Nowadays people have started seeking professional advice to have road
map of their financial future. They prefer to pay professional fee for
the preparation of their financial plan to reach their financial goals
in future. At the start of the exercise of financial planning, clients
provide all necessary details required for preparing the financial plan
and do not hesitate much while disclosing the facts. When the plan is
presented to them, they are satisfied with the plan prepared and
presented to them. But we as financial planners have noticed that they
are reluctant to implement the recommendations of the financial plan.
Sometimes they are just not ready for that.
So what stops them from implementation?
Emotional attachment:
There are several instances and situations where some clients have been
recommended to sell their second house / property to repay existing home
loan of their new house due to shortfall of funds for other major
financial goal. The clients are not ready to sell that second house due
to emotional attachment if it is their first house, which is well
understood, but sometimes we need to keep our emotions aside and think
practically that it is better to sell the second home and pre-repay the
existing home loan; and use the savings made in EMI for building a
better corpus for to meet some other major financial goal.
Loss aversion:
Clients tend to be more risk averse when faced with potential losses and
less risk averse when faced with potential gains. They dislike losses
more than they like gains of equal amount. For example, an investor
likes a gain of Rs.50,000 in a certain investment, but dislikes a loss
of Rs.50,000 more than the gain. So, if recommended a loss making
investment to sell, the client is loss averse and is unwilling to sell
the investment and bear the loss. They are willing to realize gains but
are unwilling to realize loss.
The same applies when recommended to surrender a traditional or
unit-linked insurance policy. They are not ready to surrender policies,
whose surrender value is less than the total premiums paid till date.
They continue paying premiums, and do not realize that the same premium
invested in some other instrument will earn more returns than the their
loss incurring insurance policy.
Speculation
Clients speculate interest rates changes and equity market movement; so
much so that they try to time the market. When they are recommended to
sell equity shares or equity mutual funds, they expect the market to be
bullish and hold on the securities and wait for the market to rise and
earn higher gains. Few clients also stop their SIPs when the equity
markets are falling as they find their returns in negative in their
mutual fund portfolio statement. Even after educating and explaining
them that it is the best time to accumulate units when markets are
falling and hence they should continue with their SIPs.
Such kind of investor behavior and psychology do not allow them to
implement the recommendations. Clients should not think emotionally all
the time while taking financial decisions and should consider the
recommendations of the financial planner, which are given in for their
(clients) benefit.
Published in: Moneycontrol.com, The Tribune
