Raj Talati runs a successful financial planning and advisory practice in Baroda, serving over 700 clients, many of whom are fee paying clients, and has accumulated a MF AuM of around Rs.28 crores. But what really sets him apart is the manner in which he explains financial concepts to his clients, in a way they can instantly relate to. How can the ongoing IPL help you explain the benefits of asset allocation to your clients? How can an annual vacation help you explain what financial planning is to your clients? How do you bring out the true power of compounding in a manner that clients get bowled over? How can a blockbuster movie help you explain the need for general insurance to your clients? Read on as Raj shares with us some of the novel ways in which he explains to his clients many terms that we frequently use as advisors and planners. We are grateful to Raj for readily agreeing to share his insights and ideas with Wealth Forum, for the benefit of the wider IFA fraternity across the country.

What is asset allocation?

Here's how I try to explain the concept of asset allocation :

Let's say I get a chance to own an IPL Team "Dream Achievers'. How should I go for buying players, during the auction ? Will I buy all 15 team members as Fast Bowlers or All Rounders or Spinners or Hard Hitters. No, I will make a strategy looking at different options available, their pricing and my budget. According to that I will probably buy 7-8 good Batsman, 2-3 Spinners, Obviously a Wicket Keeper and 4-5 Fast bowlers. Out of these, I will possibly try to have 2-3 of them being all rounders.

Depending on the ground conditions and opponent I will decide the final team on the Jumping Japak Jumpak Jumpak. I might have 3 spinners and 2 pacers or 4 pacers and 1 spinner. I might send opener as Mr.Pinch hitter or Mr.Reliable. So I need to put in place some strategy in buying the players as well whom to utilise before start of each match.

In each match, some batsmen will click, some won't. Some bowlers will do very well on the day, some won't. But, as a team, if we have more players performing than those who are not, we have a good chance of winning the game. The key is for the team owner and captain to create a well balanced team that compliments each other's skills, so that the team can do well.

Similarly in investments, all asset classes don't work at all the time, They perform in cycles. Hence if one were to invest all his savings in a single asset class then certainly he is inviting big trouble for his future. As we all know, the world of finance is very uncertain and sticking to your asset allocation holds the key to success.

Financial Planners use asset allocation strategies not only to create wealth, but also to protect it during volatile times. It is not the maximisation of returns, but optimisation of returns that becomes the goal. This process plays a key role in determining the risk and return from your portfolio. Broadly speaking, the portfolio's asset mix should reflect your risk taking capacities and goals.

Once clients understand the concept of asset allocation through this manner, we can then get into a more detailed discussion on strategic, tactical and dynamic asset allocations, and agree what is best suited for each client.

Why take home insurance?

This is how I try to broach the topic of home insurance with clients :

There are a few movies that leave a deep impact on us - movies like 3 idiots, Rang De Basanti, Munnabhai series, Taare Zameen Par - these are movies that give powerful messages in a very effective manner. Though not in that league, there is another movie - Oh My GOD (OMG) - which leaves a powerful impression on us. I am not talking about the belief in God or otherwise - I am talking about how one small mistake made by Kanjibhai brought his whole family and life almost to ruin. For most of us, our home and our business represent by far our biggest investments. And yet, these are the very assets we leave unprotected. Or, if we do try and protect, like Kanjibhai did, we often don't pay enough attention to whether we are protecting our biggest assets adequately.

With this prelude, it becomes a lot easier to get into the details of home insurance, explain the nuances of what is covered and what is not, and help clients understand how to get their biggest assets adequately covered.

What is financial planning?

Rather than launch into the text book definition that we have been taught in our CFP course, this is how I try to explain what financial planning is :

Lets say you and your family decide to take a vacation, a well earned break. The first thing you will decide is where you want to go. Then you will decide how much time you want to spend in this vacation. Then you will assess your budget for this vacation. Based on your budget and the time factor, you will decide your mode of transport. Then you will decide what to pack - depending on the weather conditions you expect at the vacation destination.

If you are planning to drive down to your destination, you will budget the total journey time that you are likely to take. If you have sufficient time on your hands, you can drive leisurely. If time is a little short, you will decide which highways you will speed up to make up time and which roads you will go cautiously on, and then hope to make up when you hit the next highway.

Financial planning is very similar to planning such a vacation. You need to first identify your goal - where you want to go. Then, you identify how much time you have until you reach that goal. Then you look at your resources and plan on how you can reach that goal with your resources. Based on your resources, the time available with you and your attitude towards risk, you will have a judicious mix of cautious driving (low risk assets) and high speed driving (higher risk, but higher return assets) that can get you to your destination.

After this introduction to financial planning, we then get into the details of data gathering for creating a financial plan for the client.

The power of compounding

I often narrate the famous story of the rice grains and the Persian king, to get clients to actually understand the true power of compounding.

A courtier once presented a Persian king an exquisitely hand crafted chess board. The king was impressed and asked the courtier to name his gift. The courtier simply asked for 1 grain of rice to be placed in the 1st square of the chessboard, and that this be doubled in each subsequent square until all 64 squares are completed. The king readily agreed and got his staff to start handing over the required grains of rice. It was 1 grain for the 1st square, 2 for the 2nd, 4 for the 3rd, 8 for the 4th and so on. By the time they reached the 10th square, 512 grains had to be given - which was done without a fuss. By the 20th grain, this doubling had reached a level of 524,288 grains. By the 30th square, the figure had shot up to 53,68,70,912 - that's over 53 crore grains of rice. The king was getting very worried by now, as his granary was getting fast depleted. By the 40th square, the figure had already reached an impossible figure of 10,99,51,16,27,776 grains - that's over 100,000 crores of grains for the 40th square - and he still had to keep doubling this for 24 squares more! The king lost all his riches, by not comprehending the power of compounding.

This old and famous tale is worth telling even today, as so few investors truly understand the magic of compounding and appreciate the power of compounding.

How I introduce my services

After introducing myself, I go straight to my firm's tagline and narrate and explain it to my prospective clients. My firm's tag line says : Aao, sapnon ko taarikh dein. I then break this down into 3 parts :

Aao - an invitation to take the journey together - the planner and client need to go together on this journey, for it to be successful

Sapnon - its all about your dreams, your aspirations

Taarikh dein - lets put a date to those dreams. Right from when I was in school, my father used to say that the best way to study is to put a date - a target. I will complete this subject by so and so date. I will complete my 1st revision by so and so date. Unless you put a plan - a date - a milestone, you will wander aimlessly and not reach your goals. Likewise, the first step to achieving your dreams is to put a date to those dreams. Then comes the plan on how we are going to jointly achieve these dreams.

This introduction generally goes down well with clients, because they understand in the first 5 minutes of our meeting, what exactly I am going to try and do for them.

To conclude

There are similar stories and anecdotes that I share to explain the benefits of starting early, the need to evaluate risk in high coupon FDs, the importance of budgeting, how to select mutual funds etc. The key aspect is that while all these issues are vitally important for our clients to understand, for them to become successful investors, it is our job to explain these to them - not in the way we learnt it in our profession - but in a manner they can relate to and understand. Its only when they fully relate to it, will they embrace these concepts. And without them embracing these concepts, we cannot walk together with them in the journey to make them successful investors.

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