Financial Adviser evolves certainty among uncertainties of life

Uncertainty is possibility of an outcome, i.e. what you expect may or may not appear.   While we say future never resembles the past, we mean our future is uncertain. As Financial Adviser in Kolkata, we make you aware of things which are uncertain. The only certain things are our past (that had happened) and present moment (that is happening). In our daily lives we assume many things and draw conclusions. The probability of certainties may be zero or one. The outcome “zero” means impossible and “one” means it’s certain. E.g. Death is certain. The only truth of life is death. Therefore, probability is one.  Probability Distribution assigns each measurable subset of the possible outcomes of a random experiment, survey, or procedure of statistical inference. “Death is certain but the time of death is uncertain.” So probability of death is one.

A Financial Adviser addresses uncertainties

Plan is for the present and the future which is based on certain assumptions relying on the current and the historical data. Financial planning based on historical data in personal finance is a method that helps an individual/ family/ business to project future. This is uncertain and through periodical reviews it becomes certain. It is used to identify the most important assumptions in an individual/ family/ company’s business plans and to accommodate unexpected outcomes.

Financial Adviser takes you through unique processes to reduce uncertainties

As Financial Adviser, we rationally want to reduce extent of uncertainties

Can anyone reduce future ramifications? Yes, hardly an abstract Plan can deal with these present and remote ramifications. But one can reduce or offset present and future ramifications by revisiting the Financial Plan as time passes. Uncertainties may be due to mainly macroeconomic or personal factors.

Macro economy deals with inflation, price levels, growth rate, national income, gross domestic product and unemployment.

Personal factors mean one’s health, family, income and expenditure, net worth etc. Personal factors of Mr. X is bound to be different than that of Mr. Y. But in case of macroeconomic factors both Mr. X & Mr. Y will be influenced almost similarly.

While we make a Plan, as your Certified Financial Planner in Kolkata, we necessarily address such uncertainties as far as practicable. What do you prefer? It reflects through your behaviour. Would you like to cut some of your spending to generate wealth or you would like to be spendthrift with minimum asset or no asset for your future? Another subtle decision you may take is not to cut your spending habits for your wealth creation. Thereafter, you’ll be greedy to park you residual surplus in risky portfolio to generate more returns and try to bridge the gap between required fund and available fund. It’ll not match with your risk profile, investment time horizon, goal priority and objective. Your behaviour is also a personal factor.

Let us discuss about some basic and common factors of uncertainties. Human being has three enemies, “dying too soon, living dead and living too long.”

While we live in too many uncertainties, we quest for financial security and emotional support. In personal finance, there is no such solution of emotional loss. But through Estate Planning it can be resolved partially. Suppose both my wife and I die in a road accident and leave my entire assets for my minor children with a valid Will. What if I had ignored to appoint a legal guardian who’ll take care of my children? There may be adequate financial provision but who’ll bring up my minor kids? My children need parent’s care, what an orphanage can’t treat alike. Naturally I’ll select a guardian who can guide my kids till they become major. Thus it is evident that Estate Planning is a must.

Being a Financial Adviser, we have to address many doubts of our clients. How many of us think we are mortal beings? We mentioned that the probability of death is 1 and death is certain.

We also mentioned about uncertainties of human beings:

Problem 1: Dying too soon

The only solution to the problem is to have adequate insurance in case of untimely death.

Why do people insure?

They don’t know the date, month, year and time of death unlike date of birth. Therefore question of untimely death is all about uncertainty. Who’ll finish the unfinished job of the deceased? On the other hand, if the assets are damaged due to a peril or for me if anyone losses financially.

What do they insure?

• They insure the capitalised value of human life;
• The replacement value of an asset;
• The compensation/liability value or
• Mortgage Cancellation insurance Policy etc.

 How much do they insure?

They insure present value of their future income, present value of family commitment/s, liability etc. Neither a husband nor father can be replaced excepting his income. So in one sentence we can say that “protection of economic value”. There are many techniques for calculation, i.e. Human Life Value (HLV), Capital Need Analysis (CNA), Advanced Capital Need Analysis (Adv CNA).

How much means that we have to quantify the amount of loss or future income of the deceased person. It’s unlike asset or liability insurance. For Health Insurance or any other insurance except life, insurance means indemnification of financial losses. No insured can make profit from a claim.  If someone had undergone a surgery and the cost is Rs. 2, 00,000, although s/he has coverage of Rs. 25, 00,000, s/he can claim up to Rs. 2, 00,000. Likewise if the claim amount is Rs. 40, 00,000, his/her limit is Rs. 25, 00,000. The claimant gets Rs. 25, 00,000 & not Rs. 40, 00,000.

While you insure your property (house/flat) against fire & earthquake, always insure as per current market value & on the basis of reinstatement. Inadequate insurance coverage means that in the event of a claim, it may result in economic losses to the insured. As a Financial Adviser we should educate our clients.

Better to insure on the basis of reinstatement

Suppose the property market value is Rs. 1 Crore and you have insured only for Rs. 75 Lakhs against fire & earthquake. The flat is damaged by an earthquake, whose loss is assessed at Rs. 15 Lakhs. Assuming that the insurer (Insurance Co.) applies the principles of Average to the loss what will be claim amount the insured (Claimant) will get against the claim? Will it be Rs. 15 Lakhs as the coverage is Rs. 75 Lakhs?  It’s big “No.”

He’ll get (75, 00,000/100, 00,000)*15, 00,000 = Rs. 11, 25,000.

Since you are your own insurer for Rs. 25 Lakhs (Rs. 1, 00, 00,000 – Rs. Rs. 75, 00,000), you share the loss in the same proportion with yourself. Although the market value is 1 Crore, you are under insured by Rs. 25 Lakhs. The consequences are that you have to bear the loss of Rs. 3.75 Lakhs (Rs. 15, 00,000 – Rs. 11, 25, 0000).

In case of compensation or liability insurance, you have to disclose the facts in your insurance proposal form and the insurance underwriter will determine the premium as per liability insurance coverage.

When do they insure themselves?

If someone asks when one should? We say RIGHT NOW. Why? Your health buys insurance and not your money. You don’t know whether tomorrow you will be insurable or not.

Nobody knows the date, month, year & time of accident or calamity. It may happen at any moment. If you stay without insurance, it may be too costly while you can’t share your risk with insurer.

Problem 2: Living dead

The solution to this problem is insurance and simultaneously contingency fund. But before you proceed further you must know the nature whether it’s temporary & total disablement or permanent & total disablement? It may be due to accident or illness. Critical Illness coverage, Personal Accident Policy, Contingency Fund provision should be kept which may partially/entirely see you through the disruption.

Why I say “living dead”?

Anybody may be a mere expensive consumer than an income producer when s/he becomes disabled.

Why I use the term “costly consumer”?

S/he needs nursing costs, medical expenses, day to day living cost of other family members who’re potential dependents. A Financial Adviser considers all areas and makes clients aware.

For reference you can see my previous article : “Concerned about your Personal Finance? Follow the basics”

Problem 3: Living too long

Due to galloping life spans, if someone lives for 85/90 years and the Financial Plan for unproductive years is not addressed properly, you may outlive your retirement corpus. This is the risk of living too long.

Sometimes you may ask yourself “Have I made my bellyful retirement precaution?”  A retiree has to consider Income Tax & Inflation. We have progressive tax structure. A progressive tax is a tax that takes a larger percentage from high-income earners than from low-income individuals.

Although you may invest in bank or post office, there is an interest rate risk. What is interest rate risk? While you deposit an amount in bank or post office and after maturity when you opt for reinvestment you can find that interest rate is lower than the prevailing interest rate.

In case of bond market, the longer the maturity, the greater the degree of price volatility.  If an investor holds bond till maturity you may not experience price fluctuations (which are known as interest-rate risk, or market risk), because you will receive the par value, or face value of your bond at maturity. In the market we can see business cycles which affect the level rates in the economy.

Practical Scenario

Mr. Aswin Singh (39) is a business man (name changed) was looking for a SEBI Registered Investment Advisor in Kolkata and approached us for his detailed Financial Plan. His wife Mrs. Rukmini Singh (35) is an Assistant Teacher in a Govt. School. Their only child Rohan Singh (4) has just started to go to a renowned school. Mr. Singh is an MBA. He was working in a MNC. After few years of his service, he started a side business in real estate sector. He had been earning whopping amount during boom phase in real estate. His assumption was that if he quits his job and gives full time and energy in the business he can earn lot of money than he used to do before. He left his job but his assumption did not click. Now the Real Estate market cycle is in trough. Every month he has a deficit of income of Rs. 33,000/-. To meet his family needs, he is currently spending from his accumulated fund. Now the question is how long he can use his savings towards his needs? He bought a land and anticipated that it’ll appreciate like anything which did not happen in reality. This asset is a contingent asset. It’s uncertain as to when it’ll reach in break even point. It’s highly iliquid asset and he can’t even sale it at a distressed price.

Mr. Singh invested in land for the purpose of his retirement corpus.  Now he anticipates the market price will not be recovered in coming 10/15 years. It may be useful for his next generation. Mrs. Singh is a Govt. employee. She has high blood sugar and high blood pressure. There is a doubt whether she can work until her customary retirement. Being a Financial Adviser, I have to consider the grave situation. If she would continue her service till retirement, she will be entailed for good amount of pension and other benefits like leave salary, gratuity, GPF. If I consider these benefits on the basis of assumption, it may be a disaster for him.

Secondly, Mr. Singh can’t depend on only interest income which can’t offset inflation. The real rate of return will be post tax return and post inflation return. This will be negative undoubtedly.  He has to use both interest & retirement corpus. He has to generate a retirement corpus of Rs. 6 Crores within 16 years time horizon if he survives up to 30 years after retirement.

Unless a person makes detailed Financial Plan for her/him, s/he can’t understand the areas of uncertainties. One must be serious enough while making provisions. Too much of assumptions are not healthy for economic freedom. If you want to be free of worries, it’s better to avoid unwise decision and assumptions without periodical reviews. Your Financial Adviser will ethically guide you at all times to keep you on track.

“An unproductive consumer is too old to work but too young to die”.

The above sentence is an indicator of uncertainties. In case of real asset, what you assume may not follow the history. This asset was bought on certain assumptions, like value will become double or more within next 5 years or so. Investment is quite high and the risk is also high. The assumption was wrong. Do you have a plan for building your net worth with the positive cash flow? A qualified and farsighted Financial Adviser can create your present and future more stable.

Review your objectives with your Financial Adviser and incorporate changes to stay on track

You can lead a worry free life by following these along with your Financial Adviser:

• Evaluate your current cash flow and net worth
• Create detailed Financial Plan with achievable aspirations/goals by considering present & projected cash flow and net worth
• Increase cash flow by identifying unwise expenses, taxes, insurance, and debt etc.
• Increase net worth by investing cash flow margin in appreciating or income producing assets or activities
• Develop contingency plans in case of disruption
• Insurance planning & risk analysis
• Your asset priorities are investment assets than personal assets
• Manage your existing assets to accomplish medium/long term goals

“As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they do not refer to reality.”
― Albert Einstein

As Financial Consultant in Kolkata, we keep advocating that Contingency Planning & Insurance Planning is the foundation of a Financial Plan. Before you implement your Plan, you must consider your foundation. Then you must consider your other objectives and prioritize them. Remember that, only Financial Plan with periodical reviews make you certain among uncertainties. A good Financial Adviser focuses both on visible & invisible areas. Don’t treat your Plan as an ornament.