product, but would charge for his financial advice which would form the basis for your wealth creation. A financial planner sees your financial situation in a single part & makes every possible attempt to make you invest in a manner which helps you achieve financial goals like Retirement Planning, Child Marriage, Vacations & buying a house. You are open to buy or not to buy any product from financial planners. As he has already earned money from his financial planning fees, so he is there to offer you the best possible advice.
Example # 1
To explain it with the help of example, for a 30 year old male 50 Lakh term insurance would cost you around Rs 7500 where as endowment plans are almost out of question when you ask them for a sum assured of Rs 50 Lakhs. You would get an endowment policy at a minimum price of Rs 25000 per year for a life cover of Rs 5-8 Lakhs only. Now financial planners would always suggest you to buy term plan if you are young, self employed or into business where as insurance agents want to earn maximum commissions from expensive products like endowment plans and would offer you endowment plans
Example # 2
Financial planners would always suggest you to invest in debt instruments like fixed deposits or FMPs if you have a short term goal like buying a car after 3 years or you are looking to buy a flat after say 4-5 years because investing in equity for a period of less than 3 years can be risky. You may end up in a situation where in you are mentally prepared to buy a car after 3 years by investing in equities, but you found your money half after 3 years because you invested in a risky asset like equity for a short term horizon. Insurance advisors in this situation also would love to sell you some crap policy if you want to encash money with appreciation after 3 years.
Example # 3
Financial planners would suggest you to stay invested in equity mutual funds with some part in debt for long term goals which are to happen after 10-15 years. A monthly SIP of Rs 5317 make can you a Crorepati in 20 years assuming 16.5% returns from equity mutual funds
The cost factor accounts for 100% decision making factor for any investor whether to go for financial planning services or not. Don’t look at the cost only but look at the cost benefit analysis. It means how much you are spending & how much are you getting back. So if the fee for financial planning service is Rs 10000, just see if you would be able to get more returns of Rs 10000 if you hire a financial planner in the long run. You may recover your cost in one year by buying term insurance on the advice of financial planner of the annual premium of around Rs 10000 for 30-35 year male against buying an expensive endowment plans on the advice of an insurance agent which may cost around Rs 30,000-40,000 annually.
You can earn money in thousands, but can get Crores out of it of you invest with the systematic approach