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Don’t buy financial products

Don’t buy financial products

by Efren Ll. Cruz, RFP®

Question: A financial products salesperson had long been asking me for a meeting whenever I would drop by their office. I finally agreed, and they presented me a slew of instruments to choose from. Being at a loss at what to get, I just told them that I would go through the proposals first. But I don’t know where to begin. Can you help?

Answer: The best route to take is to challenge yourself and the salesperson in determining what you truly need. For example, which would be better to use, a hammer, mallet and jack hammer? You will undoubtedly ask me for what purpose.

Don't buy financial products — Photo by Rohi Bernard Codillo

In the case of investment instruments, there are three basic asset classes to consider, namely money market, bonds and stocks. While returns get potentially higher from money market to bonds and to stocks, risks to earnings and return of capital also increase. It is important then for you to know what returns you need to make as tempered by the risk you are willing to take. Don’t just buy financial products without knowing how they can help you.

So, get the salesperson to help you compute the future inflated value of your goal.

If the salesperson is worth their salt, they will first look at how much money you want to have in the future. Then they will compare that with what you currently have and what you can periodically add. This will help them derive the return you need to earn and tailor it to the level of risk you’re willing to take. Then and only then can both of you figure out the financial instruments you need to get.

The foregoing exercise is what is we call in the industry as comprehensive financial planning or CFP.

When done properly, the CFP will produce objective advice on how to handle your finances by looking both at the forest then the trees. The CFP can cover the following:

analysis of your statement of assets, liabilities and net worth (i.e. SA-L=N);
valuation of your human capital (i.e. present value of your potential future earnings);
creation of plans on how to fund your children’s education, your purchase of a car or home;
computation of retirement funding needs with pension and retirement benefits from a private sector employer, the SSS and/or GSIS included;
estimation of potential estate and donor’s taxes;
determination of effective interest on loan offers;
computation of ideal (additional) life insurance coverage;
derivation of the level earnings needed to fulfill financial plans.

The full service CFP will also help in monitoring the plan’s execution in investments and business ventures. At the same time it can take advantage of tax saving measures from laws such as the Personal Equity Retirement Account (PERA) and Barangay Micro Business Enterprise (BMBE). We will need a separate discussion on PERA and BMBE.

Investing may be complicated with all the numbers being thrown out. But do not be rattled. Also, ignore the razzle and dazzle of huge payouts that are forecast in the future. Many times, the effective return from such payouts is not that great. To paraphrase Oscar Wilde and make his quote literal, many know the price of everything but the value of nothing. To paraphrase again, but this time John F. Kennedy, do not ask whether an investment is good. Rather ask what good an investment can do for you. The same can be said of other financial products whether they are simple deposits, loans, fixed income instruments, stocks, options, currencies, commodities and insurance.

So, don’t just buy financial products. Instead, work towards your future.

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Efren Ll. Cruz is a Registered Financial Planner and Director of RFP® Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines and a YAMAN Coach™. He also writes for the Philippine Daily Inquirer’s Money Matters column HERE.

or more money advice in marriage, you can check out the column For Richer Or Poorer on Inspirations.ph every Friday (publication date may change without prior notice) or send questions directly to yaman@personalfinance.ph.