Financial planning promotions are often lies and half-truths

I am sure there are some great financial planners around as are there people really knowledgeable about personal finance – it is just unfortunate that I have not met them in real life, at least in the Indian context. In a couple of discussions over some web forum a couple of planners got rather upset with me when I expressed my opinion that people who think equity returns compound are obviously not having any financial expertise. One particular person said that I should stop all criticism unless I came up with specific examples and could name the planners promoting lies and half-truths.

Well, it is not my idea to name and shame people in the blog. I believe that each individual needs to be careful about where he or she is getting the money advise from, more so if it is paid for. However, I received a very interesting email from a leading Financial services company yesterday which I wanted to share with all the readers. Note that I am reproducing the email here exactly as I received it, just deleting the line which names the company. Here it is :-

In our experience, any further delay can cost you more than what you can afford!

One of simplest ways to get started is through SIPs. An SIP helps you build wealth by investing small sums of money every month, over a period of time. The wealth accumulation of an SIP is based on the power of compounding.

Below scenario as an example shows us that when it comes to fulfilling your financial dreams, time is more valuable than money!

 Scenario 1: Person starts today-

 SIP (Systematic Investment Plan) Amount: INR 21,000
Investment Period (in years): 10
ROR (Rate of Return)/annum: 10%
Total Sum: INR 43,01,745

 Scenario 2: Person defers by six months-

 SIP (Systematic Investment Plan) Amount: INR 21,000
Investment Period (in years): 9 ½
ROR (Rate of Return)/annum: 10%
Total Sum: INR 39,70,388

 So, when you start today, you actually save INR 3,31,355 (Total Sum in Scenario 1- Total Sum in Scenario 2)!

What are the basic problems with what these guys are saying. Here are some basic ones:-

  • They cannot even do basic Maths. In scenario 2 the investment made is lower by 1,26,000 which they have very conveniently forgotten to mention.
  • Rate of return per year is nicely taken to be 10 %, without even mentioning the risks associated with equity. The investments are treated like a recurring deposit with 10 % interest. If only like were that simple.
  • No consideration given to purchase price depending on market levels. It is quite possible that in the first 6 months the markets were at very high levels and the units available were quite low.
  • The intent is to convince the buyer that equity pretty much works like debt only with a much higher return that is tax free too !! In fact it is copied from a commonly used example for debt, in order to show the impact of compounding.

Now, what will such planners advise you when they do not even understand the basic characteristics of equity as an asset class? Or maybe they understand it but feel if they share the truth with you, you will not go in for SIP anyway? In either case, you will be well advised to steer clear of them. Financial planning and investment does require a certain level of knowledge but any reasonably successful professional in any field can acquire that fairly quickly.

For starters you can read some of the posts available in this and other good blogs. Take control of your money and make it work hard for you – after all you have worked quite hard for it.

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2 thoughts on “Financial planning promotions are often lies and half-truths

  1. Everyone who thinks beyond the present is continuously planning intuitively. Role of advisor is to be seen as someone who introduces you to the world of financial products and possibilities but to be taken with a pinch of salt as in the adage buyers beware. Even if you have a formal plan in place, there is no guarantee it would work because of a number of variables that may throw up over long time horizons. Indians have traditionally been savers and their continuous rolling plans keep them in good stead. However, one should not get influenced by modern day debt traps due to propensity for advance satiation.

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  2. India is becoming a mature market, and returns will not be as per past performance, as mature market has depth and absorb volatality to the greater extent. People who are showing past performance shud remember that as more and more money comes, returns become less.

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