Publication: The Times Of India Mumbai; Date: Jun 17, 2008; Section: Your Money; Page: 23His CA has given him excellent advice on taxation, audit and related areas. But Aryan’s insurance situation is alarming, to say the least. Aryan, a footloose single with no dependents, forks out Rs 1 crore in premiums for a combination of endowment, pension and unit-linked policies. The reason his CA—who sold him the insurance through his wife—gave him was financial security, but one wonders whose financial security he was talking about.
Occupational hazards
Financial security is especially important for those in the entertainment industry, particularly leading actors, because of the risks they face. For one thing, career spans may be short, and peaks, even shorter. So it’s imperative to have alternate revenue streams. Secondly, public taste and demand for one’s abilities is fickle. Today’s star may be out of work tomorrow. Thirdly, lifestyle expenses tend to be higher than in other professions, because a celebrity has an image to maintain. Fourthly, while hard work goes into accumulating money, savings are often deployed based on rudimentary advice from secretaries, close relatives, CAs, and relationship managers in banks. It’s easy for a celebrity client to end up with a plethora of products that she may not even need. Fifthly, accumulated capital sometimes leads to flawed business plans (a classic example is Amitabh Bachchan). And lastly, celebrities are exposed to the risk of managing inefficient and unproductive real estate assets, making them assetrich and income-poor. Also, being self-employed, they don’t have employee benefits the way corporate executives do. So a disability or emergency could make a bad situation devastating.
Goals
Aryan has had a great career thus far. He has accumulated sizeable assets, but deployed them in an ad hoc fashion, in many irrelevant products and non-productive assets. The aim is to have enough at retirement for Aryan to maintain his lifestyle and provide for medical contingencies. His goals are simple: he wants to maintain his lifestyle and have an income of Rs 500,000 a month in today’s rupees, provide for medical emergencies, and build a foundation to support education and healthcare initiatives.
An assessment of Aryan’s goals, cash flow and net worth statements, insurance policies, investments and tax returns revealed a number of things. Firstly, despite his lavish lifestyle, he had accumulated sizeable assets. But most of his money was in real estate and insurance policies. A big plus was that he had no liabilities. Secondly, he paid almost Rs 60 lakh as pension plan premium, and expected some unrealistic number by the time he turned 55. He had nine life insurance policies which were not only expensive, but also low on returns. His unitlinked insurance plan (ULIP) had a price tag of 72% in the first year.
Thirdly, Aryan’s portfolio was skewed towards real estate and debt. The equity portion consisted of three ULIPs, 10 mutual fund schemes, and five stocks. His real estate portfolio consisted of a vacation house (which he paid to maintain, but never used), several apartments (not yet rented out) and a good commercial property bought some years ago. Fourthly, there was no clarity on what would happen to his
considerable wealth, should something happen to him. He had no will, and his documents were not in order. And lastly, although Aryan was engaged in philanthropic work through his foundation, its structure was unclear, and the management of funds was questionable.
After reviewing all this, we created a comprehensive investment strategy, of which highlights are discussed below.
Strategy
The first step was to inventory Aryan’s investments, and get his paperwork in order. We ensured that all his accounts were in the name of accountholder or survivor (with his father), and that nominations were made where possible. We started drawing up a will, and set a deadline to complete this aspect of his financial planning. The second thing we did was to take a hard look at insurance. Aryan had no need for life insurance or pension plans. We reviewed the policies to see what we could surrender. There was no reason to continue paying exorbitant premiums for the next 15-20 years. After assessing the surrender values of his policies, premiums to be paid, past returns, and expected returns, we were able to surrender enough policies to slash his premium from Rs 1 crore to around Rs 10 lakh a year.
Thirdly, we advised him to scale up his debt exposure through the Public Provident Fund, fixed maturity plans, and debt funds. Fourthly, we scaled up equity exposure through one-time and monthly investments, and created a diversified portfolio of stocks, mutual funds and portfolio management schemes. We also evaluated and shortlisted a few start-up investments.
Fifthly, we drew up an exit strategy for some of Aryan’s non-productive assets. This involves some emotional decisions, so he is mulling things over. We also discussed renting out some of his property, and evaluated the possibility of selling some to lock in the gains that he had made, and to make management easier. Lastly, we started off with monthly and quarterly systematic investments in selected equities, and decided to add to it at every 5% to 7% drop in the market.
Make money…and keep it!
Most people—are focused on the first aspect of financial planning, namely wealth creation. The other two areas—wealth management and succession planning—get short shrift. In the race for wealth creation, we often forget to optimise what we have in a way that matches our goals and values. One way to do this is to steer clear of poorly thought out business plans, unproductive assets (especially where costly maintenance is involved), buying life insurance as an investment, and making inappropriate investment choices. Secondly, be thorough about succession planning. No one is happy to plan for their own death, but it’s important to think through what will happen to your assets after you pass on. They should be used according to your wishes, and should not cause avoidable problems for grieving survivors. Thirdly, take a comprehensive view of your situation, to make the best decisions in every area of your finances. Even the not-too-smart Munnabhai cautioned us against a piecemeal perspective when he said, “Dimaag ke doctor ko maloom nahin ghutne main kya ho raha hai.”
Accumulating cash reserves is simply not adequate, even if you have Rs 10 crore. Depending on your lifestyle, this corpus may not even last 10 years. Preface your financial planning with introspection, and ask yourself what is most important to you.
Amar Pandit is a Certified Financial Planner
and Director, My Financial Advisor
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