Don’t buy financial products

Q uestion: A financial products salesperson had long been asking me for a meeting every time I dropped by their office to transact some business. I finally granted the meeting. In that meeting, the salesperson presented me with a slew of instruments to choose from. Being at a loss as what to get, I just told the person that I would go through the proposals first. But I do not know where to begin. Can you help? Answer: The best route to take is to challenge yourself and the salesperson in determining what you truly need. For example, which would be better to use, a hammer, mallet and jack hammer? You will undoubtedly ask me for what purpose.

In the case of investment instruments, there are three basic asset classes to consider, namely money market, bonds and stocks. While returns get potentially higher from money market to bonds and to stocks, risks to earnings and return of capital also increase. It is important then for you to know what returns you need to make, as tempered by the risk you are willing to take.

So, get the salesperson to help you compute the future inflated value of your goal. If the salesperson is worth his or her salt, that future value will be compared with what you currently have and what you can periodically add to derive the return you need to earn as tailor-fit to the risk you are willing to face. Then and only then can you and that salesperson figure out the financial instruments you need to get.

The foregoing exercise is what is we call in the industry as comprehensive financial planning (CFP). When done properly, the CFP will produce objective advice on how to handle your finances by looking both at the forest, then the trees. The CFP can cover the following: 1) analysis of your statement of assets, liabilities and net worth (i.e. SA-L=N); 2) valuation of your human capital (i.e. present value of your potential future earnings); 3) creation of plans on how to fund your children’s education, your purchase of a car or home; 4) computation of retirement funding needs with pension and retirement benefits from a private sector employer, the Social Security System and/or Government Service Insurance System included; 5) estimation of potential estate and donor’s taxes; 6) determination of effective interest on loan offers; 7) computation of ideal (additional) life insurance coverage; and 8) derivation of the level earnings needed to fulfill financial plans. The full service CFP will also help in monitoring the plan’s execution in investments and business ventures while taking advantage of tax saving measures from laws such as the Personal Equity Retirement Account (Pera) and Barangay Micro Business Enterprise (BMBE) We will need a separate discussion on Pera and BMBE.

Investing may be complicated, with all the numbers being thrown out. But do not be rattled. Also, ignore the razzle and dazzle of huge payouts that are forecast in the future. Many times, the effective return from such payouts is not that great. To paraphrase Oscar Wilde and make his quote literal, many know the price of everything and the value of nothing. To paraphrase again, but this time John F. Kennedy, do not ask whether an investment is good; rather ask what good an investment can do for you. The same can be said of other financial products, whether they be simple deposits, loans, fixed income instruments, stocks, options, currencies, commodities and insurance.

So, don’t just buy financial products. Instead, work toward your future. INQ

Send questions via “Ask a Friend, Ask Efren” free service at personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook. Efren Ll. Cruz is a registered financial planner and director of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines and a Yaman Coach. To consult a Yaman Coach, email [email protected]. To learn more about personal financial planning, attend the 98th RFP Program this October 2022. To inquire, e-mail [email protected] or text 09176248110).