Right advice goes a long way in financial planning

Acquiring sustainable wealth is the product of a cautious and well-balanced approach, say analysts. (ASHOK VERMA)

There is a general belief that many people are not prudent when it comes to money.

They are often pre-occupied with oversimplified thoughts, such as: What's the need of financial planning when they are in a job that provides them a paycheck each month in addition to handsome perks.

Why should they seek an expert opinion on setting their finances straight when they already have a bank balance and have invested their money in various asset classes for the "rainy day"

But is it enough on their part to just invest and sit back? Being indifferent, and sometimes averse, to seeking expert advice for managing one's finances, according to changing market dynamics and according to risk appetite, stands out more as a norm than an exception among many investors.

They sit on the internet for long hours keeping an eye on new investment products launched in the market and keep on investing their money without giving a second thought whether their money is working for them or whether they should invest in that product.

Many a time a word of mouth is enough to make them decide on a particular investment product. Does it sound like a déjà vu? It should, because this turns out to be one of the most common mistakes many investors are prone to, said financial planners.

Not all investment products or classes are meant for or suited to all types of investors. And one needs to do a bit of homework on whether a particular investment product would meet one's financial needs either in the short, medium or long term. Getting a regular financial advice does cost a bit, but in the long term it can generate returns on investments much more than one could have got without getting an expert advice.

It's just like rushing to see a doctor to confirm whether the body is working well.

"You would not set off on a journey you'd never undertaken before without a plan. You wouldn't start a business without a plan. You wouldn't set your children off on their education without plan. If you fail to plan your finances, you plan to fail," said Steve Gregory, Managing Partner, Holborn Assets, Dubai.

Start young

Financial planning is meant for everyone and one should not wait for long to begin. The more early you start, the more the chances are of getting a good return on investment, said analysts.

"We tend to overspend relative to our actual needs for the future and that's the biggest problem most of the people have in their daily lives. Financial planning is for everybody and not just for the wealthy. If you don't plan for the future, the future won't come. So you not only have to plan your spending but also the way you are saving. The worst thing to do is to invest in something where the outcome has huge probabilities of losses as well as gains. That's why people over-invest in the equities market in the hope that it meets their needs," said Gary Dugan, Chief Investment Officer, Emirates NBD.

He said financial planning is about meeting your needs of the future – whether buying a car or home, or planning a holiday.

All these are future liabilities that need to be matched against the way in which you invest your wealth.

One of the things people miss is that when they build up their assets or when they invest in equities or bond markets, they do not actually realise what they are going to use that money for.

Analysts believe acquiring sustainable wealth is the product of a cautious and well-balanced approach. In essence, it is a steady, disciplined and a long-term journey difficult to complete successfully all alone.

"Getting a financial advisor is always a good thing. Your advisor should guide you towards financial priorities, provide you market insights and then recommend investment strategies that best suit you," said Ishrat Kiyani, Head Of Premier and Wealth Management, HSBC UAE.

He said this can only be achieved after a comprehensive discussion has taken place between you and your advisor, within which, a range of topics will have to be understood by the advisor.

This will include, but will not be limited to, your financial and personal circumstances, time horizons, future objectives and risk appetite. After considering all aspects that make up your profile, only then can the advisor customise an investment portfolio to suit your needs.

Someone outside of one's circle would give an independent advice about how best to invest and plan, said analysts. In the Gulf, there's an insufficient use of life insurance policies and low-risk assets, and there is a legacy of investing in riskier investments. But people need a real balance of asset classes in order to reduce the amount of risk they take in order to achieve a certain amount of wealth growth. And they can only do that if they have a professional adviser sit down with them and do the financial planning, said Dugan.

Follow the steps

There are different steps when it comes to financial planning, just like climbing to the upper floor of the building through stairs step by step.

First establish where you are. What's your net worth? Is it positive or negative? Is all your money landing in other people's pockets or are you saving for when you really need it, said Gregory.

The next step is to project forward, to where you want to be at different times in the future. Are your plans for marriage perhaps, or children, or educating the children, or starting your own business, or buying property, or stopping work early, or working beyond retirement.

What are the priorities for yourself? Do your plans impact other people, like parents or partners or dependents, he adds.

Decide where you want to be financially and by when as you go through life. Now consider the risks, like loss of job, health, disability or even death and look at managing financial risk for yourself and others. Then make a plan – short, medium and long-term plans can evolve.

Wandering aimlessly through life will see most of your money in the pockets of other people. Set goals and objectives, and review them annually, he said.

There are three basic steps one should be aware of when it comes to financial planning, said Dugan.

The first is identifying lifetime needs. That means how much money Do you need to run your life at the current level. Second is to prioritise your one-off needs, such as replacing your car, sending your children to school, adding an extra room in your home, or anything. Thirdly, it's the aspirational factor, which means things you would like to have that your money doesn't give you today, he adds.

Avoid behavioural bias

Behavioural finance says humans are prone to make injudicious decisions when they are in panic.

For instance, they dispose of their assets when in panic, etc. But there are definitely ways to abandon or at least render such behavioural biases ineffective.

Budgeting is one of the effective ways to do it, said analysts. The importance of budgeting is to make sure that your level of spending is consistent with the long-term future of your wealth planning, said Dugan.

Budgeting comes under your lifetime needs.

We often find people overspending relative to their needs in the future. It turns out to be a problem when they get into older age as their ability to earn more money is more limited. They end up finding their income insufficient for retirement years or old age, he says.

The rule in successful investment is buy low (cheap) and sell high (at a profit).

Unfortunately many people do the opposite when markets turn against them, said Gregory.

Regular reviews with a good advisor should help guard against this.

If your advisor does not have the skills, get a different one. Panic is not a rational behaviour, and causes people to buy and sell at exactly the wrong time, due to either fear or greed, he adds.

Investors must look to have a diversified portfolio that will include a range of investment solutions like capital protected investments, bonds, mutual funds, structured notes and alternative investments, said Kiyani.

Being more informed about the investments made and maintaining this diversity in a portfolio, will then prepare you as an investor to ride through difficult market conditions and remain focused on future objectives.

Investors should not risk all their money by tying it up into medium to long term investments. They must set aside an emergency fund, at least six months salary, which they can easily access.

If an investor is short of money and is forced to draw the value of his investments before its maturity term, he could incur large losses, he said. Behavioural bias has a lot to do with how your lifestyle is, believe experts. So, a little tweak in your lifestyle can make a lot of difference in the way you react to panic. Take for instance one burdened with loads of credit card debt. For him, one of the ways to deal with the rising credit and interest charges is to change the lifestyle a bit.

One of the problems with people struggling with credit card debts is that they just don't give up the lifestyle they were having before which they couldn't maintain through their regular income because they had to borrow to maintain it. So they have to restrain their spending.

Dos & Don'ts

When you decide to have your finances planned, start looking for a qualified financial planner to help you out, said analysts.

Ask for the credentials of the financial planner, exam qualifications and certificates of ongoing competency.

Ask friends and family for their experiences to help select a great advisor, rather than a product salesman. Don't make instant decisions, and don't take something that looks too good to be true. Never commit to something you cannot pay into for the entire term of the contract, said Steve Gregory, Managing Partner, Holborn Assets, Dubai.

The dos are that you must think about absolutely everything that you're going to spend your money on in your life in order to maintain the current lifestyle.

Lot of people leave this factor out when they don't plan for their holidays, or any other needs, said Gary Dugan, Chief Investment Officer, Emirates NBD. What they should avoid is not to spend too much time trying to be too aspirational.

They have to be balanced to lead the current lifestyle when they retire.

For that they need to invest in things that beat the current inflation, because if your total wealth is not beating inflation, your way of life will deteriorate over time because you wouldn't be able to afford certain things.

Many people go for buying a six-bedroom house instead of a four-bedroom home that they actually need, and that increases their risk.

So one has to be very realistic in the way one puts the planning together. Don't be too aspirational and try to generate too much income out of the hottest assets in the market, which often carry a great degree of risk, he said. Buy when the market is going down and sell when the market is going up is a simple investment strategy but this makes a huge difference in investment returns. But most of the people don't do it, he said.

Secondly, don't go for any investment too aggressively just because everyone is doing that.

We all saw it during the peak of the credit boom. In case of stocks, historically, the highest amount of money goes into any asset classes when their prices are about to peak. So don't follow a herd investment philosophy, he adds.

Expats need a lot of help in financial planning, he said. As soon as they realise that they're going to stay in the region for a longer duration, more of their assets should be invested locally in order to maintain the lifestyle.

Many people have the tendency to ship all their money earned here back to their home country, but there's a great risk in that if the value of their investments in home country goes down, or if the exchange rate of their home country currency declines in relation to the regional currencies, he said.

Manage your debt sensibly

Treading the path to financial planning without paying due attention to the way one manages debt can land one in a tricky situation, said experts. So what are the strategies a person should follow to get his finances straight when he is struggling with credit card or personal loan debt?

If you have a bank loan, overpay it by a couple of payments so that you get a breathing space if you lose your job unexpectedly, said Steve Gregory, Managing Partner, Holborn Assets, Dubai. With credit cards and bank loans, check the credit shield terms and conditions. In which circumstances can you claim, and for what and for how long?

Repay at least double the minimum payment required by the bank on your cards. If you cannot afford that, you are already overextended and at the risk of default.

Don't borrow to help friends and never offer to be a guarantor for someone else. You cannot help them if you land yourself in prison, he said.

If you can't keep up the repayment on your credit card, contact your credit card company immediately. Additionally, continue paying at least the minimum payment if possible because the interest rate on credit cards is generally higher than other types of credit.

Pay off your credit card balance as soon as possible and stop using your card or you'll make the problem worse, said Ishrat Kiyani, Head Of Premier and Wealth Management, HSBC, UAE.

To save on credit card interest payments, a customer can clear the total retail outstanding on or before the due date (without any cash withdrawal transactions involved) and will have no finance charges applied, he said.

Besides, as a customer, you can also revolve your balance previously and decide to pay off total outstanding for the current month, this way only balance off days of finance charges would be applied in the following month statement, that is days used after the statement is generated to the payment date.

When it comes to managing personal loan debt, look at your non-essential outgoing first.

That is where most, if not all, of your saving will come from.

Reduce all non-essential spending.

Additionally, use a budget plan to accurately calculate total income and spending each month, he said.


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