The Hindu Business Line : Investment versus financial planning

Financial and investment planning are terms that are interchangeably used in personal finance parlance. But nothing could be farther from the truth. To understand the difference between the two concepts, we first have to understand them well.

Investment Planning (IP) has the "rate of interest" factor at its core, thus making the approach a little myopic. The IP process involves several steps, ranging from setting investment goals and understanding the risk appetite to designing an investment portfolio after evaluating the markets and the investment landscape. IP refers to a commitment of funds to one or more assets that will be held over a specific period. Anything not consumed today and saved for future use can be considered an investment.

Financial planning (FP), on the other hand, is the process of meeting your life's goals, through prudent management of finances. It provides direction and meaning to financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. By viewing each financial decision as part of a whole, you can consider its short- and long-term effects on your life goals.

FP contrasts sharply with the individual-need-driven approach of IP as it takes into account the needs of the individual as well as the family.FP would ordain that even before you begin considering how and where to invest your money, it is important to identify and prioritise your wealth accumulation goals. It would mean answering questions such as:

What does IP mean to you?

What dreams are you saving for (retirement, a home, education)?

How have you approached such issues as risk tolerance and diversification?

It should create a clear picture of your current financial situation. Spread your investments across `asset classes' to reduce risk. It should help arrive at the optimal asset allocation strategy with regular monitoring to maintain the allocation in line with your then current needs and should be tax efficient

Financial planner vs broker

A normal broker makes recommendations for investments. However, FP is not simply the ad hoc purchase of a range of investments; rather, the investments are the end process of a financial plan's implementation. Implicit in the process of personal financial planning is the preparation of a written plan that details a client's financial needs and resources, establishes set objectives, and in appropriate circumstances, details specific recommendations. Your financial planner will help you to not only identify but also prioritise your needs and then make a judicious allocation of your resources.

Successful investing for you does not mean sourcing the highest possible return, but means placing your money with investments that satisfy your needs. When investing, much attention is directed towards the choice of investments, but in financial planning, the emphasis is on exploring and meeting the investor's needs. Investors and their advisors spend much time understanding the merits of the investment avenues available. Little time is spent understanding the needs of each person and ensuring that the most appropriate investments are selected. That is essentially the difference between a broker and a financial planner. The success of a financial planner is measured by how well he manages to meet the client's needs. Your dreams will change. Your tolerance for market risk may change. That is why it is important that your financial plan is adjusted as necessary. Your financial advisor can help you revisit your investment strategy to make sure it stays in line with your long-term goals.

(The author is CEO & Managing Partner, ASK Wealth Advisors. The views are personal and of his organisation.)

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