Personal Finances - Inertia & Inactions

02 Feb, 2003

The best of professionals among us who may have honed their skills and experience to deliver fine results for their employers and their businesses, are found to be shoddy, when it comes to managing their personal finances. There are instances replete of how those that are as meticulous in their professional pursuits, are not so in their personal affairs.

I am aware of a former colleague, who unfortunately and suddenly, succumbed to cancer, at the prime of his career and in his forties. He was a senior banker and a management graduate. He excelled in the finance discipline, as it applied to businesses and could tear apart financial propositions presented to him. He was decisive, relentless and more importantly, focused; when it came to business matters. He also believed in living well and was devoted to his family of four. I used to see him working out in the gym, with the same tenacity that he displayed at work. It was therefore, a rude shock to many of us, when he was diagnosed as having a late stage lymph cancer. Suddenly the entire world seemed to turn upside down for him and his friends. He was remorseful, withdrawn, unable to participate in social activities and more so, was contemptuous of any sympathy or support shown by those around him. He suddenly felt vulnerable and was loathe to admitting that he needed assistance from others, as he had been fiercely independent and in peak condition physically, thus far. Naturally, he spurned; what he viewed as unnecessary solicitousness, just because, he was now "down the dumps", as he put it. In fact, he pulled me up for visiting him with the family on the evening of the day, that he had returned from the doctors. The diagnosis of advanced cancer was devastating to him and indeed to all of us. It was shocking to see that as he went to the U.S. and came back, he could not push the luggage trolley at the airport, whereas earlier, he used to pump iron and run in the treadmill for forty-five minutes at breakneck speed at the club. C'est la vie as they say, but this episode illustrates the need for careful and sensitive planning.

There will always be rainy days in the lives of all of us; days when there could be storms and / or mishaps and that can happen to the well prepared, but that will leave the ill-prepared not just exposed but unable to take care of their near and dear ones, when the chips are down or in a crunch. This is where many of us, in our advanced years, realise sadly, somewhat in a delayed manner, that we may have succumbed to the inertia and inaction in our younger days and in a sense, believed in our own invincibility and immortality. Often our minds run ahead of what our bodies can cope but worse, in some instances, we refuse to accept that we will not be able to continue doing certain things the way we did in our prime. These are the contexts in which pensions, financial forecasts and contingency planning are all relevant and timely.

That said, the friend in question could not survive the trauma and chemotherapy and died within a few months of the diagnosis. A tortuous path of unravelling his financial details befell his widow in Dubai, who had to contend not just with the application of Sharia but to tidy up the financial affairs of a person, who died in testate (without a will). She had to go through laborious court processes back in India, as well as here, to receive what she would have taken otherwise for granted, as her dues! Not just the bank account balances were suddenly frozen. This friend made investments in his single name, which meant that the custodians had to be furnished details as to the rightful heirs.

When tragedy strikes and anguish sets in, it is hardly the appropriate time to disentangle personal finances, produce death certificates and answer awkward questions or engage in seemingly endless paper / documentary correspondence. This is what brings home to every professional, even the seasoned ones, the need to devote adequate time to assemble, modify and manage one's personal finances.

Just as doctors (physicians heal thyself!) turn to other health specialists when they need medical attention and do not treat themselves, even those of us, that think that they are the last word in the world of personal finances, should have the humility to accept alternate and hopefully better advice; when it comes to an orderly review of personal finances. The fact that you are a specialist, perhaps puts you in a better position, to relate, understand and make decisions.

But the need for a good personal financial advisor, becomes all the more important, when you cannot or do not devote the time to attend to personal wealth management. I use the term 'wealth management' as connoting those who have sufficient money, apart from savings for the ongoing and foreseeable financial expenses, to be able to nurture the surpluses into wealth. They should behave almost like a trustee for their own future generations (their sons and daughters) and this is where, even than more care and attention, a sense of detachment needs to be cultivated.

The wealth for most comprises a blend of property / real estate holdings and other monetary investments. Ironically, a reverse trend is often noticed i.e. as you grow older and wiser, you turn to the safer and the more secure investments and avoid the exotic, complicated and the tantalising ones that may produce multi-fold returns in a bull market but can destroy value as quickly as they seek to multiply it.

Many of the wealthy individuals have made mistakes over the years and accumulated a lot of junk in their personal financial portfolios, be it in tangible or paper security form. They may prove to be often reluctant to bite the bullets i.e. sell / write off certain investments as irrecoverable and use the sale proceeds to make careful, fresh investments. Here again, the perspective becomes much more objective, if one does not manage one's own finances, but turns to an outside advisor or one's private bankers; depending on the amounts in question. Obviously, in the case of property or non-cash investment holdings, one should turn to responsible specialists, be they real estate professionals, insurance agents and the like.

This is where choosing the right private banker or a professional / financial advisor becomes crucial. There are many salesmen out there, as the Americans would say. Some behave 'a la' second-hand car salesmen. Ultimately, the product-originating institutions part with the commissions. Therefore, the sales people tend to push those products that have the highest margin and not necessarily those that make the best sense to one's portfolio. This is where, perhaps, the system needs to be a little more robust. It may be useful, even for relatively smaller amounts, say US$ 100,000 and above, for a dedicated personal financial advisor to be allocated, who can take a holistic view of the holdings and be rewarded at the end of the year; not by way of upfront commissions but on the bases of performance on the one hand and the management, time, custody and other costs on the other.

It is not wise to stint on fees. A reasonably generous fee to an advisor is similar to what you pay to the doctor or a plumber or a teacher and allows you to obtain best relative value.

"Any society that scorns plumbing because it is a lowly profession and praises philosophy because it is an exalted profession will soon find that neither its theories nor its pipes hold water"! said Descartes, a B.C. period Greek philosopher. This is equally true in the case of professional financial advisors. They need to eschew the temptation to stuff self-serving products onto their clients but equally the clients will need to remunerate them reasonably, so that they stay above temptation.

The same is true for bureaucrats and that is why, I salute the Singaporean authorities for paying their cabinet ministers on par with the chief executives of companies, so that (a) the profession i.e. that of cabinet ministers and the politicians attract the best and (b) that they do not degenerate into corruption. Many of them make key decisions, be it at the individual or the public level. To expect them to do their best for what they are paid is reasonable. You need to, in fact, make them accountable. In this region, personal financial consultants should be appointed, based on their experience and qualifications and accredited by the institutions that employ them under norms agreed with the central bank and other regulators. This is of course common place in the U.S., Europe and in the matured markets, where Series 7 or similar qualifications are mandatory. Otherwise, regional banks will end up having those that are more adapt in selling investments than in creating and sustaining value. This can be potentially lethal to the credibility of the institutions and to the future of this entire gamut of catering to personal financial planning. There is nothing private about 'private' bankers other than the term illustrating the need for discretion, dedication as well as competence to the needs of high net worth individuals or portfolios of clients that are in the upper income / wealth brackets.

Ultimately the rich, the famous and the wealthy, all are usually well versed in knowing how to take care of themselves and their money. It is also true that once you have made your first million, the second million is much easier to make and it flows through! Nevertheless, it takes one set of skills and circumstances to create the millions. But quite another, to grow it in value without succumbing to greed or fear or worse, inaction and inertia.

Many years back, I received a letter from an insurance salesman that said about insurance that, 'it is better to have it and not need it, than to need it and not have it'. This has as much relevance on the need for good advice and careful planning of personal finances.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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