Some of the significant personal milestones of our lives include our first job-offer, buying a house, marriage, childbirth and child’s education. These are followed by planning for vacations, saving for emergencies, retirement, etc. All these goals have financial implications of various magnitudes. Middle income families and financial advisors make financial decisions without having these goals as a reference. Therefore product purchases are made without specific and clear objectives.
Human thought process is always goal driven. Common questions that occupy the middle income group are “When should I buy a home?”, “Am I saving enough for my child’s education?”, “Should I buy the car now?” Interestingly, the financial industry does not follow this thought process. These conversations are financial product centric and more suited to the needs and thought processes of a savvy investor, the elite and high net worth individual (HNI).
It is therefore important to identify the goal or have a clear demarcation of the end objective. Once that is set, one can work backwards and identify decisions in an objective way so as to reach the goal/s. This can be an arduous task for an individual advisor, but nonetheless he/she should be able to convert the vague constructs of financial goals into more specific and definitive ones.
To elucidate the above objective further, here is an example of an unarticulated goal, “I want to buy a house”. But it is not a goal until the target is clearly defined. A clear construct in this regard would be “I want to buy a house worth 50 lakhs by March 2016, and I intend to make a 20% down-payment and pay the remaining through a loan”. This then qualifies as an actionable plan for the person and the personal financial advisor to work on mutually until the said goal is realized.
In our experience, the three common goals of India’s middle income group include:
- Child’s education
- Buying a house
Until now these goals have been directly linked to specific products such as Child Plan, Retirement Plan etc. But these products are not necessarily the best ways to save for these goals.
There is a need for a new breed of advisors and financial services companies that can have a compassionate undertaking of the goals and aspirations of this middle income group. It is imperative that the industry aligns itself with this finding sooner than later. Moving to goal based financial planning and advisory is the first step in doing so. This will then change the paradigm of conversation between the industry and the general populace and bring more investors into its fold.
“Personal Finance: How Goal Based Approach Can Change Your Perspective”, a feature on OPEN, the magazine.