Why Your Chartered Accountant is Not Your Financial Planner
May, 17th 2014
This article is not aimed at proving who the best is: CA (Chartered Accountant) or CFP (Certified Financial Planner). Rather, it is an attempt to inform you of the different roles of these two professionals in helping you with your finances.
Before getting into the comparison, I want to share with you a real life story. Mr. Anil (name changed) had a family CA who used to help him with all aspects of his finances. However, one day someone suggested Anil to review his finances which were in a bad state. Anil decided to seek the help of a CFP for this. He contacted one such financial planner near his place. He was pretty impressed by that person and decided to make a financial plan with him.
However, he imposed a condition with the planner that he should talk to his CA before making the plan. He organized a meet of his CA and CFP. During this conversation, a few questions were asked by the planner to the client's CA. This is how CA replied to those queries:
Q.1) How is Mr. Anil's Asset Allocation?
A) I have no idea about asset allocation.
Q.2) Does he hold any fixed maturity plan (FMP)?
A) What does an FMP mean?
Q.3) Where does Mr. Anil save for an emergency fund?
A) He has Rs.1.5 lakh in his saving bank account, which he can use during an emergency.
Though there were a lot of questions asked in the conversation, the above 3 ones are enough to classify who's who. The answer to the first question states that CA does not have any idea about asset allocation. The second answer tells you that CA does not have complete knowledge on the investment products available. The final answer tells you that a lump sum amount was lying idle and CA was unable to help the client earn a higher rate of return on it through liquid funds.
A financial planner would have been able to answer the questions in this way:
Answer 1) Currently, Mr. Anil's portfolio is skewed towards real estate which is illiquid in nature. He holds a few fixed deposits which fetch him 6 per cent post tax returns since he is in the 30 per cent tax bracket.
Answer2) He has no FMP and he should use this as part of debt investment since it also provides him indexation benefit along with decent returns.
Answer3) Mr. Anil has a lump sum amount lying idle in savings account. He should rather put aside up to 6 months expenses as part of emergency fund in a liquid fund which also provides him adequate liquidity.
These answers clearly tell you that a certified financial planner is an authorized person who can help you in a comprehensive way with your finances. CA's job is something different and he/she is an expert in taxation and related aspects. Let's list out the role of CA viz a viz CFP.
Role of CA
1) Taxation - A CA is an expert in the areas of taxation, both personal as well as corporate. He can help you plan your taxes well. He is well versed with the latest tax laws.
2) Auditing - If you have a business/company, he can perform an audit on the accounts and certify the same. He is authorized to do so. A CFP cannot perform an audit.
3) Accounting - He is brilliant with accounting concepts, making balance sheets, reading the financials of a company, etc.
Role of CFP
1) Insurance Planning - A Financial Planner can help you with your insurance needs. He would be able to calculate how much insurance you actually need and what type of insurance plan is the best for the said purpose.
2) Retirement Planning - A CFP can calculate how much of a corpus you would need at the time of retirement so that it would suffice for the rest of your life. He would also tell you how much you need to invest monthly from now to achieve this.
3) Investment Planning - He can suggest you a suitable portfolio depending on your risk appetite, goals, etc. He also has good knowledge on the investment products available and their past returns.
4) Tax Planning - He will not just minimize tax for the year but would help you plan your taxes in advance. He will suggest you products depending on your tax status.
5) Estate Planning - He will make sure you have an estate plan in place so that any event would not disturb your future goals.
6) Budgeting and Cash Flow - He will encourage you to prepare a budgeting sheet so that you can track your income and expenses. He will also check your cash flow from time to time and offer suggestions accordingly.
7) Financial Planning - He can prepare a financial plan by integrating all the above concepts. He can also help you track your past and present investments. He would review your portfolio every 6 months - 1 year or whenever there is a major event such as marriage, birth of child, divorce, etc.
The incident narrated is not to prove that CAs do not have any idea on aspects of personal finance. Not all might be the same. A lot of CAs these days have decent knowledge on aspects of personal finance.
CA is a great course and it requires a lot of effort for someone to clear this course and take up this profession. CFP on the other hand is a product designed especially for the purpose of solving your personal finance problems. If you ask me who I would go to if I have a tooth problem, I would say a dentist rather than a cardiac surgeon just because he is an expert in my area of trouble.