Your banker as your financial planner – Pros and Cons
Further to the previous article (Emergence of banks in India as financial planning outfits), whom should you hand over the task of managing your investments??
Your bank – with whom you have been dealing for years for your banking transactions and which now has a full-fledged wealth management division too (which they also keep aggressively advertising about every time you visit them).
OR
One of the Wealth Management/Broking firms or independent financial planners who specialize in this area.
Pros and cons of having your bank as your financial planner
Advantages/Benefits
- Higher credibility/accountability The relationship/wealth manager dealing with you represents the organization which has a good brand visibility and is perceived to have more accountability compared to an independent advisor/agent as the client can always approach the organization in case of a problem/grievance.
- Ease of transacting – The Relationship Manager usually act as a one stop shop for the client and goes an extra mile and even take care of the banking related issues of the client.
- Greater comfort level – The client feels more comfortable revealing his financial health to an employee/ representative of the bank with whom he has been banking for a long time.
- Better logistics support – Financial planning divisions of banks are equipped with a good research team, financial planning tracking software, infrastructure etc. which makes the process simpler and ensures smooth functioning.
Now, the concerns –
- Increased competition among banks has resulted in Relationship Managers being given stiff sales targets by their employers due to which they may be forced to be more sales focused than customer focused.
- They have to function within certain guidelines set by their seniors/ organization which could sometimes come in the way of their exercising their independent professional judgment while working on the client’s portfolio.
- Most of the financial planning exercise in banks is more person driven than process driven and the client usually looks upon the Relationship Manager as a trusted advisor .High attrition rates among them, with all banks trying to acquire the best of the lot leads to the clients having to deal with a new relationship manager frequently, causing customer dissatisfaction.
Emergence of banks in India as Financial Planning Outfits
Till about a decade ago most banks in India offered only traditional banking products-opening savings /current accounts and fixed deposits, loans, credit lines etc. Major part of the revenue was from the spread between the rate of interest offered on deposits from customers (funds borrowed) and the rate of interest charged on loans (funds lent).
Going beyond just transaction oriented banking –
Greater competition in the form of new private sector banks being formed, foreign banks opening branches in India, dwindling interest income and increased customer expectations made it necessary for banks to go beyond just transaction oriented banking and look at other sources of revenue .This resulted in banking foraying in to selling third party products like mutual funds ,insurance , bonds etc and slowly graduating to relationship oriented banking to private banking to wealth management and then to financial planning.
Today most of the private and foreign sector banks, and even the public sector ones are setting up dedicated financial planning outfits complete with qualified professional planners, a strong research team, customer service staff, and the other infrastructure. Banks are also focusing on training their existing manpower for developing the required skills in financial planning. One such initiative has been the IIBF (Indian Institute of Banking and Finance) collaborating with FPSB (Financial Planning Standards Board) in India to develop a specialized postgraduate diploma course in financial advising aimed at bankers.
The future potential-
The world wealth report 2011 by Capgemini and Merrill Lynch Global Wealth Management says –
- Globally, HNWIs’ financial wealth grew 9.7% in 2010 to reach US$42.7 trillion, surpassing the 2007 pre-crisis peak.
- The population of HNWIs in Asia-Pacific, at 3.3 million individuals, is now the second-largest in the world.
- India’s HNWI population entered the Top 12 for the first time.
Inspite of the growing population of high net worth individuals, the market for investment products in India is unorganized and largely broker driven, with a large chunk of the wealth in the country being managed by hundreds of small time agents and brokers. This puts the banks, with their wide branch networks and huge existing customer base, in a very favourable position to go out and tap this wealth.
Why do I need a Financial Plan ??
Since this is my first post on my blog, I’ll start with the basics..Why does one need a financial plan ?? Most of us save on a regular basis anyway!
What is the difference between saving and financial planning??
Saving is regularly investing the surplus accumulated from the regular household income after meeting all the expenses in to various investment avenues.But this may not ensure that you will be able to meet all your future financial goals.
Financial Planning is nothing but PLANNED savings .The process starts with identifying specific financial goals like buying a new house, childrens’ education and marriage, providing for retirement etc.This is followed by an estimation of the amount required in future to meet each of these goals.Finally suitable investment schemes are identified and regular investments are done to accumulate this amount.
Why is it so necessary to have a financial plan??
1. Higher salaries due to the economic boom and globalization – Higher disposable income and investible surplus which requires prudent planning.
2. Availability of a vast (and ever increasing ) number of investment options today – choosing the right and suitable investment avenues is not an easy job!
3. High income taxes significantly reduce the post tax earnings – need for identifying tax efficient options.
4. High inflation – eroding the purchasing power of the rupee- need to take calculated risks to earn a positive real rate of return.
5. Rising cost of education and medical facilities.
6. Increased life expectancy and the lack of a social security net in the country- saving enough for retirement becomes essential.
7. The nuclear family trend – people prefer to be independent rather than depend on children during their retirement years.
Sriraksha Financial Planning Services 