Ensure your adviser's motivation remains your financial security

Your financial adviser must be familiar with your financial profile. This allows him to choose the best possible plan for you. But could you trust his judgment if he also gets paid to sell financial products? Of course, endorsing a policy or a fund is not a red flag in itself. There is a sizable section of investors who want product recommendations.

"Mis-selling of this kind tends to be higher if the adviser is associated with only one product category or firm, say, selling insurance plans of one life insurance company," says Kapil Narang, chief operating officer, Ameriprise India.

This single product might be then sold without analyzing its compatibility in a portfolio. Even if the type of product suits you, you might be advised to buy a plan without comparing it with other products available in the category. Bancassurance is also a channel where we find such instances.

Malhar Majumder, a CFP and FCMA (Chartered Institute of Management Accountants, UK), says, "The initial idea was noble. Banks with huge networks and trusted positions were to help distribute financial products evenly across the country."

"However, what happened was that the management, to show immediate profits, pushed their employees to sell products that generated more revenue. So mutual funds (before entry load was removed) and insurance products such as Ulips, which had a frontloaded commission structure, were sold indiscriminately."

LOOSE RULES
Sebi recently released a concept paper that aims to distinguish financial advisors and distributors. The paper states that anyone who receives remuneration from the manufacturer will be called an agent and only those who receive all their compensation from investors will be advisers. So, a financial adviser cannot take a commission for recommending a product.

However, it is not yet implemented. There are currently no parallel rules in the insurance industry. However, early this year, insurance regulator Irda drafted guidelines on a concept called 'prospect product matrix' to curb mis-selling.

The regulator wants life insurers to adopt a standard Irda 'proposal cum needs analysis' form. This was to evaluate if a product will suit a prospective customer's needs based on factors such as risk profile, investment goals and investment experience. It was to be followed by all agents and brokers. Irda had then given a compliance date of the first of April of this year, but it too is not yet implemented.

"Insurance is sold through local agents who represent the company and not the client. It should be the other way round. Anyone who sells a policy should represent the client," says Narang of Ameriprise.

BE SMART
Regulations are more like guidelines now and it might be some time before strict measures are implemented. It is therefore best to look out for the red flags. Here are some.

Credibility and qualification: Certifications from Amfi and Irda are essentially a licence to sell a certain financial product, while a certified financial planner, or a CFP, is a qualified adviser. It is important to distinguish the two. Better to pay for good advice that act on free advice that is biased. Ask for references and check with existing clients to authenticate his advisory status.

Business model and size: What is the source of his income? Is financial planning his profession or a part-time source of income? If he suggests a product, you have the right to enquire if he gets a commission on the sale. You need to be wary if the adviser gets cagey about disclosing details.

Vivek Rege, a CFP and MD of VR Wealth Advisors, says, "The size of operation, such as office premises, staff strength, etc., will also help gauge his reliability."

Planning, not selling: Scrutinise if his advice is a sales pitch or a financial plan. An adviser recommending a product without asking about your financial goals is major warning signal. Pushing a product without being able to tell you why it suits you better than other similar products is another sign.

Portfolio management: A financial plan should be re-evaluated periodically. Even so, it is essentially long-term planning. So, frequent churn of a portfolio, especially long term investments such as insurance and mutual funds, is a definite warning. There must a reason to change an investment plan.

"It is odd for your portfolio to have a number of similar products or for you to be pitched new investments too often," says Narang. If you are smart and stay alert, sieving the good from the bad should be relatively easy.

Unmask the Poser
Smart questions to ask a financial planner and the answers he should be giving you

Q. What qualifies you to be a financial adviser?
A. I am a certified financial planner (CFP) or I have a certificate from Irda/Amfi/National Institute of Securities Markets. (A CFP is better qualified to manage a portfolio).

Q. Do you have relevant experience?
A. Yes (Make sure you are not the guinea pig. The years do not matter so much as the kind of exposure and profiles he has handled in the past).

Q.Can you give references from current clients?
A. Yes (Speak to at least two existing clients to ensure you get quality service).

Q. Will you draw up a service agreement? Will the advice be given in writing?
A. Yes, and the advice will be recorded in writing.

Q. Is my fee your only source of income? Do you get commissions for the products you recommend?
A. Client fee is my only source of income. I do not earn commissions on the products I recommend.

Source - Business Today Online 

Stay alert for tax-free bonds

Invest in tax-free bonds to get higher post-tax returns

With most long-term fixed deposit rates settling in the 8.5-8.75% range, investors looking for fixed-income instruments have an opportunity to invest in tax-free bonds that can give higher post-tax returns than bank fixed deposits (FDs).

By March 2013, 10 government-owned infrastructure companies would issue Rs 53,500-crore worth of tax-free bonds. As interest earned from these bonds would not be taxed, investors would earn a better post-tax return than from FDs.

The interest earned on bank FDs and other normal bonds are added to the income of the investor and taxed as per the income-tax slabs. Post-tax return from an FD that offers 8.5% annual interest would be 5.9% for an individual in the 30% tax bracket.

Tax-free bonds are rated long-tenure (usually 10-15 years) fixed-income securities offering annual interest at rates less than the yield of government securities of similar tenure. At present, 10-year government bonds are trading around 8.2%. Going by these rates, one can expect the interest rate to be 7.5-8%.

One can buy and sell these bonds on the stock exchanges. Though the interest earned on these bonds is tax-free, any capital gain from sale in the secondary market is taxable. Short-term capital gains are taxed at the normal rate, while long-term capital gains are taxed at 10% without indexation and 20% with indexation. Indexation is adjusting the purchasing price with annual inflation.

Source - Business Today Online

Close ended fund versus an Open ended fund

An open ended fund is one that sells and repurchases units at all times. When the fund sells units, the investor buys them from the fund. When the investor redeems the units, the fund repurchases the units from the investor. An investor can buy and redeem units from the fund itself at a price based on the net asset value (NAV) per unit. The number of units outstanding goes up or down every time the fund sells new units or repurchases existing units. Therefore the “unit capital” of an open ended fund is not fixed but variable. When the sale of units exceeds repurchase, the fund size increases. When repurchase exceeds sale, the fund shrinks.                                                                               
 In practice, an open-ended fund is not obliged to keep selling new units at all times, though it has an obligation to repurchase units tendered by the investor. Unlike an open-ended fund, the unit capital of a close-ended fund is fixed, as it makes a one-time sale of a fixed number of units. After the offer closes, close-ended funds do not allow investors to buy or redeem units directly from the funds.                                                                                                                             
 To provide much needed liquidity to investors, close-ended funds list on a stock exchange. The fund’s units may be traded at a premium or discount to NAV based on investors’ perceptions about the fund’s future performance and other market factors affecting the demand and supply of the fund’s units. Sometimes close-ended funds offer buy-back of units, thus offering another avenue for liquidity to close ended fund investors.

5 Commandments for your 30s

Most investors start to really get serious about planning for their retirement, and other life goals such as their children’s educations, buying a house, and so on, when they are in their 30s.

Before you reached this age, chances are you would not have taken a close look at your cash flows, or thought about your long term major financial needs. Maybe you were unmarried, or were married but didn’t have kids and were spending your cash inflows only on yourself, your spouse and your parents.

By the time you are in your early 30s, you have settled down a bit, have a stable career path, have a family to provide for and have a better, more crystallized idea of what your major financial obligations are going to be. By your mid 30s, you’ve been working for about a decade now, have some funds salted away in your EPF, PPF, tax saving mutual fund schemes, and perhaps some direct equity and other investments.

So what do you need to do now? Here are the steps to make sure your financial life takes on a more structured definition and you sleep well at night, knowing that you have taken control of your financial life.

1. Know What Your "Number" Is
   
   The retirement corpus that you require can be quite a hefty figure.
   First, figure out what you are spending today on a monthly basis - on various categories of expenses such as household, medical, entertainment, travel (including fuel), EMI, children’s school and tuition fees and so on. Next, see which of these expenses are likely to continue in your retirement years. Once you know this figure, you can inflate it to see what the same lifestyle will cost you once you retire.
   
   Our Retirement Calculator can help you with this. Remember, if you like the calculator, share it!
   
   Here’s a small example:
   
   Mr. X is 35, wants to retire at 60, currently spends Rs. 75,000 a month on household and other expenses, and spends about Rs. 5 lakhs a year on travel and medical. He assumes household inflation is 7% per year both pre and post retirement, travel and medical expenses inflate at 10% per year, and he will earn 6% per year on his retirement corpus once it is built and he invests it after his retirement.
   
   How much will he need to retire and maintain his current lifestyle?
   
   Over Rs. 29 crores.
   
   Is this achievable? Yes, it is. Your financial planner can show you what disciplined, structured investments to make to achieve this, as well as your other life goals.
2. Get Adequate Life Insurance
   
   We’ve seen enough cases of people passing away at surprisingly young ages, like in their 30s and 40s, from stress and an unbalanced or unhealthy lifestyle, leaving a spouse and young kids behind.
   
   The last thing that a grieving family needs, is added worry of a financial future that is not secure.
   find out how much life insurance you need by way of term insurance, and take it.
   
   Remember, not everyone needs life insurance (only those with liabilities and financial dependents) so first check with your financial planner if you need life isnurance, and how much. Our Human Life Value (HLV) Calculator can help you see how much you need.
3. Build a Contingency Fund
   
   A contingency fund is that kitty of funds that is built up and kept aside, never to be touched, except in case of an emergency. An emergency could include a situation where cash inflows (salary or business inflows) are halted, suppose you lose your job or the business environment is not healthy.
   at times like these, expenses continue and they need to be met. They can be met from your contingency fund.
   
   It is advisable to have at least 6 months expenses kept aside in your contingency fund (held across savings accounts and liquid plus mutual funds for easy access). Your contingency fund can be 6 months to 2 years of expenses, depending on your risk appetite and tolerance.
4. Invest As Much As Possible
   
   Life today offers more than enough distractions to keep us from investing as much as we can. But the reward of maxing out your investments should be motivation enough. Consider 2 individuals, both 30 years old, earning approximately the same salary, both married, without kids.
   
   One individual, Mr. X, invests Rs. 35,000 per month into a well structured portfolio of diversified equity mutual funds, which will provide a long term annualized return of 15%.
   The other, Mr. Y, invests Rs. 25,000 per month into the same portfolio.
   
   Only a Rs. 10,000 per month difference.
   
   By the time they are 60, these are the corpuses built from this single monthly investment:
   Mr. X: Rs. Rs. 24.23 crores
   Mr. Y: Rs. 17.30 crores.
   
   A difference of Rs. 6.93 crore. To see how much wealth you can build with consistent SIP investments, you can use our SIP Calculator.
5. Make a Will
   
   When we tell our young clients to make a will, some of them respond with "I have plenty of time to make a Will, I’ll do it when I have more assets".
   
   Don’t wait. You do have assets, they can ease your family’s life in some way, and while you may have plenty of time, nobody knows this for sure. So make a will. It’s easy and not expensive. And it prevents your assets from going to the Government, and gives them to your designated beneficiaries instead.
   
   Follow these 5 simple commandments for your 30s and the sense of empowerment over your financial life will be well worth the time spent.

Marketable Financial Assets

How many of you have bank accounts?
How many of you have invested in post office deposits?
How many of you have Life Insurance policies?
How many of you have invested in company deposits or in provident funds?

Majority of you have invested in at least one or more financial assets.
What do you do when you open a bank account?
You go to a bank and meet bank officials. They ask for a few documents and open your bank account.
What do you do when you invest in post office deposits?
You go to your nearest post office and deposit your money.

Simply put, there’s a direct relationship between the issuer and the investor in case of non-marketable securities.
But, what do you do when you want to close a bank account? Do you sell it?
No. You can’t.
Because, bank accounts and post office accounts are non-transferrable and non-marketable.
What are other non-marketable financial assets? LIC investments, bank accounts, company deposits, provident fund deposits are all non-marketable financial assets because you can’t sell/market them because there’s no secondary market available for them.
Then what are marketable financial assets?
Marketable financial assets are those assets which are easily traded and a secondary market is available for them.
Examples of marketable financial assets are—equity shares, bonds, mutual funds etc.

In short, there’s no direct relationship between the issuer and the investor in case of non-marketable securities.
Since there’s a secondary market or a middleman available in this case, buyers and sellers are not required to meet physically.
As an investor/analyst, you need to know different financial assets available in market and need to check which assets suit you best.
Here’s a list of marketable/non-marketable financial assets.

Choosing the Right Bank for A Loan

Whether purchasing a vehicle, investing in a house or stuck in a financial crunch, borrowing money from a financial institution is the best means of getting the required funds. As easy it may sound, borrowing funds calls for plenty of efforts. A person has to chart out a plan for his borrowing needs and implement it wisely so as to escape any trouble later on.

Of all the stress one has to go through for getting a loan, finding a competent lender tops the list. Therefore, one should be very careful as choosing the right lender will not only eliminate the chances of any probable glitches, but will also help reduce the expenses of his undertaking.

First and foremost, the borrower should look around which means consulting everyone who has an experience of getting loans. This may include family members, friends, colleagues, kins and even neighbors. One can ask them about their lenders and how their experiences were working with those lenders. One can make a list of all the lenders suggested by people and note down their pros and cons as well.

Prodigious information about loans and lenders can be conveniently found over the Internet. So,one can spend a few good hours online searching for competent lenders. One can also search as per the list made after consulting people he knows. This will help him zero down his search and save plenty of time which can further be used to compare different lenders. While one is at it, he can search for competitive offers available online in order to nail a lot better deal.

Once he has narrowed the list down to minimum five lenders, he can call up the customer service of each one and inquire about interest rates, loan tenure, application fee and other costs. He must ensure that he is asking the same questions to each lender. It's important because he will have the same information to make comparison easier. In case he asks different questions to each lender, he will be, let's say, comparing the guavas, apples, grapes, pomegranates and pears. While with the exact details at hand, he will be comparing guavas to guavas.

One more thing to consider here is that the information gathering part should not take more than two to three days because if one takes longer, the market will probably fluctuate, resulting in different answers from each lender. During this digging into various lending institutions phase, one should also ask the institutions' representatives to explain the different types of loans. One should express his financial requirements and ask the representative to spell out the kind of loan that would best suit his situation.