Thursday, September 16, 2010

Being Financiall Responsible...

What does it mean to be financially responsible? This may seem to be difficult question to answer by most of us. One must have heard of the saying "to live within your means". Though this may be at heart of being financially responsible, it hardly is enough in today's world. Being financialy responsible today is probably much more than this. This article gives an insight as to what would constitute a hoslistic financial responsibility for any person.

Managing debt prudently:
Though taking credit or debt today is no longer considered a taboo, one should make sure that it is only for basic necessities and not for luxury and convenience items. Merely being able to pay your EMIs and credit card bills doesn't give you the licence to go out and spend heavily. Remember that for every loan that you take, think that paying interest means that you are spending more for that item than the purchase price and as such, avoiding paying interest on anything should be a major objective. Of course, when it comes to the cost of housing and car, avoiding interest is almost impossible for most of us. In such situations, minimizing the amount to borrow and the interest payable is the most responsible action. Typically for housing loans, it shouldn't cost more than 2 or 2.5 times of your annual income. Another estimate of housing loan affordability is that it should not cost more than 30% of your monthly take-home pay. But in case you have already borrowed more than your comfort level and now feeling the pressure, it's time to spend much more responsibly and reduce your debt by paying off the high interest rate loans earlier.
Use of credit cards is good, as long as one is not encouraged to spend more freely. Credit cards are handy because they eliminate the need to carry cash, defer your payment for a while and are helpfull in times in an emergency.

Insuring for future:
Financial responsibility means being prepared for the unexpected. It means that you and your family are ready, financially, for any eventuality, in case of any temporary or permanent loss of income and large sudden and/or prolonged medical or other expenditure. But having insurance is not enough and one must have adequate insurance cover given his/her standard of living and background. Insurance is a broad term and includes life, health, property & valuables, car, etc. For life cover, as per the human life value concept, it must be the multiple of your annual income and years to retirement. Thus, if your aged 30, earning Rs.4 Lacs p.a. And retiring at age 55, your life cover should be Rs.1 crore (Rs.400,000 x 25 years). This amount can be further adjusted for existing investments, liabilities, lifestage and family background, etc. For health insurance, looking at the present medical costs, one may roughly estimate it to be between 3-5 lacs per person. To be responsible means to buy both health and life insurance as early as possible in your life for a longer duration. This way you are assured of better coverage, cheaper premiums and more choice. For other insurance covers, its better to think first and judge later.

Investing for goals:
Spending without investing for future goals is something that every prudent man will do. Ideally every household must invest at least 10-20% of their income subject to the kind of goals and existing investments you have. The more you invest, the better it is. A point here to note is that saving is different from investing. While saving is mere "not spending", investing is more about "generating returns" on your savings. Any savings or investment avenue that gives you less than your inflation rate after tax effect is no real savings at all. To be responsible is to be practical and invest in avenues that give you positive post tax real returns, matching your risk appetite and desired objectives.
Investing can be goal oriented or otherwise. In case it is goal oriented, it is always driven by required amount and required rates for a defined periods. Independent of goals, you can also follow asset allocation method for choosing the right mix of assets & products in your portfolio. If you are investing for long, say above 5 year, equity related investments would be good option. You may even start a SIP or Systematic Investment Plan in these mutual fund schemes an ideal way to invest in equities.
Among the goals that one invests for, one of the most critical is that you save for yourself – Retirement. Saving for child education and marriage has probably decreased a bit in intensity with educational loans abounding and children being independent and earning decently even in starting years of their careers. Saving for retirement though has become more critical with longer life spans, higher medical costs coupled with greater probability of new age diseases and nuclear families. Being responsible is investing rightly for your and your family's future goals.

Paying Taxes wisely:
Paying taxes is an obligation and evading taxes is a crime. But reducing tax liability smartly by using the benefits offered, is perfectly justified. Managing tax payment and tax returns is a non-pleasant but an important activity for every earning member. Being prudent in saving taxes means that you have chosen that right investing products and time to maximise tax breaks and that you have made appropriate use of the perquisites, allowances, deductions offered. Typically different types investments offer different tax breaks while investing, withdrawing and on returns / interest earned. Being responsible means that you pay all your legal dues and file returns on time.

Planning and Budgeting:
Having a comprehensive Financial Plan prepared by your advisor is the most important financially responsible step that you will take. Having that plan in your hand will give you the answers to the critical questions in your financial life. Often people ignore this, but its surely is worth it, even if you have to pay for it. Be sure that you disclose all your material details properly, else the financial plan will be meaningless. Further, having plan is just not enough, its just the beginning. Follow your qualified advisor's advice in structuring your finances and planning for your objectives in life followed by regular review of the plan and its progress.
At a personal level you can also manage your finances in a much better way by having your budget defined before-hand. Contrary to belief, budgeting is very simple and very less time consuming. The only part difficult is being prudent and sticking to it. Observing your expenses for a couple of months can throw up great surprises for most of us. You should know where your money is going. Business owners know the importance of understanding their cash flows and balance sheets; as a result, no successful business exists without a budget. Neither should you.

Financial responsibly means doing what you have to do to take care of your needs and the needs of your family. To make this happen, your focus should be only on yourself. A prudent being would never compare self to neighbours, friends or relatives and let them set the bar for spending habits or standard of living. Its better to be modest and safe than be flamboyant and sorry. Being financially responsible doesn't really mean that you have to scrimp and save, unless if thats the only way out. Every family has to enjoy life within own means. Likewise its also important to no get carried away by great offers, quick-money schemes, hot tips and rising markets. Ultimately, financial responsibility means living within your means, regardless of the level of those means. Only this way can we ensure a peaceful, worry-free future for ourselves and our family.

Tuesday, September 7, 2010

Evolving Financial Advisory Business

The financial advisory business has been undergoing transformation of sorts in recent times. We have entered into a phase of unprecendented possibilities and opportunities in the financial planning / services profession. However this is also coupled with changes in the ecology of the industry. In addition to the challenges posed by the evolving industry, independent financial advisors of today are being faced with key generic challenges in the profession that will define their success. While the confidence level in the profession remains intact, there is now a sense of urgency on meeting these generic challenges. This blog shares some of the problems being faced by the financial advisors and some ideas on tackling them...

Challenge 1: Defining the Value & Fees
Defining the value proposition for the financial advisor and his services is the core of the advisory sales pitch. With easy product availability to the client no longer a challenge in most of the products, there is now a growing emergence of advisory oriented value proposition / offerings to the client.
Traditionally in India, the concept of the financial advisor is generic and is used synomously by every other product distributor or agent & even accountants. But creating a strong offering with the client at the centre in this environment can be seen not only as a challenge but also as an opportunity for new age financial advisors. The trend is towards greater professionalism, transparency and product neutral advice with a multi-asset & mult-product basket.
Increasingly, advisors are showing creater inclination to offer holistic client advisory and financial planning services. Though pure fee-based advisory is a greater challenge in this country where advice is freely given rather than asked, advisors have started charging fees for their planning and transaction services. While one may segregate differing service offering for different client groups, the question is putting a right price on it. One may define a price based on the advisor's time / hours, and the actual transaction / operation costs for any service. The challenge here is to get the right mix of offerings / services that appeals to the client and rewards you for your efforts and expertise.

Challenge 2: Delivering Service Excellence
Being in the service industry, the client is the king. Every offering has to be designed keeping the client in mind and driven towards client's interest. But promising is not enough and every promise has to be backed up with proper infrastructure, process and the right people who would execute the promise on time. Here, It is better to under-promise and over-deliver rather than over-promise and under-deliver. Sooner or later, the client is wise enough to find out better service providers if you are not up to the mark.
The first step towards delivering service excellence is defining service standards. Remember, that being just good every time is much better than being excellent some of the times. Sticking to basics often works as clients over time value small things done properly. But for advisors today, this is only the starting point and with growing client expectations and growing exposure to services being offered by others, these service standards have to be revised from time to time. The best time to begin, is now.

Challenge 3: Maintaining Quality of Advice
In the business of advisory, the advice is the commodity that one is selling. Ofcourse it is intangible, subjective and dynamic to the extent that one advisor may at different points of time give differing advise to a client in same situation. Defining quality of advice and maintaining the quality is then possibly the greatest intangible challenge for the advisor. Being in a fiduciary relationship, often undefined, with the client also places the advisor in an obligation to provide the best advice possible, which is at the heart of the profession.
The best way to ensure quality is to be institutionalise it – make the advice process driven, rather than advisor / person driven. Though this may sound a difficult, it is not impossible to achive a certain degree of standardisation, provided the advisor commits himself to this. One may of doing this is make standard advice / plans for standard situations / objectives or client profiles. Designing standard portfolios or methodology of arriving of portfolio or investment recommendations is part of this process. The idea is to look at every advice as result of some set of logics, assumptions, product preferences, client preferences, etc. Defining these components will throw up new realisations and increase productivity significantly. Although it is not possible to entirely replace the expertise & knowledge of any advisor.
Quality of advise is also a lot about keeping self and team updated, educated and skilled in advisory subjects. This is something that directly involves person committment to continuous learning and education.

Challenge 4: Keeping Costs Low
Independent financial advisors have one huge challenge to grapple with. Managing operations in such a balance that the costs are under control and the service offerings are not compromised. Many advisors often tend to approach this challenge with breaking up the operational tasks, processes and handling each independently. While this micro-approach is effective, advisors must also look at the bigger picture. This entails creating of the client groups, defining of the service standars to the exact processes & frequencies and devising the plan for its execution. While many advisors, may even do this activity, most advisors often short of breaking it further into 'free' services and 'paid' services and putting the price therein.
Other than the above, costs can also be managed by smarter use of technology and automation. Making the most of what is available on hand is the best way to begin with. The question one should ask is – am I making the most optimum use of available resources for all my clients? Quite often, the answer will be No. Advisors often tend to skip activities that can be done easily with the technology at hand and rather look for newer and better packaged products in market. Quite often when evaluating new systems, rarely does one find solutions that meet all the needs of the advisor. After considering license & renewal costs, installation, migration / integration / customisation costs, future integrations of other applications, etc., the ready-made solutions loose their appeal. The ideal option, as seen in trends in many markets, is being associated with large platform providers who provide advisors with a ready solution for implementation at much lower overall costs and with the promise of continuous additions on the product & the technology front.

Challenge 5: Managing Growth & Expansion
For a bicycle to stand alone on its two tyres, it needs momentum to go forward. This is true for every business and not just for the financial advisory practice. However this is a greater challenge since financial advisory is a people driven or advisor centric profession where trust & personal touch is critical and time is limited. An independent financial advisor with focus on quality advisory can only handle a limited number of clients or households. Even this is subject to the range of financial products / asset-classes and the scope of services / advisory the advisor is dealing into. The larger the range and scope, the fewer would be the number of manageable clients, single-handedly.
In the end, there are two ways of expanding. One being increase in the time devoted to building of business and second multiplying the time available by recruiting manpower. It is a fact that the advisors devote a very large portion, upto 60-80%, of their time towards non-productive, operational, servicing activities rather than on pure advisory and client acquisition activities. Advisors should be aware of where their time is being spent and should smartly delegate the non-value adding tasks. The second option of recruitment of quality manpower at reasonable costs is also a challenge, with still greater challenges appearing thereafter in terms of training, maintaining quality, measuring & rewarding performance & retention. Another way of looking at expansion is progression into newer product categories, newer services and newer customer segments. This though is more in nature of 'forced' evolution rather than expansion of the advisory practice.

Challenge 6: Building Customer Loyalty
Customer loyalty is the end result that boldly says the the advisor has successfully met all customer expectations over time. This statement itself lists the recipe for customer loyalty. The advisory should be careful that customer retention should not be interpreted as customer loyalty. While customer retention may be because of any reason, be it personal relationship, gratitute, non-availability of other options, customer inactiveness or indecision, reputation, etc.; customer loyalty is only for the reason of satisfaction. Always remember that retention is temporary and loyalty, though permanent, can never be taken for granted.  

  • Building customer loyalty is being able to do the following continuously for long term...

  • providing right advice in client's interest

  • meeting most, if not all, of the client's needs

  • keeping client's trust and confidentiality, intact

  • having a larger share of the client's mind (brand recall)

  • maintaing client relationship, with a personal touch / intemacy 
Meeting the challenges of the evolving financial advisory business though, not an easy task, is also not something which cannot be done. Advisors often tend to evolve a smarter practice suited to them and thier clients. The opportunity for financial advisors is huge if one is ready to the most in this transformation. In changing business dynamics, one thing is sure. People who mistakenly believe that they have reached such a degree of success that nothing much needs to be done, are sure to be left behind and advisors who anticipate and adapt to change would be the ones to reap the harvests tomorrow.

Sunday, September 5, 2010

The Rise of Nations

The global economy is not a static picture but a movie where the actors in the story change over time and take up new roles. Like a movie, the picture of global economy is also shaped by both sudden events and slow long term changes in the different nations of the world. Events like the Great Depression in the US in 1929, the First & Second World War to the recent Financial Crisis of the developed economies. Slow changes includes the rise of the industrialized countries at the start of the 20th century, the rise of Japan, China and now India. The world keeps changing, things keep moving and economic power changes hands over decades. Its an interesting movie and now the emerging giants of China and India are now among the leading actors in the global economy.
Factors affecting the rise of nations in global arena:
Internal economic drivers:
This factor is the core element without which no country can dream to emerge as powerful. History has shown that rise in the global economy was driven first by internal economic boom. In the early 20th century it was the rise of the industrialized countries, then the South East Asian Economies and now with the Asian giants of China & India. Though the models of growth may differ from the China & East Asian Economies driven largely by exports to the Indian growth story driven largely by internal consumption. A high growth rate of GDP sustained over few decades can propel an economy in the global skies.
Political factors:
The global political relations of a country can play a major role in enabling the growth of a nation. History shows that countries having stronger political relations with powerful, big nations have prospered and those who have not have stagnated. Examples, abound with Russia, North Korea, Libya, Zimbabwe, etc. on one side and with Saudi Arabia, South Korea, Pakistan, etc. on the other had.
Trade relations:
Stronger trade relations have traditionally helped countries to benefit from each other the most. International trade associations, have a very important role to play in this arena. European countries present a classic example of how trade relations can help a country or a group of countries to emerge powerful. Better trade relations would mean greater integration with other nations and would help in the areas of exports, imports, FDIs, labour movement, technology sharing, etc.
Environmental factors:
Environmental factors and natural wealth coupled with geographical location too play an important role in the rise of the nations. It is though interesting to note these factors alone do not determine the growth, but is determined by the extent of the use / productivity of same. E.g., being the Saudi Arabia which has managed to transform the economy better than anyone else with optimum use of its oil reserves coupled with progressive business environment.
Law & order:
A simple fact is that countries, and even states/provinces within a country, having a stable law and order situation have prospered more. One can easily see this with countries like Afghanistan, Pakistan, African countries, Cambodia, Iraq, etc. have suffered because of their internal, volatile law & order situation.

Globalization Trends:
In aftermath of World War II, countries started rebuilding their economies. The size of US economy had doubled during World War II and the United States started dominating the world politically, economically and militarily. Technological development and product design remained the focus area for US companies and US Multinationals viewed rest of the world as source of raw material.
In mid 1950s, American giants started expanding overseas which resulted in increased purchasing power abroad specially in Europe and Japan arrived on world manufacturing stage. During 1970s and 1980s Japanese manufacturing companies started giving head on competition to US giants. As a result both international trade and integration intensified in last two decades of 20th century.
The modern day globalization is supported and encouraged by institutions like IMF, World Bank and ADB. World trade forums like GATT – General Agreement on Tariff & Trade and WTO- World Trade Organization remained pioneered in taking globalization to next level in 21st century.
Globalization is the door that opens up an otherwise resource starves country to the international market. This allows countries to focus on their core competencies.

Where does Asia & India stand today in globalize economy?
The wave of globalization opened door for Asian economies to the developed world and market. It allows them to access their market as well as technology. This has given new opportunities to emerging Asian markets. If the decade of 70’s was dominated by Japan, 1980’s and 90’s saw emergence of China on global map.
India opened its economy only in 1992 on back of severe foreign exchange crisis that dragged the economy close to defaulting on foreign exchange loans. The process of globalization and liberalization that had started as a compulsion has continued over a period of past 17 years now. Due to initial policy changes and by opening of economy, we managed to grow at little over 6% in a decade between 1992-2002 and we managed to take this rate to higher level of 8.8% in last five years. This has put India on a global map along with China as two Asian giants to take world economic growth forward. If India can manage to grow at this rate, it could transform the way China has in 1990’s. India’s $1 trillion economy would double in size in eight and half years.
At the start of 21st century, the process of shifting of world economic power has started as Asia due to its two economic giants (India and China) now commending higher stake at world economic stage. At any international trade forum no trade discussion can be ended without consent of these two nations. If China has risen as world manufacturing hub, India is going strong in terms of services. Today the world is looking at these two Asian giants to revive economic activities due to sheer size of their domestic economies. Savings rate in India are at record highs of around 35-40% and the country is poised to reap the benefits of the demographic advantage of young generation. India is estimated to be the third largest economy in the world by 2050 and will be home to great multi-national companies.

The world has been talking about decoupling few years back. Now we are experiencing the new phenomenon of reverse coupling in which Asia especially India and China will pull USA forward rather than the opposite. As Indian citizens we are now experiencing the rise of our nation globally and this will only grow in future as has been experienced in other economies. As citizens of India and as investors too, we now have a great opportunity before us to gain the maximum from this rise and growth. The decisions we take today, will determine our prosperity in the years to come in a prosperous India.