Going beyond financial planning

You advocate 'life planning' as opposed to financial planning. How are the two different?
There are two ways in which life planning can be defined. One is that it is simply financial planning done very well. The other is that it is understanding what must happen before a financial plan can be made. In other words, it is a process where you really get to know who the client is, what he or she is passionate about, what he cares about, his secret aspirations or sorrows. You then make a financial plan that really fits the client.

One more way of thinking through this is that financial planning is still all about money, products, services, investment and retirement. But life planning shifts the focus to the client as a person.

You advocate that advisors ask three questions to clients before they make a financial plan:
1. If you were financially secure, how would you live your life?
2. If your doctor told you that you had just five-ten years to live, what will you change?
3. If you had just one day left to live, which of your dreams will remain unfulfilled?
But isn't there an inherent conflict between living out one's dreams and fulfilling one's duties? For instance, I may want to go on a vacation in Europe but I need to put my son through college in five years. I have no money for both!
There are many conflicts in life, and life planning aims to sort those conflicts. Here you speak about the inherent conflict between living out one's dream and fulfilling your duty towards others. However, often those duties are also a part of one's dreams. Sometimes they are felt more as an obligation. The great advantage of having a life-planning process is that the life planner helps us to think through the relative importance of both. If a passion/dream of one's life is going to be totally lost because of fulfilling one's duties towards others, that is counter-productive, too. What we then try to do is to find out how could we balance and fulfil both.

So what we discover in the life plan will impact the financial plan. Our main focus is to let the client be able to live their dreams. Clients typically figure out that they are going to put something off for a few years, and very often they end up putting it off for longer and then never get to it. So we try to move things forward so that clients can pursue their true goals in time.

Once a person does share his or her life goals, how does this impact the actual financial plan?
The actual financial plan is very similar to a traditional financial plan. But the life plan will now have many elements that you weren't aware of while making a traditional financial plan. For example, maybe you want to heal a relationship with your sister or maybe you want to find time to write a novel. So those goals sound like they don't have a financial elements. But they do.

Healing a relationship with your sister may need you to travel to another part of the world and spend time and money to fulfil that goal. To write a novel, if you need just five hours a week, then that's not a big deal and may not entail financial decisions. But if you need twenty hours in a week then it would cut into your work commitments. This would require financial planning.

What are the life goals most people have shared with you which are very different from their financial goals?
I would instead ask what financial goals are. The financial advisor separates financial goals into several categories: estate planning, retirement, risk management, investment, taxes and cash flow. But whose goals are those? Those goals have no meaning separate from the client's life. So in life planning, none of the above mentioned things are significant.

Typically, there are five elements around which people define their life. First comes family and relationships; the second is values; the third is creativity or entrepreneurial spirit; the fourth is community; and the fifth one is travel. Most of these are very different from the above-mentioned financial goals. We want the financial plan to be able to support these life goals.

Most investment returns come from the asset-allocation decision. So how do you design an asset-allocation plan for clients?
There is still a mix of assets: equities, debt, real estate and commodities. But the difference is that a life planner would know much more about what a person really wants to do. So while the asset-allocation plan is very similar, it is tailored to the client's aspirations.

For instance, if we see a career change coming in five years, we would not want to tie up the client's money in traditional retirement vehicles. The classic example I can cite is of a doctor who actually wanted to be a spiritual teacher. Yet all the retirement vehicles tied his money up, so he couldn't use those assets for a career change. A typical financial advisor doesn't ask questions deep enough to know such aspects.

India offers high returns from risk-free options. Does that change one's asset choices in any way?
A great advisor knows that 7 per cent is only a value in relation to inflation. So, if you are investing at 7 per cent and inflation is 10 per cent, you are clearly not doing very well. Moreover, these things can change dramatically. One of the unfortunate things is that consumers see that 7 per cent and think they are getting all of that. But they don't reflect on inflation risks. In fact, if the stock market takes off and inflation goes up, then value of that investment may go down.

What are the big risks that every investor must plan for while setting aside money towards financial goals? The traditional suggestion is to have a six-month emergency fund. But is it enough?
It depends enormously on the life plan. It could be six months, one year or none at all. It all depends on who the client is and factors like risk tolerance, career risks, investment horizon, among other things, which are all taken into account when we build a life plan.

Is financial planning today very different from, say, what it was ten years ago? What has changed?
I think that life planning has been around in a modest measure for more than twenty years; the book that I wrote, Seven Stages of Money Maturity, is more than 17 years old. But the difference over the years is enormous. There are two big changes I see over the years. The first one is not related to life planning and has to do with fees and fiduciary nature. There has always been a sense in financial planning that you put the client first. But because financial planning started as a product-driven field, there were always complications around the fees and mistrust amongst the consumer regarding the same. Regulations which clearly distinguish between the product and advice are healthy because if consumers go to someone who calls himself an advisor primarily selling products, consumers may not feel very good about it.

The second major movement we see is the movement of financial planning towards life planning. This is to actually know that the client comes first. So far we have been saying that the client comes first but we have not delivered it. Only life planning delivers it.