My jaw dropped as I stared at the ₹25,000 invoice. “Babu, how can a water leak cost so much to fix?” I asked incredulously. My plumber’s response vexed me more. “Madam, the material cost is only ₹3,000. The remaining amount is my labour charge.” My eyes bored into him as I awaited further explanation. He asked me to recall how much money I had spent over the last few years trying to fix the same leak. A rough mental calculation put the number somewhere between ₹50,000 and ₹60,000. Babu grinned slowly, displaying crooked, discoloured teeth, as he ground his khaini (tobacco) into his palm. He said that was the price I paid for rejecting his keemti par majboot (expensive but solid) service and availing that of inexpensive but incompetent plumbers. He said he would fix the leak for good and I wouldn’t need to spend another rupee henceforth. I knew this was true, having known his work for many years. I wordlessly handed him the ₹25,000 cheque.
You may wonder what correlation does this story have with money management. Let me elucidate. I am a financial planner, who charges a fee for my services. I am often countered with why anyone would pay a fee when there are enough people and websites offering free advice. How do I justify charging money to generate money?
Here is where I draw the parallel between the plumber and I. The plumber attributed nearly 90% of his fee towards his expertise and only 10% towards material cost. Similarly, I charge a fee for my knowledge and skill in helping clients manage their money in the most efficient way. The by-products of my advice may be mutual funds, insurance, bonds, stocks etc. These products operate on the fringes because they are simply the tools with which I create and enable a well-structured financial plan. It is a means to an end and not the end itself. If I focus on products, I become the product, which can easily be replaced. If I focus on my expertise, I am not easily replaceable.
A well-constructed and delivered financial plan goes beyond selection of investment products and their returns. Planners help clients identify what they really want out of their money, meet cherished goals and aspirations during their lifetimes, and help make the right money decisions each time. It is a continuous, participative process that is flexible enough to accommodate changes in goals and lifestyle, both positive and adverse.
Most importantly, an advisor brings about behavioural changes in their clients, which goes a long way in preventing them from making emotionally-driven decisions. An advisor encourages clients to invest when they may be fearful, or hold them back when they may be greedy, resulting in gains that sit over and above portfolio returns.
A client-planner relationship is based on trust and a fiduciary commitment to always keep the client’s interest above everything else, much like the relationship between a doctor and a patient. It is through continuous hand-holding and disciplined actions that a planner helps a client stick to the right asset allocation and maintain the desired balance between safety and growth in the plan. Eventually, such actions enable clients to invest more, tide over market volatilities, meet their short- and long-term goals comfortably, and build a higher estate value.
The fee I charge is for the tangible and intangible value I bring to my clients’ lives. It is hard to quantify this value through a definite number such as a fee or a return percentage. How does one quantify the value of preventing clients from making wrong investment choices that are not in line with their needs? How can one quantify the marital harmony that ensues because the family’s finances are now better managed? How does one quantify the value of helping a client win a fair divorce settlement? How does one value the effort of helping a suicidal client come out of years of debt? Or helping clients retire early to pursue a passion? None of these situations are directly linked to portfolio returns and yet add tremendous value to a client’s life.
Several entities such as Wealth Forum, Morningstar and Vanguard have attempted to quantify advisor alpha. Their analysis points to this conclusion: excluding investment returns, an advisor augments the portfolio between 3% and nearly 5% each year, compared to an investor who manages her own portfolio. Of course, this conclusion assumes that the financial planner is qualified and has the required knowledge, analytical capabilities, skills and certifications to bring value on the table. Else, investors might as well go the do-it-yourself (DIY) route, enlist the help of a robot advisor or use a product advisor rather than a financial planner.
You can go to a hardware store and buy putty to plug a leak. If you know how to solve the problem, go ahead and DIY. But if you don’t know the real source of the leak and slather the putty on a superficial leak instead, you will have an ongoing problem on your hands, not to forget the money that you will flush down the drain. That is why Babu can charge ₹25,000 to fix a leak and a financial planner can charge a fee for her advice.
Priya Sunder is director and co-founder, PeakAlpha Investments