5 Important Questions To Ask Your Financial Planner

Stung by sharp selling tactics, many informed consumers of Financial Products & Services are migrating to "fiduciary" Financial Planners such as SEBI Registered Investment Advisers (RIA's) and Certified Financial Planners (CFP's), who don't earn commissions from distributing products but charge a fee for their advice instead. If you've recently signed up for the services of such an individual, here are 5 worthwhile questions to ask to get started.

Am I adequately insured?
It remains a confusing paradox that despite being voracious consumers of Life Insurance products, most of us remain under-insured. What's behind this phenomenon? Primarily, our propensity to shy away from pure risk coverage policies that don't have a savings element, but cover our risks adequately. Sit with your Planner and evaluate your coverage requirement from a pure risk transfer standpoint, keeping in mind your number of dependents and their inflation adjusted expenses, as well as their important future goals. Typically, this number will lie anywhere between ten and twenty times your annual income; implying that for an individual earning Rs. 20 lakhs per annum today, it's likely that a coverage of 2-4 Crores will suffice.

Besides Life Insurance, ask your Planner if you need to up your health insurance coverage or switch over from your current plan to another plan. A single medical emergency can deal a crippling blow to your personal finances, so it's best to have that base well-covered.

Do I need to junk any of my existing policies?
Our undesirable collective habit of signing up for Life Insurance plans at the penultimate moment in the fiscal year to save taxes often leads to the accumulation of 'lemons' in our Life Insurance portfolio. Over time, you may have signed up for low yielding traditional plans that would be best made paid up, or expensive ULIP's whose funds are consistently underperforming Mutual Funds while affording you nothing more than a sliver of life coverage! It's not uncommon to have clients with fifteen of twenty policies adding up to several thousand rupees of premiums per month. Dig up those dusty papers, get them together and put your Planner to work. Quickly figure out which policies are worth carrying on and which ones you'll be better off putting down.

Do I need to consolidate my Mutual Funds?
Many investors end up making bite sized investments into a host of Mutual Funds, either goaded by well-meaning friends or smart marketing tactics. The fallacious belief that NFO's are a good bet due to their "low NAV" further exacerbates this. Over the years, this could lead to a phenomenon called "over-diversification" which could in fact counterintuitively start affecting your portfolio returns negatively. Additionally, a scattered Mutual Fund portfolio will almost always not be in sync with your ideal risk profile. A qualified Planner can help you concentrate your investments into the best equity and debt funds, based on your individual profile as well as tactical market outlook. Giving your portfolio a facelift could actually add a few percentage points of additional annualized returns to your Mutual Fund portfolio; which could, in the long run, add up to a sizeable Rupee amount.

Am I on track to meet my future goals?
It's a fact that most of us save in an ad-hoc way; although we Indian's fare reasonable well as savers in terms of the quantum of money they put away on average (our country's savings to GDP ratio stands at roughly 30%), we're not goal oriented with our savings. When asked whether their regular savings are sufficient, or being properly channelized towards their future goals, most clients draw a blank. A Financial Planner can help you create a roadmap for your future, defining important time bound milestones and calculating inflation adjusted Rupee amount requirements at each of them. This exercise can be quite cathartic, and lead to a deeper focus with respect to one's regular savings. In case your current surpluses are insufficient in terms of your future goal requirements today, you can always get started with a smaller amount right now, while keeping an eye on the big picture.

Is my asset allocation OK? 
Most of us have limited awareness about asset allocation and its significance. Although there's no magic formula to arrive at your ideal asset allocation, your Planner can help you arrive at a best-fit split based on a number of factors: your age, your income, your savings and your risk appetite, to name a few.

Typically, most investors have what can be called a "pet" asset class (real estate, gold, stocks, fixed deposits) and this is where they blindly channelize the bulk of their investments. In the long run, this exposes them to cyclical risks, and can also reduce overall long term returns too. See your Planners support to define your optimal split between physical and financial assets; and within each of them, lower and higher risk sub-asset classes (for instance, stocks and bonds within financial assets). Stick to this allocation resolutely and rebalance your portfolio on a periodic basis.