Rich people, middle income group, youngsters: Who needs financial advice the most?

When the stock market was touching new highs in January this year, Tarang Vasisth and his wife Chandni were taking free advice from an untested source. They had saved meticulously for their twin goals of buying a house and starting a business, but the required corpus was short by about Rs 5 lakh.

“We still had two years to go. So we took a colleague’s advice and invested in stocks to make up for the shortfall,” says the Delhi-based consultant. But the free advice proved to be super costly. When the markets receded, their stock investments tumbled. “Our short stint in equity investing lasted about 10 months and we lost Rs 2 lakh,” says Vasisth.

In Pic: Tarang Vasisth, 32, Consultant, Delhi & Chandani Bakshi, 32, Delhi

To make up for the shortfall in the funds needed to start a business, Vasisth and his wife, Chandni Bakshi, invested in stocks. Their friends had advised this route for making a quick buck. In 10 months, the duo lost Rs 2 lakh and had to dip into their retirement kitty and borrow money.
"Till we repay our loan, we will have to put other goals on hold. we should have taken professional advice earlier."

Vaibhav Kanwal’s family also faced a huge loss in stocks. “My father started investing in stocks in 2007 and lost big time in 2008. We concluded that stocks are not for us and moved away from equity investing,” says the Delhi-based IT professional.

Years later, when he started working, Kanwal returned to the market. But this time he was well armed. “I took help from a professional financial adviser, who explained how stock market cycles work and how I should invest in equities in a systematic manner,” he says. Such is his confidence that he has allocated more than 50% of his portfolio to equities.

In Pic: Vaibhav Kanwal, 29, IT Professional, Delhi
His father started investing in stocks and suffered a huge loss. This turned Kanwal off equities altogether. Later, when an adviser pointed out how he was missing out by not investing in equities, Kanwal began investing in them.
"My confidence in equities increased after my adviser explained how market cycles work and how to invest gradually. I now allocate more than 50% to equities."

The two cases underline how the right advice can make all the difference. Vasisth relied on the free advice given by an unqualified person. Kanwal, on the other hand, paid for financial advice from a trained professional. The outcome was completely different.

Also Read: DIY investing is not everybody’s cup of tea: View

We at ET Wealth have come across scores of such cases during the past eight years. Therefore, in our eighth anniversary issue, we thought it appropriate to address this critical question: Do you need financial advice?

Admittedly, there are no black and white answers. It depends on the life stage of the investor, the size and complexity of his portfolio as also the individual’s knowledge of financial matters. An online survey by ET Wealth shows that only 12% of investors in India have financial advisers. A large majority prefers to take the Do-It-Yourself (DIY) route.


Are the young listening?
The survey shows that younger people are less likely to take financial advice. The percentage of people seeking advice increases with age and income. But this could also be because at a young age, the investor has neither a very high investible surplus nor a clear understanding of his goals.

Many professional advisers are also reluctant to serve small-ticket clients who can invest just Rs 5,000-10,000 a month. If the portfolio size is Rs 1 lakh, even a 1% charge on the portfolio will fetch only Rs 1,000, which is not sufficient for a professional adviser. “It is difficult for small investors to get quality advice. They should try to learn financial planning themselves,” says Ankur Kapur, Advisory Head, Banyan Capital.

As age or income increase, people tend to seek professional help
Even though 94% of the respondents with monthly income of more than Rs 1 lakh save over 10% of their income, 88% of these don’t have an adviser

The online survey was conducted by economictimes.com in Sep 2018 and got 1,395 responses.

Ironically, young investors and people with low incomes are the ones who need financial advice the most. If they get the right guidance at the very beginning of their working life, young investors can take the right steps that will have a lasting influence on their finances.

Also Read: 5 reasons why money remains idle in bank account

Also, while high income earners have very high investible surpluses, they can easily manage their money and need only investment advice. It is the middle class person with a low surplus who needs financial guidance on every aspect, including saving, goal planning, investing and insurance.

What it takes to DIY
Many people take help from qualified professionals, though not every financial adviser has investors’ interests in mind. Turn to page 9 to know if you have the right financial adviser. Many others manage their finances themselves.

Meet Mihir Shah, a Delhi-based marketing professional who initially approached a financial planner but got put off when he started asking too many questions. “He asked me personal questions like when was I planning to get married and in how many years will I have my first kid,” he says. Shah read books like Intelligent Investor by Benjamin Graham, subscribed to personal finance magazines and newspapers, and spent hours educating himself on portals like Value Research.

In Pic: Mihir Shah, 37, Marketing professional, Delhi
He started managing his finances by learning from financial magazines, books and digital resources. For his short-term goals, he invests in liquid funds, and for long-term goals he has invested in equity mutual funds. For risk protection, he has taken life and health insurance.
“Managing one’s portfolio is not a rocket science, why pay fee to an adviser?”

Which of these avenues have you invested in?

• High allocation to insurance signals bad advice
• One out of two respondents have invested in insurance plans

Figures denote % of respondents who have invested in a given product. Numbers will not add up to 100 because of multiple responses.

How much have you allocated to equities?

• Too little exposure to equities can hurt.
• A fourth of those in the 30-40 age bracket have allocated less than 10% to equities.

In Pic: Nilesh Shah, Managing Director, Kotak Mutual Fund
"What we do for physical health, we need to do for financial health too—seek the help of professional advisers."

Can you also manage your money without professional help? Take the test to assess whether you can do it on your own. It is not easy, but also not very difficult. “Since managing your portfolio is not rocket science, why bear additional costs?” says Shah, who handles his own financial portfolio.

Also Read: Do you need help in managing your money? Find out

The foremost reason why one needs guidance is the inability to save. Many people, especially young earners, are not able to put away enough. “A journey of a thousand miles starts with the first step. People who have not yet taken that first step need external help for that,” says Amol Joshi, a Mumbai-based financial planner.

With nobody to nudge them, people tend to postpone savings on one pretext or the other. Ideally, you should be able to save at least 20% of your income. But our survey found that one out of three respondents was unable to do this. In fact, 4% are not able to save anything, and 11% save less than 10%, which is very low. Such people need structured financial planning and external assistance.

How much of your income are you able to save every month?

• One-third of respondents save less than 20% of their income
• Seek expert help if can't save at least 20% of your income

The culprit: high expenses and discretionary spending, which has been made worse by the ease of online shopping and proliferation of large format shopping malls. “I used to spend a lot at malls and eating out, till my financial planner made me cut down and save more and spend carefully,” says Mumbai-based professional Lakshmi Menon.

In Pic: Sandhya Shetty, 49,works with an MNC, Mumbai
She had been managing her finances for the past 15 years without any professional help. She recently decided to take professional advice to select mutual fund schemes that were best aligned to her goals and to navigate the equity market.
"Now investments for both our goals, daughter’s education and retirement, have been planned well and are going smoothly because of professional advice."

The situation gets worse if these high expenses are paid for by future income. Reckless use of credit cards can land you in a soup. Thankfully, the situation is not too bad in India.

Also Read: 7 sources of financial advice: Which are useful?

Our survey shows that only 6.7% respondents rolled over their credit card balance once or twice in the past one year, and 7.4% respondents did it three times or more. These people will do well to take financial advice to rein in their spending.

How often did you roll over the credit card balance in the past one year?

• Frequent credit card debt rollover indicates poor financial management.
• Average credit card rollover rate stands at 20%, but the rollover rate for those below 30 years is 27%.

Have a safety net
People with control over their finances will always keep some funds for emergencies. “Setting up an emergency fund should be the first goal of any individual,” says Mumbai-based financial planner Melvin Joseph. Without this cushion, an emergency can derail the entire financial plan. Most of the respondents to the survey are comfortably placed, but 11% have just one month’s expenses as emergency fund and 18% haven’t got any.

How long will your emergency fund last?

• An emergency fund equal to 2-3 months' income is a must.
• Roughly 10% of respondents with monthly income of more than Rs 1 lakh don't have any emergency reserve.

In Pic: Melvin Joseph, Founder, Finvin Financial Planners
"It is essential for the middle class and salaried individuals to follow goal-based investing."

The other safety net everybody needs is insurance. Unfortunately, the so-called financial advisers in this space are only salesmen who want you to buy high-cost plans that fetch them fat commissions but give you low returns and inadequate cover. Our survey found that 15% of the respondents had a life cover of less than their annual income. Another 13.3% had a cover equal to their annual income.

“Adequate cover is a basic necessity. Else a family could go back 50 years in case of an unfortunate incident,” cautions Joseph. That means external financial advice is needed for people whose life cover is less than or equal to their annual income.

How much is your life insurance cover?

• Low life insurance cover is a big risk for your dependents.
• Nearly 61% of those below the age of 30 are grossly underinsured. Their life insurance cover is less than their annual income.

How much is your health insurance cover?

• Health cover is critical for financial health.
• Almost 95% of the people with annual income above Rs 24 lakh have medical insurance.

Invest in right avenues
Financial advice becomes critical when it comes to investing. Most people who take the DIY approach end up making mistakes. They will either take too little risk and go for low yield traditional products such as bank deposits, post office schemes and insurance policies. Or they will, like Vasisth, take too much risk by investing in stocks with a short-term view. A qualified financial planner would not have recommended stock investments to Vasisth if his goal was only two years away.

As mentioned earlier, even the ‘adviser’ may try to mislead you. Mumbai-based Raman Nayak lost more than Rs 30 lakh due to wrong advice. “After I sold my ancestral flat in 2010, an insurance adviser convinced me to invest in several Ulips with huge premiums. He said I had to invest for only one year. It was only later that I realised that this was the annual premium and I didn’t have money to pay subsequent premiums. I was forced to surrender the Ulips at a loss,” he says.


Controlling emotions
The real need of professional financial advice is felt when the markets are doing very badly—or very well. Left on his own, an investor is very likely to react in a knee-jerk manner if the Sensex moves by 600-700 points in any direction on a single day.

A financial planner is able to temper the emotions of the client. “Most value addition of advisers comes in the form of behavioural aspects and by hand-holding investors from getting jittery in a falling a market or from getting greedy in a bull market,” says Kapur.

How does one know that one is making a mistake? “The decision to buy or sell equities should not be based on external factors such as a trade war fears or a prediction that market will go up or down. Buy and sell only if asset allocation has changed, there is increase or decrease in monthly inflow, your goal is nearing or an there’s an addition in the family,” says Joshi.

In Pic: Amol Joshi, Financial Planner
"Tying investments to goals saves investors from the adverse impact of knee-jerk reactions."

A periodic rebalancing of the portfolio is one way to control emotions. Ideally, you should review your portfolio on a yearly basis or after a big upward or downward movement in the market that disturbs the predetermined asset allocation. Most respondents to our survey got this right, but a significant segment failed the test. In fact, one out of five respondents didn’t even know how to rebalance.

When do you rebalance portfolio?

• Rebalancing is crucial to investing and ensures stable returns.
• As many as 35% of people earning more than Rs 24 lakh per annum don't know how to rebalance their portfolio.

If your goal is two years away, where would you invest?

• Safety of capital is critical if goal is very near.
• Almost 40% of the respondents believe that the best option to invest for a goal two years away were equity and hybrid funds.

Which of these loans will you opt for?

• More than a third of the respondents did not know whether flat of reducing balance rate is better.
• A financial adviser can help you identify the best deal.

If stock markets crash, what will you do?

• Around 12% of the respondents earning less than Rs 6 lakh preferred stopping SIPs in a downturn.

How much time can you spare to review your investments?

• If you don't have time for DIY, engage an adviser
• More than 25% of the respondents barely spend any time to manage their finances.

Knowledge is the best weapon
As mentioned earlier, managing your own finances is not difficult. But you have to be well armed to take on that challenge. “An investor can gain knowledge the costly way through his own experience in the market or the inexpensive way by learning from others’ experience,” says Nilesh Shah, Managing Director, Kotak Mutual Fund. The only way to do that is by extensive reading of books, magazines and personal finance portals to improve your skills.

This should be done even if you decide to engage a financial adviser. As Kanwal says, “I take advice from a professional but make sure that I understand the rationale behind the advice he gives me.” In other words, keep the reins of your finances with yourself. After all, it is your money.

All charts, except when people seek professional help, show responses from people who don’t have an adviser.