Truth, Integrity Should Be the Hallmarks of Financial Planners

Truth and integrity are words we hear a lot, but hardly find in real life. Politicians talk a lot about it and almost have nothing to show for it. Their oath of allegiance when they assume office is hollow, as politics today is a game of private enrichment at public cost. 

It is surprising that people have this conviction that integrity and truthfulness do not have a place in the present-day world. In fact, integrity does have a place in today’s world and those who are practising it know it and are doing extremely well. There are many who practise the highest levels of integrity in their personal lives and in their corporate avatars.

Infosys, Wipro, Tatas, Godrej, and the TVS group are some of the wellknown companies/groups, which come to mind when we are on the subject of integrity. For some of them, it is their calling card. For Tatas, apart from their management acumen, they are sought after by any company looking for an India entry, due to their impeccable credentials.

Integrity can be an actual differentiator. In the finance field, which deals with people’s money, it is even more important. The field has received a severe battering in the past three years and the integrity of this industry is in tatters. To this day, we read stories of deceit and wanton misleading of various participants.

Integrity is at the heart of building longstanding relationships. Integrity is difficult to maintain at all points. It is easier to bend the rules a bit, to suit one’s convenience. But that would bring down the moral stature a person has and their allweather dependability. Trust is built over time. One wrong move and their integrity is compromised.

Trust is a word that is often used by many in business. It is used even more in the world of finance — to allow another person to handle your money and with it your future requires quite a leap of faith. Hence, trust and integrity have even more relevance in the financial space.

Come to think of it, this can be one’s calling card. It will be an effective one at that. Each one of us operating anyway require something to distinguish us from the rest. Why not integrity? Why not actually take the moral high ground and stay there, where the clients like us to be?

Think of this as a long-term strategy. An insurance agent might lose some potential income by foregoing on the opportunity to push a product with juicy commissions — especially to a client who anyway does not know much about insurance. That is where integrity comes in. Integrity is what you do when no one is looking. What does the agent gain by doing the right thing? On an immediate basis, nothing. But the agent can always communicate to the clients all the options available to them and educate the client why, from among the various options, he is suggesting a particular product. This willingness to spend time to engage and do the right thing will certainly be appreciated and remembered. These are the agents who will go on to become the star agents of the branch, region, company, because a happy client recommending the agent to 10 others.

It works. Not just in insurance. It will work everywhere. It is even more fundamental in the financial planning profession, where I come from. Integrity is the backbone of this profession. Financial planners get to handle complete client information, unlike any other who may only get to see bits and pieces. Hence, integrity needs to be of the highest order here — not just beyond reproach. Trust is the currency here. And trust needs to be earned.

Earning trust is a relentless, dogmatic pursuit. Talking the truth all the time is immensely tough. But it needs to be done, because that is the highroad that one needs to take if success of the highest order needs to be achieved.

Quite simply, it is in our own self interest – enlightened self-interest. Doctors take the Hippocratic Oath to always act in their patients’ interest. A similar oath is what we all require. Both professions have a fiduciary responsibility. Done right, finance is as much a noble profession as medicine is – for one treats the body and the other takes care of the other most important part – money.

We all need to think about it. Each of us has to attest to the highest standards of honesty, integrity and truthfulness. This is not some utopia that I’m talking about. It’s what regulators are trying to create. It is what we can create ourselves and reap the benefits, too. And be counted as some of the best professionals there are. The choice is ours.

Seven Things You Should Look for in a Financial Planner

Recently, a new breed of professionals has emerged who are making financial plans for everyone and are not restricting themselves to investment planning. A financial plan includes planning for your taxes, retirement, kids’ education and marriage, buying a home, estate planning or any other goals you may have. 

This new breed of professionals, known as financial planners, writes a plan for you with all your goals specifically laid down and then provides you with a road map on how to achieve these goals. They always give you a holistic account of all your finances, taking into account all your assets and liabilities, besides taking care of all the risks associated with you and your family and also the assets owned by you. These financial planners will first collect all the data related to your finances and the goals you have for future. These goals may be anything ranging from buying a home, to planning for your child’s education to going on a vacation. After this exercise of data collection, the financial planner will analyse your goals and accordingly write a financial plan for you.

This financial plan will carry recommendations you need to follow as they will help you achieve all the goals. These financial planners may charge professional fees for making this plan for you. You will find various planners who can do this job for you.

But how to choose a financial planner who can handle your finances in the best possible way for you? Below are seven pointers you can keep in mind while scouting for a professional who can write a complete financial plan for you.

1. The planner should start by collecting data relating to your finances, analyse your goals and then recommend through a written financial plan and not just recommend a plan to you without understanding either your finances or your goals. Your financial planner should provide you with a holistic picture of your personal finances and provide you with a road map for your finances rather than just trying to sell you products.

2. Ideally, you should always go for a ‘fee only’ financial planner. This will ensure that the planner doesn’t have any interest in selling any particular product along with the plan. Along with that, this will also make sure that the recommendations provided to you in the plan are completely unbiased and to your benefit. A fee-only financial planner will disclose his fees upfront.

3. The financial planner should analyse all your goals and take a holistic picture of your finances. Once the analysis is done, he should draw out an asset-allocation plan for your goals. All the product recommendations should follow the asset allocation suggested. The financial plan may or may not carry any product recommendation. In case the plan is carrying product recommendations, then be sure that you have an option of buying the product from any other broker or distributor.

4. The financial planner should be well qualified to take care of all the decisions concerning your money. You must verify if your planner holds professional degrees like a certified financial planner (CFP) qualification or chartered accountancy and has specialised in financial planning. Both knowledge and qualifications will build up your confidence in the financial planner and will assure you of good management of your money.

5. If your financial planner is suggesting you to buy products like a traditional insurance policy, then be sure that he is just trying to make money for himself through commissions for himself or some of his associates. Stay away from a financial planner who suggests you to buy such dead products, which cannot be justifiably recommended by any financial planner.

6. Do some research on your planner and his reputation in the market. You can go on Google and search for his/her name. A financial planner with good reputation will always be very popular with the media and you will find enough to read about them over the Internet.

7. Stay away from a financial planner who starts off with advising you a product without analysing all your goals.

Most importantly, go with your gut feeling after the first meeting.

Get the HUF Advantage

A tax professional is the last person you would expect to dish out matrimonial advice, but Delhi based chartered accountant Mahesh Agarwal often tells his bachelor clients to tie the knot. “If they are paying too much tax and all possible deductions have been availed of, the only way to bring down the tax liability is by starting a Hindu Undivided Family (HUF). However, they can do so only after they marry,” he says. 

Though tax planning must figure in the list of 10 whackiest reasons to say ‘I do’, there is no doubt about the usefulness of the HUF as a tax planning tool. The taxman treats the HUF as another entity, which is entitled to the same exemptions as any other individual taxpayer and enjoys the same deductions as you and I. This effectively gives the head of the HUF an additional basic tax exemption of 1.8 lakh per year, an additional tax deduction under Sections 80C, 80CCF and 80D, along with the benefit of lower tax slabs.

The enormous tax savings from this arrangement are what led Suresh Bohra to set up an HUF in 1995. It helps this Delhi-based stocks and commodities broker save close to 86,000 a year in taxes. “As the karta of the HUF, I get a combined basic exemption of 3.6 lakh a year as well as a savings limit of 2.4 lakh a year under Section 80C and 80CCF,” he says.

Bohra isn’t alone. Lakhs of taxpayers, including salaried professionals, small businessmen, even retirees, use HUFs to save tax. You too can avail of this benefit provided you fulfil the conditions and complete the legal formalities laid down for an HUF.

Who can form HUF?
Any Hindu, Sikh, Jain or Buddhist man can form an HUF, provided he is married. In fact, an HUF is automatically constituted when a couple exchanges wedding vows. Still, there are a few simple formalities to be completed for the HUF to function as a legal entity (see graphic).

A husband and wife can form an HUF but a wife can only be a member, not a co-parcener. Therefore, the HUF income will not be assessed separately. A member has equal rights but only a co-parcener can demand the partition of the HUF. “Only the birth of a child will give the unit the status of an HUF for tax purposes,” says chartered accountant and legal expert Rakesh Gupta.

The HUF can be formed with money received as gifts from relatives. But there’s again a tax implication here. While there is no tax on gifts received by an individual from specified blood relatives, the HUF does not enjoy this exemption. “The HUF is not an individual, so it has no relatives. Any money it gets will be treated as a gift from a stranger. If the value of the assets received as gifts in a year exceeds 50,000, it will be deemed as income of the HUF and taxed accordingly,” says Rakesh Gupta.

Even so, an HUF can safely receive gifts of up to 1.8 lakh in a year without incurring any tax liability because of the basic exemption available to it. In fact, if the HUF invests 1.2 lakh in tax-saving instruments under Section 80C and 80CCF, it can receive assets worth up to 3 lakh a year without paying a paisa as tax.

The best way to avoid the tax tangle is to form the HUF corpus with assets received as part of a will. But here too there are certain conditions to be met. If the property is inherited by the individual, transferring it to the HUF will again lead to clubbing. “A person can give property and other assets to his son’s HUF but it should be clearly specified that the asset is for setting up the HUF,” says Mukesh Goel, director, Mukesh Raj & Company.

Joining the HUF
There is no form to fill for joining an HUF. All lineal descendants of the karta, their spouses and children automatically become members of his family. Wives join the HUF as members, while children join on birth as co-parceners. “Even the unborn child of a member has an equal share in the HUF,” points out Goel.

Till a few years ago, there was a gender bias in the HUF rules because females id not have an equal share in the ancestral property. This changed in 2005 when the Hindu Succession Act was amended to give equal rights to daughters even after they were married. “The 2005 amendment was a watershed for female rights,” beams chartered accountant Minal Agarwal.

Income and tax of HUF
There are five basic heads of income, including salary, capital gains, rent, profit from business, and income from other sources. Except for salary, the HUF can earn from all of these. It can invest the initial corpus as well as the gifts received in subsequent years to earn capital gains. Ancestral property can be let out to earn rental income. It can also start a business and earn profit from it. Interest and royalty incomes are categorised as other sources.

The karta will have to maintain the books of accounts of the HUF and file tax returns on its behalf. The date of filing tax returns and the tax rate are no different from that of individual taxpayers. He also needs to invest to save tax under Section 80C and 80CCF.

Should you go for HUF?
The HUF arrangement especially suits taxpayers who also have income from ancestral property and expect to inherit financial assets. Such taxpayers will be able to divert the inheritance to the HUF, thus preventing their personal tax liability from shooting up. It may not be advantageous for someone with a low income or who doesn’t have ancestral property.

Similarly, it will be particularly useful for taxpayers with a very high savings rate. Many taxpayers in the high income bracket quickly exhaust their Sec 80C limit by the PF and children’s school fee. They will be able to get tax benefits on other investments. However, somebody who is not able to save the 1 lakh under Section 80C will not gain from the additional deduction available to his HUF.

Even so, keep in mind that once an HUF is established and assets are transferred to the family hotchpot, the income from these assets would continue to be assessed as HUF income till the HUF is partitioned completely. It is also essential that all co-parceners act in the best interest of the family. “Every co-parcener can demand the partition of the HUF property. Even if one asks for his share, the entire HUF will have to be partitioned,” points out Priyambada Sen, senior manager with Deloitte India.

HUF in 3 steps Here are the legal formalities involved in forming an HUF.

1. FORM CORPUS
Use a capital asset to establish the corpus of the HUF. This can be ancestral property, assets gifted by relatives and friends, or received by the HUF through a will. If you give a personal asset to the HUF, the income will be clubbed with your own. Gifts of over 50,000 a year received by HUF will be taxable. The best way is for the HUF to receive assets as part of a will.

2. MAKE A DEED 

You have to prepare a deed on stamp paper declaring the formation of the HUF. It should have all the details, including the name of karta, co-parceners, address and source of funds in the corpus. Once the declaration deed is made, the karta should apply for a permanent account number (PAN) for the HUF. This is mandatory because all financial transactions must carry PAN.

3. OPEN BANK A/C

After you are allotted a PAN, open a bank account in the name of the HUF.  It is also advisable to get some stationery printed for official communication. The HUF is now functional. The karta will have to invest in tax-saving instruments and file tax returns on behalf of the HUF.