By Suresh Sadagopan
The important thing in life is to live a comfortable life and meet the important goals. Put simply, this is the crux of what we are all aspiring to at the material level. Money is important for this - for sure. However, there are problems with the way investors set goals.
Contrived wealth targets - Some clients want their financial planners to work towards a certain amount, either for a goal like retirement (say Rs 5 Crore) or to have a target to cross, say, Rs 2 Crores by 40. The amounts stated often have no basis and are conjured up, based on what their aspirations suggest, without any check on whether the amount is sufficient, possible, or even appropriate. A Financial Planner/ Advisor cannot blindly work towards the stated goal.
In this example, for retirement goal sufficiency, the amount needed will depend on when a person will retire, the survival period, what their expenses will be in retirement, travel and other goals, inflation, medical contingencies, assistance to parents, children, relatives, and other such factors. Suffice it to say that such contrived numbers cannot form the basis of any proper planning process. The amount needed needs to be found out and planned for.
Aspiration on steroids - There is a school of thought that holds that you need to earn enough to spend well, instead of the received wisdom of spending within your means. To these people, spending within one’s means implies a lack of ambition and motivation. Living life king-size is an accepted paradigm for many today.
Allied with this is another movement that lays store on manifesting whatever one may want in life, however preposterous it may sound to another. While the power of manifestation is not in doubt, it does not work well in all cases.
In some cases, a real stretch goal like a luxury car turns out to be a costly, vanity project that exerts tremendous pressure on cash flows and consequently on the other important goals. In extreme cases, even regular expenses are impacted by such goals.
Working without certainty of cash inflows and hoping it will somehow happen is like skating on thin ice. A Financial Planner/ Advisor cannot plan based on the munificence of the Universe and its power to bestow what they want in their life.
Chasing earnings/returns targets - Many people wake up late. They want to ensure that their returns are very good from that point onwards on whatever they invest. They keep tracking it very closely and want to move in and out of assets. Some people remain razor-focused on this. However, for most people, this happens for a time till they find something else that captures their attention!
The return focus causes them to move from one asset to another without regard for other important parameters such as risk, taxation, associated costs, liquidity, tenure, reinvestment risks, etc.
Also, such a portfolio will not have proper alignment with goals, risk profile of the person, liquidity/ tenure needs, etc. The investments thus made tend to be ad hoc and lack coherence. This remains a disparate collection of investments instead of being a purpose-driven portfolio, put together to achieve specific ends.
Legacy for children - Leaving a legacy behind is natural and happens automatically after one's lifetime. However, this takes a life of its own for some. Such people become obsessed with this and want to plan it along with various high-priority goals like their residential home, vehicles, vacations, etc.
Many of these people want to leave behind one property per child. This is a somewhat common legacy aspiration. There are other cases where the parent wants to leave a very substantial amount for the child and wants their advisor to plan for it.
In cases like these, the problem is that the planner will need to provide for goals that are not really important in their client’s life, sometimes to the detriment of even their real goals, like a comfortable lifestyle, vacations, etc.
Financial Planners' Dilemma - Investors who are fixated on returns or specific targets pose a huge problem to their advisors. The advisors will not be able to do their best work for their clients when faced with such constraints. This will not help the investors themselves, as their own obsessions are obstructing the advisors from doing what is best for them.
In these kinds of situations, Financial Planners find themselves between a rock and a hard place - damned if you do, damned if you don’t (as the client will not like it).
The only real option for the investor to get the best outcomes is to trust the advisor fully and follow their counsel. Directing the advisor in directions the investor wants to go is like going to a doctor and pleading with the doctor about the diagnosis and the medicines. It is unproductive to put it mildly. And a costly one at that.
The author is the MD & Principal Officer at Ladder7 Wealth Planners and the author of the book “If God Was Your Financial Planner”.
(Disclaimer: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)
