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Importance of record keeping in personal financial planning

15 Mar 2023

We all understand the importance of financial planning quite well. Most of us tend to ignore an important aspect of financial planning which is record keeping. For the uninitiated, the task of record keeping may sound quite mundane and clerical to bother about. Remember, keeping your records is a systematic and organized manner is not only essential but can also add a lot of value. Let us first understand what record keeping in financial planning entails..

What do we understand by record keeping in personal financial planning..

First and foremost record keeping implies keeping all your key personal financial records in a safe and secure place. This includes your agreement with the personal finance advisor, the statement of the plan, the investment mix, the periodic review reports, the necessary certificates, account statements and demat account copies etc. Such documents should be stored in a such a way that they are protected from rain, wastage, fire etc.

Keep a digital back up of all your records. At the end of the day, there is always a risk in physical records. While these physical records are great for reference, there is a digital backup you must create. They can include scan files that can be stored in digital lockers with an additional backup in an external drive or in cloud storage. The digital backup will ensure that in the case of any loss of documents they can be retrieved easily.

The records must be classified, tabulated and organized in such a way as to enable easy tracking. If you want to locate a particular statement or a periodic portfolio review, then you should spend the better part of the day searching for it. Your record keeping must including organizing filing with a detailed documentation and index of all files that need to be accessed in the shortest time possible.

A very important part of your record keeping is a sensitivity analysis. You should stress test your portfolio under different market conditions. For example, what happens if the interest rates go up by 300 basis points or go down by 300 basis points? What happens if the world economies go into recession? What happens if the GDP growth in India falls by 200 basis points? Above all, how will my portfolio get impacted if the Nifty goes up by 15% or falls by 15%. These sensitivities should be regularly updated and stored in an accessible manner.

What are the records that you must insist on from the advisor?
When you employ a personal financial advisor to help you plan your long term finances, it is actually a fiduciary relationship of trust. You must insist on the following records to be furnished by your financial advisor, which must be part of your personal record keeping. Some of the key records with larger legal ramifications are as under:

The advisor must certify that he has discharged his duties with your best interests in mind. The advisor must be able to document that he has acted in a manner that takes of your financial interest.

Each piece of advice given by your financial advisor along with the justifications and the supporting notes should be documented by you as they can be important legal papers for your records.

Your financial advisor is required to disclose any conflict of interest in his advisory capacity and should be able to document that he has put your financial interests above his other interests. These also need to be recorded in the file.

Why is record keeping so important to financial planning?
The reason you need to be extremely meticulous about your record keeping is numerous. Here are a few key reasons..

In the event of any dispute between you and your financial advisor, you need proper and detailed records to prove your point. Thus these records have very important legal implications from a procedural point of view.

There is also an important taxation angle to this. Over a period of time your combination of insurance, equities, mutual funds and bonds can become quite complicated. All these have tax implications and should be handy while filing your returns annually.

Reviewing your portfolio becomes a lot simpler if you have all the records meticulously maintained and centralized in one place. After all, your portfolio needs to be reviewed and modified at regular intervals or in response to external stimuli.

Many of the documents that go into your financial plan have long term financial implications. You do not want delays and monetary loss due to poor record keeping. Hence adequate meticulous documentation of records and transactions is a must.

Quite often, we tend to ignore the importance of record keeping. It is not just a statutory obligation but also makes a lot of business sense to be meticulous in your record keeping. The theme is simple, “The sooner you get meticulous about your records, the better”.

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