How to help your Debt Stressed Clients?

Do you have clients who are burdened heavily under Debt upto their hairline? Do they have large credit card bills outstanding apart from their home loan and car loan EMI's, or are they still struggling to pay off their education loans?

Nowadays it's a normal scenario because of easy money, credit cards to fund lifestyle changes, getting a loan is child's play, so people are increasingly vulnerable to falling into the debt trap, especially the younger population.

You must have had clients who even stopped their SIP's or redeemed their investments because of the mounting debt. Because no matter how great the financial plan is, or how much impact can lack of investing have on the client's future, if one is burdened with debt, it makes more sense for him/her to offload the burden first and put off the investment activity to later.

Helping the clients manage their loans, is a very important aspect of overall financial planning, in fact Debt Management precedes the financial planning process. If you want them to invest, help them get out of their debt first.

So, the focus of this article is sharing insights on how you can pull your clients out of Debt. We have listed a three step process for the same:

Seek Commitment: Debt is the end result of towering expenses and an uplifted lifestyle. It's easy to upgrade the lifestyle, while it's equally difficult to mark it down. Getting out of debt is not easy, it requires genuine commitment and a strong willpower. So, to begin with, your first step as an advisor is to secure that commitment from the investor.

And securing that commitment involves a lot of communication, so there must trust between the two parties. Your client must be able to trust you with his financial acumen. As an advisor you have to act as financial doctor for your clients to treat his financial ailments.

And before proceeding to giving him any advice, it's best that you carefully analyze his financial position, his loans, the interest rates of those loans, his priorities, his expenses, his nature in general, etc. Because when you understand these aspects, only then you'll be able to establish the connect and give him the right advice.

The client will be willing to cut his expenses only when realization dawns upon him.

Show him the opportunities that he's loosing because of the huge Debt and resultant lack of investment. Show him the mirror, the possible repercussions, that his future goals are being sacrificed because of lack of investing. You can use formulas, graphs and examples to support your contention. And show him the bright side of being debt free, being free from the mental pressure and being able to start investing for his goals.

Cut Expenses: The obvious solution to debt disposal is paying for it, by cutting the discretionary expenses and carving out this payment from the borrower's regular income. The client knows it already, and you obviously don't want to be lecturing him on good and bad money habits. It's a sensitive issue, it's like telling a fat man to stop eating food. Don't be a critic, the client needs support, a solution, and you are that support system, that solution provider. You have to guide him in the right direction, there are various techniques that may be used by your client for cutting his expenses like:

1. Listing down Expenses: When he prepares a list of his routine expenses, he'll be able to better judge as to which type of expenses he could have done without. And all such expenses fall in the discretionary expense category, which should be the target points for elimination in the coming month. This activity of expense listing will help the investor keep a control on his high lifestyle expenses.

2. Following a budget: Next, it makes sense to develop a conservative yet realistic budget and aiming to keep the expenses within the boundaries of that budget. It'll be like a forced saving.

3. Experimental thrift: Say for instance, if your client is a shopping addict, a great way to cut his shopping is by uninstalling all the shopping apps from his phone for two months, or locking his credit card in his cupboard for a month. Such experiments can help the client eliminate his impulsive purchases and contribute towards achieving his goal of reducing his expenses.

Pay the Debt

The last step is putting the plan into action, initiating the Debt Repayment process.

1. Begin with the smallest debt: It's ideal to start with the highest interest bearing debt, but here your client needs an incentive. When he pays off a debt completely, it will motivate him even if it was a small amount or a lower interest rate debt, and build his zeal to strive for the second wicket.

2. Target the Sin Debt: Once your client has warmed up, the next step is he should be directing all his saving towards the high interest bearing sin debt, i.e. his credit card debt, loans from moneylenders or any personal loans. Sin Debt is the worst enemy of a borrower, the availability is so easy and the interest rates are so high, that once stuck it becomes extremely difficult for the borrower to disassociate himself from its clutches.

3. Swap the Debt with a lower interest bearing Option: You can also help your client refinance his debt at a lower cost in case options are available.

By now, your client would be out of the danger zone and would be left with his justified EMI's, the home loan, education loan or car loan EMIs. So this is the time when he should begin with the process of Debt Repayment and Investment simultaneously, because although it is important for your client to repay the debt, but it's equally important to take care of his future. Max he can get over with his student loan before proceeding with investing. These are the low cost loans, and they aid the investor in building an asset and meeting his goals.

So, the bottomline is, motivate your debt ridden investor to get over debt, by showcasing the benefits and the probable aftermath of his current situation. Guide him inculcate frugality so that he can pay of his loans gradually from the money thus saved.

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As financial advisors we have a lot of expectations from our clients. Some of these expectations are those expected as a professional and also those basic expectations as a person. Meeting this expectations is a crucial ingredient for success as an advisor. The advisor has to align his entire business practice to match the client expectations. While there may be countless expectations from clients, there are those which hold the basic fabric of the the relationship. In this piece, we will talk about some of these expectations ...

The basic expectations

• Respecting time: No longer can we continue with a 'chalta hai' attitude to our clients. This is one big thing which differentiates us As the markets become more competitive and professional and times more hectic & busy, respecting time of the clients is now a basic expectation. Advisors should make it a habit of arriving, meeting, calling, etc. on time with clients.
• Keeping records: Imagine already taking a decision with client and then forgetting it! It is something to be seen as a professional sin! Better we keep a proper record of all our meetings, tasks and all the conversations we have with the clients.
• Response time: In the age of instant foods and T20, the response time expectation has been severely curtailed. There is no excuse frankly for not responding on time. If there is some problem, you are expected to handle that but respond in time. You can take a cue from our Railway Minister who responded to a tweet from a lonely lady passenger at night. Let us set our own personal standards.
• Clear communications: Communications have to be precise, understandable, clear and concise. In today's digital age, the medium of communication also become crucial given the various mediums available. The advisor has to be follow the medium of his client to reach him else all other important ingredients of communication will be of no use.
• Regular updates: Needless to say, clients expect to be kept informed and updated, even if they are not very vocal about it. Basic expectation is of regular update on investments and financial plans, if any.
• Keeping in touch: Clients like to be remembered. The gesture of greeting on festivals, events, etc. is too basic to be stated. Some form of regular communication like news, articles, new products, etc. may be communicated as per client interests.
• Respectable & presentable: Being a complete man – with good etiquettes, dressing and language is always welcome. Successful professionals try to maintain a respectable, pleasant and attractive image and personality. It definitely you greatly in getting more business, references and obviously new clients.

The professional expectations:

• Understanding client: Understanding the client goes beyond his stated needs. It covers a whole gamut of client profile – right from risk appetite, financial situation, family background, family goals, etc. to provide truly customised and comprehensive range of services – as per your engagement. Understanding client is an ongoing process and it is not something to be asked or a matter of data collection.
• Fulfilling advisory role expectations: An important element of client engagement is knowing your role and the expectations. As financial advisors, there may be a lot of things which you can do, but perhaps which the client does not want. It is better to stick to your role and not push the boundaries of relationship unless the client wants it. Fulfilling your role to the full satisfaction to the clients is first step towards growing relationships.
• Keeping client interests supreme: Needless to say, no advisor can become big and famed unless he keeps client's interests supreme and at the heart of the relationships. Compromising this may fetch short-run benefits but they are also short-lived. There is every chance that another advisor comes along the way and highlights your misadventures to the clients. The best way to do this is to listen to your conscience after asking the question – am I truly helping the client without bias?
• Disclosing material facts: Trust develops when we do not hide things. However, it is also not necessary that we disclose everything which the clients does not need to know or is unable to understand. The true test of being material is when an information is relevant for making a decision or an element of the engagement or something which the client needs to know in his best interests. The choice of disclosure is of the advisor but so is the onus and the moral responsibility.
• Keeping updated & skilled: A financial advisor is expected to be knowledgeable, certified, licensed, informed and skilled in his area of expertise. High standards of knowledge & expertise should be maintained on an ongoing basis if we desire to grow in the business and stay relevant in coming times. This broadly covers the areas of regulations, markets, products & solutions and technology.
• Giving justice to relationship: There is only so much an advisor can do. Being human and being in the profession where your time is a precious commodity, there has to be a fine balance struck with the available time and the number of clients. There are ways to play this balance – through automation, infrastructure, people or team and by differentiated service offerings. The idea is to do 'reasonable and fair' justice to the client as per his expectations. There is no point in adding clients if you cannot do justice to the relationship. Over time, it only adds to the stress, low service quality and ultimately a dissatisfied client.

The Bottom Line
The reality today is that clients are increasingly aware and choosing their advisors carefully. In a world where many things are increasingly becoming automated and robotic, the importance of personal approach to a comprehensive advisory can never become out of fashion. Having a human face, today's financial advisors have challenges which can be met by putting proper practice related principles, policies and processes in place. The above behavioural and practice tips for meeting expectations, is but only a small part of the things that we need to do. Let us take the right step in this direction by first having strong expectations from our own selves....

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You all must have faced a plethora of questions from your clients or prospective clients about various investment products, their suitability, risk, returns, etc., and a very common question that comes up often, especially in the case of a new client is “What if the AMC goes bankrupt or if it decides to close down? People doubt the continuity of the AMC, and they wonder what will happen to their money if the fund closes down one day. This is indeed a difficult question and many times we do not have a satisfactory reply for the client. We may resort to generalized statements like “I am here, you don't have to worry” or “Nothing will happen to the AMC, it's in business since more than a decade”. The client has a very valid question and he is looking forward to getting a logic behind the sustainability of the fund from his advisor and not a vague assurance.

The advisor needs to tell them the rationale behind the safety of their investment. So we have penned down the points that will help you in supporting your contention and to provide comfort to your investors, which are as follows:

• The key logic is, the Mutual Fund AMC or the broker don't own your investment, they are the facilitators between you and the companies where your fund has invested in. Your investment lies with the companies and not with the AMC. For Eg. You have invested Rs 1 Lac in a Diversified Equity Fund of HDFC Mutual Fund, and the fund has a portfolio of let's say 50 different stocks. So, HDFC does not have your money, it is only managing the portfolio. So, in the worst case scenario if one day HDFC decides to close down, the money is yours and is lying with those 50 different companies in different proportions as decided by the AMC. In case a part or all of the investor's money is in the form of assets like Gold, or real estate or cash, then all these assets lie with a Custodian, an independent entity, and not with the AMC.
• Secondly, SEBI has put strict checks on the structure and activities of a mutual fund with a view to protect investors' interests. The structure of a Mutual Fund is such that there is minimal scope of manipulations. The day to day operations of a mutual fund are carried out by the AMC. A mutual fund is constituted as a trust, and this trust acts through independent trustees, who have no relation with the sponsor. The primary role of these trustees is protecting the investors' interests at all times. Moreover, there is high level of transparency mandated by SEBI in Mutual fund's routine operations. The NAV is published on a daily basis, the portfolio, commissions and charges, and other relevant details about the fund have to be aptly disclosed. Because of such strict checks, rules and regulations, the investors are protected at all times.
• Thirdly, the Mutual Fund may decide to shut down operations, sells its business or merge with another mutual fund. In India, such mergers have taken place in the past, without bringing in any trouble for the investors. So, if your mutual fund is about to get shut, you will be allocated units of the merged mutual fund or the new mutual fund for an amount equal to the investment you held in your last mutual fund. If in case you aren't happy with the decision, don't worry, you will be given enough time to redeem your units at the latest NAV without having to pay any exit load.

So, whenever you visit a new client, be prepared for this question, the above points will help you in gaining his satisfaction. It's best that you familiarize yourself with the Mutual Fund Structure, rules and regulations protecting the safety of the investor and past examples of Mutual Fund mergers, to support your claim better.

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