Sunday, November 28, 2004        

INTERVIEW : Dr. SOMNATH BASU

Director- Financial Planning Program, California Lutheran University, USA

Competency and ethics are important in a planner

Monika Halan talks to Dr Basu, Director- Financial Planning Program,
California Lutheran University, on retirement planning issues in India

Retirement planning are still unfamiliar words in India today. Most
people begin thinking of retirement just a few years before they
actually do retire. What is your experience from the US, are there any
economic or social changes that occur for people to begin thinking of
their retirement earlier than they do today?
Urbanisation and economic development are the two things that will make
a difference. More and more people will come to realise that they need
to fend for themselves. It would typically be second generation urban
migrants that see their parents, who are under-funded for their
retirements, to get up and say: ‘I don’t want that happening to me’ and
plan ahead so that they remain financially independent.

What is the ideal asset allocation for the retirement corpus?
I am lecturing here on the age banding model. This model looks at the
life of an average person who will retire at age 65 and then live for 30
years. The traditional model looks at putting all the money in the
safest possible vehicle, which is usually bonds. But that way the
money’s potential will not be fully realised. I would separate the
retired life into different phases and allocate money into lower risk
assets like bonds to fully fund the first few years of retired life. The
rest should be put to work in equity to keep the money working over a
long time period. For a moderate risk taker, I would recommend an asset
allocation of 60-65 per cent in bonds and the rest in equity for the
retirement corpus.

Ideal asset allocations for retirement contain a fair bit of equity,
that may work for a market like the US, but in the event of India having
high return government assured products with little risk, is there still
a case for equity today in a retirement corpus?
The case for equity is very clear. Using 70-year US data we can show
that fixed income instruments give an average annual return of 6-6.5 per
cent. Large cap stocks give 11-12 per cent and small cap stocks give
15-17 per cent return. Equity is a long run instrument, it outperforms
other instruments but it needs time. The earlier you start, the more
time you have to make up the money lost, if any, and to get over the
equity cycles.

What kind of regulation is needed for the Indian financial planning
industry?
According to me, a SRO approach is better, where the association
regulates itself. The government’s role should be kept to lay down the
rules, but it should not be poking its nose in the everyday life of the
industry. The regulation should be designed to protect the small
investor. This is a person who needs protection and if the government
does not ensure this, it will lead to market failure.

What should the attributes of a financial planner be?
Customers should look for competency and ethics in the planners. In the
US, the CFP has emerged as the hallmark of these two attributes. Just as
an accountant who is a CA carries more weight in India, so also, a
financial planner who is a CFP is preferred in the US. Something similar
must emerge here as well. One designation that is recognised by all and
is credible.

What can a person do to begin retirement planning?
Discipline the mind. Only then will the plan work. The plan involves
estimating future things like, when will you retire, how long do you
think you will live, looking at how long your parents lived, how much
would you need, how much do you have today and therefore, how much do
you need to save, given your risk tolerance levels. But you need
professional help to make a plan, just as you need a professional to
solve health issues.

 

URL: http://www.indianexpress.com/full_story.php?content_id=59740