Choosing The Right Financial Product
One personal-finance question I often get asked is: “Is this (name of product) OK?”
It’s a good one, since there are countless instruments in the market that answer every need. Add to these the marketing strategies, sales spiels and product pitches that seem to nudge, if not close the deal, and I would understand how one may be overwhelmed with the choices. And with our blind spots in financial know-how and seller-imposed quotas compounding this situation, I would imagine lots of product mismatches that fail to meet the buyer’s needs.
Being in the financial-services industry for some time now, I often see people who feel they have just been “sold,” or investors surprised that they signed up for something they didn’t understand. As a consumer, how would you know a product is right for you?
Here are some tips:
• It covers what you need. Your need is the primary factor in getting a product. If you’re not sure of your needs or which need would a particular product adrress, I suggest to first refrain from buying and ask yourself: “What need do I want answered?” Funding your retirement? Your child’s education? Additional income for your family should anything happen to you?
In stock-market investing, people too often buy stocks for “extra income.” But what is this for? For needs this year? Things you want to buy in a few months? Payment for your monthly electricity bill? Your retirement?
Each of these “needs” are different, so they need different approaches to managing your portfolio, stock selection, and trading strategy. Short-term needs may require a more active buy-and-sell approach, as you would need to raise the money needed to pay that monthly bill. On the other hand, long-term needs may require lesser trades, so the portfolio would largely be buy-and-hold.
The same principles can be applied to insurance: How much do you want to leave to your family should anything happen to you? How many months or years’ worth of expenses?
Would these be all expenses, or just the basic ones? If years’ worth, are the expense projections accounted for inflation?
The clearer you are with your need, the more definite—and accurate—you would be with your product purchase.
• It funds your financial target when you need it. They are called financial “vehicles,” because they should bring you to where you want to be. If not, why get on it in the first place? The right financial product will give you the money when and where you need it.
A lot of people I talk to go into the stock market hoping to make some money out of it. But when an unforeseen and urgent need arises—a sick child or a parent needing hospitalization, for example—they are forced to sell their holdings at whatever market value they are in and, worse, at a loss.
Same case with insurance. Some would be satisfied with X amount of insurance. “At least I have some” is their usual reply. But how much would that amount fund your family’s expenses? Another would be “advisors” who push a product with low insurance coverage that would just cover family expenses for a number of months, and rationalizing that, “at least, they have some form of protection.” But that protection may never be enough.
Worse, you would realize that the product was being pushed only because it offers the highest commission.
A good product is one that would give you the funds you need when life’s eventualities arise.
• It suits your budget. Now this is one aspect that most people neglect. Each of us have limited resources, and it is but prudent to maximize them when buying financial products. You should get the most benefit out of the least possible cost; call it cost-efficiency and cost-effectiveness.
This is most obvious in insurance: a term insurance will give you the most coverage at the least possible cost, especially if your budget is tight and have to fund several important goals. A VUL is good, but the coverage is not as huge. However, you may get it as it grows over time, provided that you can sustainably pay for it and it would not hit other more important goals, as well.
Buying a financial product is like buying in a grocery: don’t buy the one that is readily at arms’ length. Research, compare, and think. Most of all, it should fit your budget.
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Rienzie P. Biolena is a registered financial planner of RFP Philippines. He is the president and chief financial planner of WealthArki and Consultancy, a financial planning firm. Learn more about personal financial planning at the 68th RFP program in May. For inquiries, e-mail info@rfp.ph or text <name><e-mail><RFP> to 0917-9689774.
Source: http://www.manilatimes.net/choosing-the-right-financial-product/392456/
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