Ad-hoc approach to investing

My first experience with investing was in 2005, shortly after I got married. Prior to marriage, I never really looked at investing. Soon after my marriage, my wife introduced me to a mutual fund distributor and that is when I started investing. I just started investing – no goals, no plans – just on the basis of some fund recommendations. Now when I look back, I am amazed at what I did – just jumped in with no knowledge, no plan – just moving from one ad-hoc investment to another. We invested in lumpsum as well as SIPs. How did we figure out how much of an SIP? Well, the distributor said, “start a Rs.10,000 SIP in xyz fund”, and we just did it.

Then in 2007, my bank RM got in touch with me and recommended a ULIP which would give me an equity exposure as well as a Rs.25 lakh insurance cover. So we invested in that ULIP too. The bank then started giving mutual fund recommendations, and we invested on the basis of those recommendations. There was no discussion on goals, on creating a plan – just one ad-hoc investment after another. My RM would call me and inform me of some new NFO and advise me to invest, and I went along with these recommendations. Some of them were 5 year lock-ins, but they told me that I can expect good returns, so I went along and invested. In 2013, I opened an account with a stock broker and started trading in stocks. Why? Because everyone else was doing it!

Never realized what we were missing

This continued till 2015, until my wife and I came across an article written by Priya Sundar on why people like us should embrace financial planning. We were amazed with what we read – we realized that though we had been investing for a decade, we were not doing anything that the article suggested. We got in touch with them and expressed our keenness to engage them.

If I look back to that day in 2015 when we were first introduced to the concept of financial planning by that article, I must confess that until then, I had never felt as if something was critically missing in the way our investments were being managed. I have always been a disciplined investor – even though my investments were all ad-hoc and without a plan, I was disciplined in sticking with my SIPs through all the market ups and downs and also with my investment portfolio through the 2008 meltdown and the recovery thereafter.

One of the reasons for my discipline with investments was the early introduction to the world of equity that our company gave us through ESOPs and ESPPs (Employee Stock Purchase Plans). Right from the time I joined my company in 2004, I jumped onto ESPPs after studying it and understanding its potential to create long term wealth. Every month, we can set aside between 1% to 10% of our salary for the ESPP program and at the end of every 6 months, the accumulated money is used to buy the company stock (ours is a US based company) at 15% discount. The discount acts as an incentive to buy, but the real benefits come through when you hold on to your shares for the long term if your company is doing well, which of course our company has done – splendidly. I have been investing since 2004 the maximum allowed – which is 10% of salary, and that investment has demonstrated to me very vividly the real benefits of long term investing in good quality equity.

Coming back to 2015 when we first began our discussions with Shyam and Priya Sundar, I was initially a bit apprehensive on execution, though interested in the concept. We are in Pune, they are in Bangalore – that was my first concern. Then there was the initial discomfort with revealing every detail of our financial position to them – which is somewhat against the culture I suppose of most Indians. How many properties do we own? Where? What is their value? What are the details of all your investments and insurance policies? When you see someone wanting to look deep into your finances, there is an initial reluctance – especially since we contacted them based on an article, and not from any known reference.

Two questions changed everything

Despite all these apprehensions in our mind, in the very first meeting, we were fully convinced about the financial planning proposition and our advisors who were offering this to us. Two questions in specific that they asked set me thinking and helped me get fully convinced that this is what we need.

The first question was, “How much wealth would you like to leave behind for your next generation?” This was a philosophical question that we had never thought about. What this question told us is that these planners have really thought through the entire life cycle of a person and have a strategy in place to help us achieve what we articulate as life goals.

The second question that really stuck in my head was when they observed my share trading with the stock broker. They asked me why I was doing it and offered three options: (1) To grow wealth (2) To learn a new skill through direct equity trading, and (3) Because I enjoy it. I reflected on this question before giving an answer. No, I was not doing this primarily for wealth creation. Yes, some amount of learning was happening, which is welcome. But the most important realization was that I was doing this because I enjoyed the process – placing orders, deciding on limit orders, tracking execution, tracking price movements – the works.

What these questions did for me was to make me introspect, for the first time in my life, what I was doing with my money, why was I doing whatever I was doing, where am I going with what I am doing, where do I want to go – questions that I never asked myself over a decade of investing my savings in an unplanned, ad-hoc manner.

Operation clean up

When my planners made a list of all the investments that I had accumulated over the years, they showed it to me: 45 different mutual funds. We agreed on an objective of reducing this to 7 – which we then went about systematically executing. We looked at all the insurance policies that we had and figured out how much we really needed and what could be terminated. We had a detailed discussion around property investments. Like with my stock trading, they asked me to reflect and answer what these property investments meant to me. Beyond the first house, why had I invested in the second and the third? Were these merely financial decisions? Was there a status symbol attached to owning property which was important to us? Were the houses giving us joy? Since there were no such emotions for us, we looked at the merits of the houses as just investment decisions. Our planners walked us through all the pros and cons of property investments including the liquidity aspect, the ongoing maintenance costs. We decided on balance that it made sense to liquidate the extra houses and convert into financial assets.

Then they looked at my monthly income, expenses and savings and got us to articulate specific goals including education for our daughter, her marriage, retirement and so on. They have a good software which allows us to carry out various scenario analyses to come to well informed decisions on planning for each goal. Our planner made an observation that has stayed with us: when you build your home, you plan every room in detail first and then get to execution. You never build one room and then figure out what the next should be and where. Financial planning does the same thing with your money. The importance of planning holistically and then executing the plan made so much more sense than the random approach I had taken for a decade. In our business, we understand the critical importance of project planning for successful execution of IT projects. That one can and should do this with one’s money as well was a revelation to me.

One big benefit: clarity

One big benefit of financial planning for us is clarity. We were made aware of the concept of asset allocation, which made a lot of sense. So, if I sold some of my ESOPs or ESPPs, that money goes straight into Indian equity, since it is part of the overall equity allocation. We now have a well-defined portfolio of financial assets rather than an unwieldy accumulation of random investments. We have quarterly discussions with our planners and receive a report which tell us all that we need to know about our finances. We have a detailed budget which lists out all our monthly, quarterly and annual expenses down to the last detail – which tells us exactly how much we spend on what and how much we save. Based on this, we decide on the amount of SIPs for our goals.

Biggest benefit for me: confidence

Their software enables us to play around with scenarios – what if we cut some expense and saved a little more – how would that impact achievement of a goal? More importantly, the scenario analysis allows us to see what impact some indulgences will have on our finances. So, if we want to take two vacations in a year rather than one, we can look at what would happen to our goal achievement if we reduced some savings as a consequence. When you see that you can afford that indulgence, you go ahead and enjoy! That to me is the biggest benefit of financial planning – in one word – it is confidence. Confidence in our ability to meet our financial goals, confidence in enjoying life today, knowing fully that one is not being reckless. Our previous generations have taught us to always be frugal, to save today for a rainy day, save today for a better tomorrow. What financial planning does for my family is to put a structure to this saving habit and yet give us the confidence to live life fully today.

The post One word that describes the essence of financial planning appeared first on PeakAlpha.

Kailash Munipella, 44, feels he is in a much better place financially after he began consulting a financial planner, because he now has a more structured and disciplined approach to managing money—something that was missing in his early work years. “In the first decade of my working life, my financial life was all over the place. Most of my money was in the bank account and at the end of the year I would buy life insurance mindlessly to save taxes,” said Kailash. But an MBA degree at the age of 32, from the Indian School of Business, made him realise he had to change this approach. “The course helped me realise the universe of financial products but it was also my peers that made me introspect on how I had been handling my money,” he said. Kailash had been married for 3 years when he took a large education loan for his MBA and it hit him that if he had been more disciplined, loan would have looked much smaller. “Some of my batchmates paid for the course on their own and some with very little loan. That’s when I realised the importance of managing money well. It was about time for me too,” he added.

With this learning, Kailash began looking for someone who could give him unbiased and knowledgeable advice. “I started consulting a financial planner 12 years back. At that time, Bengaluru didn’t have the concept of financial advisers, but I was sure I needed professional help and that it couldn’t come from agents or distributors. An uncle of mine put me in touch with Shyam (his financial planner),” said Kailash. At first, Kailash went alone and later took his wife Sahana along. “I have never been good with money, Kailash has handled our money but it was largely in traditional products. After meeting a planner we were able to get some direction on how to holistically look at financial planning,” said Sahana.

For the Munipellas, their first step towards financial planning started with identifying their goals. “We didn’t have a child then, so our goals were primarily paying up the education loan, retirement, saving enough to buy a house and then some short-term goals like going on a holiday,” said Kailash. The second step was to do away with the financial products that they didn’t need. “I had accumulated all kinds of insurance policies to save taxes. So I surrendered those and now I have a term policy for life and health insurance that’s over and above what my employer provides,” added Kailash.

The third step was a change in attitude towards money. “I never considered equities and my comfort was only with bank deposits and insurance. The stock market was like this mythical creature everyone talked about but I had no clue how it worked. Shyam made me realise the importance of equity for long-term goals and I know for a fact that if it wasn’t for professional advice, I wouldn’t have invested in equities ever. Now I have about 60% allocation in equity through mutual funds,” said Kailash. For the Munipellas, the biggest learning has been that financial well-being is about discipline, focus and constancy of purpose. For Sahana, it was also about being more careful with the spends. “I am not much of a saver but our planner taught me how to track my expenses and that made me careful. This has not altered our lifestyle in anyway,” she added.

The Munnipellas now have an 8-year-old daughter and their financial goals have expanded. “I have paid off my education loan and bought a house, and I was able to do this comfortably. And now my goals include my daughter’s education. This I have further bifurcated into ‘till class 12 education’ and ‘college education’ and I feel confident that if my daughter wants to study abroad, we will be able to pay for it,” said Kailash.

According to Kailash, the need for a financial planner goes beyond advice—it also gives them a sense of security and confidence. “When you see stock market volatility—as is being witnessed now—it’s very easy to lose your nerve, panic and run from equity. But a planner will help you focus on the long-term goals, ignoring the short-term blips. Reassurance of a professional is very important,” said Kailash. “A planner keeps you from making mistakes. For instance, I thought we would invest in a second house but Shyam explained to us why real estate as an asset class will not give the kind of returns equity will be able to give. We were convinced and changed our mind,” he said.

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MY PLAN

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Name: Kailash Munipella

Age: 44

Profession: manager with Seimens

Name: Sahana Munipella

Age: 40

Profession: homemaker and volunteer education counsellor

Financial planner: Shyam Sunder, managing director, PeakAlpha Investment Services Pvt. Ltd

The post Reassurance of the financial planner saves me from panicking appeared first on PeakAlpha.

PeakAlpha Investment Services was the proud winner of Tarakki Champion – IFA South Metros in 2016. This award recognizes IFA practices that have built a sustainable and scalable business model, based on four parameters, namely, AuM growth, Customer growth, SIP count growth and SIP value growth. I am delighted to share some thoughts on PeakAlpha’s journey that resulted in winning this prestigious award.

“Will I have too much life at the end of my money? Or will I have too much money at the end of my life?” These are the key questions that the financial planning process seeks to answer. PeakAlpha decided, at its inception in 2005, to focus on assisting customers who were seeking the answer to these questions. We defined our target segment as those families with annual income of between Rs.30 lakhs and Rs.150 lakhs. Focusing on this customer segment helped us as our industry navigated through many changes that put pressure on revenues and margins. Our upper middle-class (or mass-affluent) customers, typically value and quality conscious, were willing to pay for good service and ethical advice.

While PeakAlpha has over 3000 customers, its core customer base consists of over 1000 families for whom we provide financial planning services. These families work on renewable annual contracts, which entitles them to four quarterly sessions. Many of these customers have stayed with us for many years, some for over ten years.

By focusing on this customer segment, we find that the revenue per customer is adequate to provide high quality service and yet remain profitable. At the same time, the revenue generated is not so high that the customer finds the rupee value of commissions and charges offensive.

We feel that we can continue to focus on this customer segment. Although there has been a good uptick in new customers entering the mutual fund fold, we are only scratching the surface in terms of the addressable market. Recent market events have also made the need for advice very clear.

Of the four criteria for determining the Tarakki champion, two of them involve systematic investments. With good reason, because a business built around systematic investmentsis both stable and sustainable. At the same time, it serves the customer very well. Most customers receive their income every month. After expenses, they generate an investable surplus every month as well. Monthly systematic investments align themselves very nicely to this cash flow pattern, apart from rupee cost averaging.

One of the things I like the most about our industry is that we don’t start each new financial year with zero revenues. Our hard work over the past many years contributes meaningfully and gets us off to a good start. Similarly, effort invested in procuring an SIP continues to generate revenues well into the future. Therefore, even though our business has been buffeted by huge regulatory swings, the impact of these swings is dampened by a good SIP book.

An oft-repeated advice to an aspiring batsman is not to lose your shape when batting. I would use a similar analogy for the advisory business as well, be careful not to lose your shape. I have learned that there are three balances that are healthy for our business, and I am vigilant to ensure we don’t lose our shape when it comes to these balances.

The first is the balance between revenue producers and support staff. With too many producers, the risk of deteriorating customer experience is very real. Errors in transaction processing, delays in responding to customer queries or support needs, and other similar issues have a much greater likelihood with an overwhelmed support team. With too few producers, of course, the load of revenues and profitability falls heavily on a few team members, which can create unnecessary stress on the business itself. We have found a healthy balance to be one where the sales team payroll is half the overall costs of the company.

The second is the balance between hunters and prospects. As salespeople grow and mature in the organization, their role usually migrates from hunters to farmers. Senior members of the sales team focus on taking good care of their existing customer base, which they have nurtured over the years, thereby becoming farmers. When new members are added to the sales team, they need to build their own customer base, thereby becoming hunters. Our marketing activities generate prospects whose likelihood of conversion diminishes rapidly with the passage of time. If you have too few hunters, then conversion suffers. If there are too many hunters with inadequate prospect pipelines, that creates stress on the hunters as well.

The third is the balance in terms of new initiatives. Stephen Covey explains this beautifully in terms of the P-PC balance, or production – production capacity balance. The number of new initiatives an organization starts must be just right. If there are too few initiatives, the organization runs a big risk of getting left behind on key industry trends, whether they be regulatory compliance, technology adoption or marketing strategies. Yet, too many initiatives can create organizational fatigue, leaving many incomplete efforts and staff overload.

All the parameters of the Tarakki awards are growth-related. PeakAlpha has been fortunate in that it has been able to sustain a reasonably good growth pace. Our original customer acquisition strategy of conducting educational workshops at companies has been ably supplemented by women-oriented sessions and customer referrals.

Growth is very important as it provides leadership and managerial opportunities to our colleagues. It also strengthens us financially, thus enabling us to invest in the future, both in terms of hiring talent and adding infrastructure. Therefore, we have always set ambitious growth targets for ourselves and strive very hard to achieve them.

However, growth must not come at the expense of the customer experience. Looking after our existing customers, whose support has brought us to where we are today, will be critical going forward. We are therefore calibrating our growth aspirations this year to ensure that we also build a strong platform now. We look to this platform to enable and sustain our future growth. This platform has dimensions of technology, processes, talented colleagues and infrastructure.

At its heart, however, is a mindset that places our customer first.

The post Tarakki Champions-4x growth in 5 years by Priya Sunder appeared first on PeakAlpha.

Think BIG articulates 5 pillars of growth (Click Here) which are the cornerstones for any distribution and advisory firm that is growth focused and has set its sights, not on incremental growth, but on exponential growth. Process orientation sits at the heart of these 5 pillars and adoption of smart technology is a vital component of executing effective processes. Peak Alpha shows us exactly how process orientation and smart adoption of technology can be BIG growth drivers in this business.

WF : You have successfully built scale in your financial planning and advisory practice, without compromising quality of advice. In what aspects of advice have you instituted processes that enable you to offer consistent advice? What are aspects of advice that are more difficult to build processes around?

Shyam : There are two broad types of advisory processes that one needs, the moment you wish to build a firm that uses multiple advisors. The first type pertains to processes relevant to each customer. The second type pertains to processes relevant across customers.

Processes for each customer – One of our founding, guiding principles was that our customer should have a consistent experience no matter whom he spoke to in the company. To deliver to this, it was essential that we have clear processes for every step of the advisory experience. The major steps here are 1) Understanding the customer and his needs 2) Articulating actionable recommendations and 3) Instrument selection. Each of these processes is completely standardized. This is extremely important and useful not only in achieving the consistency I referred to earlier but also in enabling a relatively seamless transition from one advisor to another for any reason.

The details behind each step are too much to cover in this article, but at a high level this is how we approach each step. We use our proprietary financial planning application, PEAKPLANNER, to understand the customer. We use our report generator template to identify and articulate actionable recommendations. Each month, I create PEAKFILTER, which is our mutual fund ranking system. The system is completely objective and numbers driven. Funds are recommended strictly based on PEAKFILTER rankings. Each scheme’s PEAKFILTER ranking is also available to customers in their portfolio, so discussing performance using PEAKFILTER also becomes a process that customers quickly get comfortable with.

Processes across customers – There are four main processes, scheduling customer interactions, the interactions themselves, report writing, and execution. We have a central team that oversees these processes very tightly to ensure that we perform to high standards in each area. We have metrics for each of these that we track and review during our sales meets each month. Every customer report is uploaded to his portal, so that he can easily access all of his reports and track progress from one to another. Apart from these, we also collect feedback from our customers regularly, which we find to be extremely useful.

WF : To what extent has technology played a role in institutionalizing advisory processes in your firm? How did you go about the buy vs build decision and what influenced you to build your own IT solutions?

Shyam : Technology has played a critical role in helping us to put these processes in place. When Priya and I started PeakAlpha, I had a good understanding of financial services technology. We used technology extensively in most aspects of our business, advisory or otherwise. Our industry, and a few others, like telecom, have a huge advantage. Our product is virtual, and therefore lends itself very well to technology adoption.

Our use of technology has enabled us to maintain consistency in service delivery. When it comes to customer interactions, it has enabled us to take what could be a very loose set of discussions and bring a level of quality and predictability around them. We frequently tell our customers, “Give us four hours a year, and you don’t have to worry about your finances after that.” This is only possible on a consistent basis through a robust service delivery platform.

We feel completely vindicated in our decision to build rather than buy. Anyone who has been in our industry for the last ten years can clearly attest to the fact that change has been massive. We have needed to change our processes to accommodate these changes several times. Since we have built this application from the ground up, our knowledge of the system is very solid, and enables us to make changes as needed. Further, as our own thinking evolves, we can have as system that reflects this thinking.

WF : In this profession, do you regard your IT enabled advisory platform as a key differentiator or does it get quickly commoditized? Is there lasting value to the firm in going with a build approach?

Shyam: Our company was born in Bangalore and caters to a set of customers who are quite savvy in their technology adoption. Therefore, our being able to offer a strong service enabled by current technology has definitely been appreciated. At this point we don’t see a product we could buy off the shelf which can do what we offer our customers through our platform. Our ability to maintain the platform as a key differentiator depends on our ability to keep innovating and improving our platform. As of now, we don’t see this getting commoditized very soon.

WF : Is there an opportunity for you to consider a robot-advisory model where you will have a purely online advisory model?

Shyam: It is very tempting to consider a model where the solution is completely technology based. However, we strongly feel that any service is worth paying for only if lasting value is delivered. In our experience, advice alone is not likely to create this value. Wealth is created only when recommendations are consistently executed and monitored. Our customers really value the discipline that we help them to inculcate in their finances. This discipline is created over time, and with frequent hand-holding through rough and smooth times. We have seen often that people start many things with enthusiasm, but are not able to maintain the same enthusiasm over time. A gym membership with a personal trainer is much more likely to yield results than without a trainer, for the same reason. Life tries very hard to distract you, and often succeeds. Therefore, we are not convinced that a robot-advisory model will yield long-term results in financial planning and wealth management. We would like to share life’s journey with our clients and celebrate their joys and successes, it is one of the high points of what we do.

WF : How has your experience been with instituting processes for service delivery? Where does IT play a role in your firm in delivering seamless service and where do you see gaps that you are keen to fill?

Shyam: We have a great story to tell in terms of processes for advice. We have a lesser story in terms of processes for service delivery. We would love to be in a paperless world, where many other industries have already evolved to, including banking. I can’t remember the last time I walked into a bank branch. Yet, in our business, we are still pushing pieces of paper around. This is quite frustrating.

There are a few processes that we have institutionalized at PeakAlpha. We scan every application before it leaves the office to be processed. We find this to be very useful in case of issues in processing transactions. We capture each transaction in our system before the application leaves the office and reconcile against registrar feeds, so that we know quickly when transactions have failed. Automated alerts are sent to customers for various events, such as processed transactions, SIP alerts, redemptions, etc. But I suspect this is par for the course among most of our peers in the industry.

WF : We now have MF Utility and the NSE platform as two key transaction platforms for IFAs to choose from, apart from many others that have been in business for some time. What are the key factors you will look for in a transaction platform that you wish to embrace?

Shyam: This is not rocket science. A good transaction platform should make it easier to do business. It should enable advisors to spend more time with customers and less time filling forms. It should be reliable and easy to use. The platform should make information related to transactions, customers and the overall business easy to access. The MF Utility and the NSE platform are eagerly awaited and will certainly help.

Think BIG salutes Peak Alpha

For their excellence in adopting smart technology within a well defined process framework to deliver high quality advice and service to their clients, the 2014 Think BIG award for technology adoption was given to Shyam and Priya Sundar of Peakalpha Investment Services, Bangalore.

The post Give us 4 hours a year, and don’t worry about your finances after that by Shyam Sunder appeared first on PeakAlpha.

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Priya Sunder, co-founder of the award-winning wealth management company, PeakAlpha Investments has a few tips on hidden costs to look out for when investing in a home.

When Securing a Home loan

A home loan is large and expensive and usually comes with an interest rate of 10% to 12% attached to it. But here are a few things you may not have budgeted for:

• Depending on the loan amount sanctioned, you will be paying Rs 15,000 to Rs 20,000 as loan processing fees.
• Every home loan provider today bundles home loan insurance with your loan, which is an additional Rs 80,000  to Rs 1 lakh, dependent on the loan amount. This is a single premium that is bundled into your home loan and will reflect in the EMIs you pay .
• Another thing to consider is that this additional bundling is not taken into consideration for your 80C tax deduction and it will cause an increase in your premium.
• Home loan vendors do not finance your contribution to the sinking fund, khata and any legal charges applicable to your purchase of a home.

Expenses you may incur along the way:

• If you are planning on investing in a built-up bungalow you will need to factor in the fees of a property valuer. The cost for this is approximately Rs 20,000
• All papers related to your property must be vetted by a lawyer, irrespective of the reputation of the builder you may be dealing with. At this point you will incur expenses for a lawyer and a notary authority. A notary is required to verify that he has seen the original documents and the signatures on the documents are whose they claim to be. So several documents like a POA need to be notarized.
• Doing up the interiors of your home is a cost many of us do factor in, but it is always a good idea as to what your budget is and set that aside. It is a personal decision. People spend anything between 10 % to 30 %of the property cost.
• When you invest in a home, a large part of your investment portfolio, almost 95% of your assets get stuck. It is therefore imperative that you have home structural insurance in place to safeguard the value of your investment. This insures the structure against damage. It also covers reconstruction of the property. Usually it also covers architect, surveyor and engineer’s cost.

Recurring costs

• When you buy an apartment, you will have to pay an upfront cost in terms of maintenance fees. This goes towards the larger maintenance works of the building and is normally applicable only for 2-3 years. Besides this, you will also be paying a monthly maintenance fee ranging between Rs 3000 to Rs 15,000 depending on the kind of apartment you are staying in.
• Property tax is usually between Rs 7000 and Rs 10,000 depending on several factors put down by the government.

Related Expenses you may not have planned for

• A delay in the construction of your new home/apartment will mean an additional cost in terms of the monthly rent you may be paying for your current residence. If the renewal of your rental agreement is close on hand, you will end up paying the yearly appreciation on rent as well.
• If you plan to sell your home at any stage, you will also have to factor in the cost of a broker whose services will come at about 2% to 5% of the property cost. This will be above the costs of repair and home beautification you will undertake.
• Selling your home also means your income will be subject to long term capital gains tax which may be rather high as it is subject to indexation and the figure is rather high depending on the sale price.

The post Hidden Costs When Investing in Your Dream Home appeared first on PeakAlpha.

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