This article was published in freefincal.com, on 8th January 2019, under the “Fee-only adviser journey”. Click Here for the link to the article.
While going through the title of this post one might get the impression that my tap dancing to financial freedom has been a rather uneventful journey but let me tell you it was anything but that. My quest for financial freedom like that of many started on a rather sad note, but that did not deter me from seeking my goals. Through this post, I want to convey the message that journey to financial freedom is laden with complexity thrown in for no reason and I would like to paraphrase my idol Mr. Warren E Buffett that do not jump over 7-foot bars, look around for a 1-foot bar that one can step over.
A journey of thousand miles begins with a single step – Chinese Proverb
26th December 2004 was the day when many people across India like me heard the name ‘Tsunami’ for the first time in their lifetime. That word changed everything for me. My parents were in Andaman & Nicobar Islands that day when a gush of water washed away most of the worldly possession my parents had acquired over a period. I and my sister were thankful to God that our parents could survive the ordeal and we could not ask for anything more from the Almighty. But once my parents found a roof again over their head the task of building our lives started and from there on financial planning became the essence of our lives. Till that time my parents had invested mostly in term deposits and endowment plans. Our single step toward financial planning started that day.
So, I started reading about financial planning and organizing our family’s finances in order. As my father was a central government official much before a contributory new pension scheme was introduced in 2004, he and my mother could lead a comfortable life post his retirement by living off the pension, but that was not the case with me and my sister as we had to build our retirement nest by putting aside money regularly in investments which could beat the inflation.
Whose bread I eat, his songs I sing – A German Proverb
We wanted to seek unbiased financial advice but that was hard to come by. During those days it was easier to squeeze water from stone but impossible to find a fee-only adviser. We met a lot of so-called financial planner who was doing the deed of principals (Mutual Fund AMC’s, Life Insurance companies, etc.) and selling the products of those principals in the name of financial planning. This is because their interest is aligned with these principals who lure them with commissions and the client’s interest comes secondary to these financial planners. So, we stopped searching for one and thought of getting into do-it-yourself financial planning. It was difficult but we realized that if we looked hard enough, we could secure our future.
If they answer not to your call walk alone – Gurudev Rabindranath Tagore
We first started with term plan for life insurance as we found that buying traditional endowment or ULIPS was giving away our hard-earned savings to the agents and officials of these companies apart from getting inadequate life cover in return. To give an example one gets life cover of around 10 times of annual premium in these plans whereas one usually needs 10 to 15 times of annual income as insurance cover. This meant that to get adequate coverage of even 10 times annual income of say 10 lakhs one would require a life cover of at least 1 crore but if one were to buy same then it meant paying nearly 10 lakhs just as annual premium (Life cover of 1 crore means 10 times of annual premium which translates into 10 lakhs of annual premium per annum)! This meant that to get adequate life cover in an endowment or ULIP plan one must shell out nearly all his annual income as an annual premium. Hardly a tempting option as other option meant buying inadequate life cover.
We were sitting in 2005 and online term plans were yet to be made available (eventually introduced from 2009 onwards) so we had no option but to consider offline term plan and thankfully few life insurers were offering same although one must approach branch office of those life insurers as their agents did not want to touch it with a 10-foot barge pole for obvious reason. Once we bought offline term plan next item on the list that we bought was health insurance and personal accident insurance (primarily for disability cover as we already had term plan for life insurance). After buying these three types of insurance I cannot describe the feeling that we had at that point in time, to feel that our dependents would be well-taken care off in our absence because of risk mitigation as part of our financial planning was something we achieved. Now came the task of asset building for our future by setting aside our monthly savings into investment assets.
Rule 1: Never lose money; Rule 2: Don’t forget Rule 1- Warren E Buffett
We realized that investment is nothing but delaying present consumption to have enough money for future consumption. This essentially meant saving monthly from our income and putting that money aside in income-generating assets, so that when we do not have active income then we can use that money saved previously for our requirement in the future. That’s ‘Investment 101’ and anything else is just complicating things for sake of complexity.
Gold was not part of our investment portfolio as it does not any generate income (despite introduction of Sovereign Gold Bonds in 2015 the coupon rate is lower than the post-tax return even on savings banks rate) and its value to paraphrase Greek philosopher Plato ‘lies in the eyes of beholder’, who is willing to pay a higher or lower price than the buy price.
Also, we observed that as we were changing locations from one city to another for better prospects, so we decided to stay in rented accommodation. Our parents were against our decision to rent as during 2003-2007 property rates were going higher and higher so they felt that we could use the same to invest in an asset that is appreciating at a higher rate than all other risky assets (majorly equity). They felt that we would spend a lot of our earnings on rent and that by buying a property we could secure our future by having a roof over our head. But we stood our ground by agreeing to disagree as we realized that property is a big-ticket item, and we did not have enough liquid assets to buy it off without loan. This meant that we must secure the loan and direct a major portion of our monthly savings into loan EMI. We were not willing to reduce our monthly savings by putting money in an asset which is not liquid at all. Also, when we compared the rental yield of the real estate with other asset class, we found it to be lower than even term deposits on a post-tax basis. So, we started building our investment portfolio with debt and equity mutual funds as these were income-generating assets. Slowly and steadily, we built our individual corpus.
‘Give me six hours to chop down a tree and I will spend the first four sharpening the axe’ – Abraham Lincoln
Almost 8 years went by and I felt the need to upgrade my skills. Towards that end, I joined IIM Bangalore for my MBA in 2013. Through its world-class faculty and an equally wonderful peer group, I further honed my financial skills. The learning from IIM Bangalore helped me in shaping up my plans in financial planning. I got married and had a kid in subsequent years. But after passing out from IIM Bangalore I met many family friends and acquaintances who told me that they wanted to seek help in financial planning but found that fee-based planners were not giving unbiased financial advice. Although I was working in a corporate job back then I started giving them advice for their personal financial goals. Towards the end of the year 2016, I had achieved my financial freedom by investing in income-generating assets for the past 12 years and I was reasonably confident that the annual cash flow from these investments could cover my annual expenses. Was it time to hang up my boot? No, because by then I had identified through my personal experience and that of my friends and acquaintances that there is a gap in the market which a fee-only adviser can fill.
An ounce of prevention is worth a pound of cure- Benjamin Franklin
I felt that I could fill the gap between probably biased fee-based and strictly unbiased fee-only advisory so after taking my family into confidence I left a corporate job to pursue fee-only advisory. In 2017 I was issued a registration license as an RIA (Registered Investment Adviser) by SEBI after fulfilling its stringent criteria. The initial set of clients came from my network of IIM Bangalore and my ex-colleagues from my corporate job days. I wanted to test my conviction and that is why took a conscious call of not launching a website for almost a year as I wanted to focus on my initial set of clients. This was considered a blunder by many of my well-wishers for the right reasons, but I felt that my first providing financial planning services to these clients and spending time on their issues I could steepen my learning curve for growing my advisory services. That helped a lot as with time my processes improved a lot, and I was ready to handle a larger client base.
So, I launched my website: sahajmoney.com. I also joined a quite popular Facebook group run by Mr. Ashal Jauhari and was impressed by his helping attitude. Through many interactions on Mr. Jauhari’s FB group, I came across Mr. Pattabiraman Murari (Pattu for most of us) who ran a popular personal finance website. I found that there exists a handful of RIA, who also provided a fee-only advisory like me, personally vetted by Pattu and included in a list of fee-only planners. I reached out to Pattu in December 2018 and after vetting my credentials although rather rigorously he was kind enough to add me to the list of my fee-only advisers’ peer group.
‘If you build it, he will come’- Field of Dreams
Through my trial and tribulations, I have realized that fee-only advisory is going to be future as it has clients’ interest at its core and all it needs is momentum. To give an analogy from the field of business is ‘Flywheel’- a concept introduced by Jim Collins of ‘Good to Great’ fame. Flywheel involves a process of relentlessly pushing a giant, heavy flywheel, turn upon turn, building momentum until a point of breakthrough, and beyond. The flywheel is there all it needs are clients who understand what is in their interest and fee-only advisers who keep clients interest as their focus, turn upon turn the momentum will build and there would come a point in time when the weight of goodwill generated between clients and fee-only advisers would generate enough momentum that the flywheel would go faster and faster with the effort required to do that is minuscule when compared with momentum of flywheel in fee-only financial planning.
Through this introductory article, I would like to thank all clients who had confidence in my abilities and belief in my conviction. I would like to thank my family members who stood with me when the direction was clear, but the path was not. I would like to thank Pattu for giving me an opportunity to write about my journey so far and giving valuable suggestions from time to time.
I enjoy my work a lot as it is my passion – simplifying investment. Every day I tap dance to my work, an act popularized by none other my ideal Mr. Warren E Buffett. Every day I work towards making my clients tap dance to their financial freedom. Let us turn the flywheel!
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