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Sunday, July 22, 2018

Financial plan is a guided missile

She was worried that the client will refuse to renew his contract with us.

Written by SumeetVaid | Published: May 21, 2012 2:51:21 am

One day,one of our planners came up and said that she was upset that her client’s goal milestone was not met at the time of reviewing the plan. She started questioning the process of planning and our claim that getting a financial plan done will ensure that you will reach your goals. She was worried that the client will refuse to renew his contract with us.

Think about it – Will a financial plan ensure that you reach all your goals? Will joining a gym ensure that you lose weight?

Regularly working out at the gym and following a diet is what will ensure that you lose weight. Not just joining the gym,right? Then how will getting a financial plan done ensure that you reach your goals,if you won’t implement the recommendations in the action plan?

But this client who our planner was mentioning had implemented the plan,but yet he was not close to reaching the short term milestone. The investments suggested did not perform as projected or as assumed and if he had to be at level A today to reach his goal due after 6 years,he was at level A minus 10. If he continued what he has been doing,he wouldn’t reach his goal. No mistake of the client. But if he continued doing what he has been doing in spite of knowing he wouldn’t reach his goal that way,big mistake of the planner.

I was reading up the other day about missiles and the different types of them. The most sophisticated and most useful ones are the guided missiles. Guided missiles have some sort of guidance mechanism like infra red or laser radiations or other guidance systems like INS or GPS systems to identify target. When the missile takes off,the target is located to be at a specific place and wind direction,obstructions on the path etc are assumed and then the flight system is programmed.

Assume that the target moves. Will the missile be abandoned? The missile changes course to attack the target. When there is heavier wind or obstructions on the path the guidance system maneuvers the missile in flight,on the go and counters inaccuracies. And the missile will attempt hitting the target within a certain radius,in such a way that the target even if not exactly hit will feel the impact well enough.

Isn’t that what a financial plan also attempts to do? The goal is projected and returns are assumed. The goal can move with time and so can assumptions go terribly wrong. Would then the planning process be abandoned? Isn’t it just logical to do course corrections on the go and ensure that an impact is made when the goal is due?

Assumptions are exactly that,by definition they can go wrong. Any financial planner worth his salt should have the courage to keep the client on course,make corrections and guide the plan to the goal. If the course correction means change asset allocation,make a one-time investment,increase regular investments,liquidate some assets,borrow to pitch in or whatever makes logical and economic sense,so be it.

Whoever said a financial plan is to be cast in stone?

Financial planning is a process with the ultimate objective of reaching goals. It is not a magic wand that will ensure achievement of goals. The planner should have the capabilities to spot change in circumstances,make more assumptions,get them right or wrong and make corrections on the course. The client should have faith.

— Author is Founder & CEO,Freedom Financial Planners

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