Advice is plentiful, but good advice is scarce. This is something we’ve seen over and over again, and which we’ve tried to show you in the previous pages. But how do you actually get good advice? Here are some tips to choose a financial adviser who will work in your interest.
Don’t go by designation: There’s more to a financial planner than a fancy business card. Don’t be impressed if the prospective planner is a vice-president or a senior relationship manager. Consider the alphabet soup that follows the name: a CFP or LUTCF is good, but an MBA, or Amfi or Irda certificate is not.
Look beyond recommendations: Minoti Chakravarty-Kaul relied on an adviser recommended by her friends who conned her into buying a pension plan at the age of 69. “I had Rs 6 lakh invested in RBI’s tax-saving bonds. He knew they would mature soon and suggested that I buy a pension policy which would mature in three years and give a return of 30%,” she says. The plan turned out to be an insurance policy which covered only her children. “How can you trust any professional, when this agent, an employee of a famous bank, could not be trusted?” asks Kaul.
Kaul’s mistake was in not doing her homework. Use friends and colleagues only to give you leads. Once you get in touch with a planner, ask for references from other clients. In addition, check the number of clients, the range of the portfolio sizes and the variety of asset classes that he deals in.
Common Mistakes |
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| The errors that investors are prone to make. |
| Having no measurable goals: Investors must know what they want and set realistic and quantifiable financial objectives before the adviser. |
| Confusing financial planning with tax planning: There’s more to your portfolio than just tax-saving. A good planner will help you meet your life’s goals without compromising on your lifestyle. |
| Expecting unrealistic returns: A financial planner is not a magician and can’t guarantee high returns. If a planner promises sky-high returns, tread cautiously. |
| Investing, not planning: People confuse financial planning with investing. Remember, investment is only one of the components of a good financial plan. |
| Believing that financial plans are for the wealthy: Anyone with long-term financial goals should ideally use the help a financial planner. |
| Using a one-time financial plan: You have to keep an eye on your plan and ensure that your planner updates it and reviews it periodically. |
Keep an open book: Half-truths result in half-baked advice. If you don’t tell your adviser that you will inherit a house in the future, he may hurry into an unnecessary real estate purchase that strains your cash flow. Says Mohit Batra, CEO of Alchemy Capital Management, “Don’t expect a holistic and accurate solution if you don’t describe the problem completely and truly.”
Ask for explanations: “A year ago, I was approached by a few advisers affiliated to a bank who were insisting that I buy specific mutual funds. When I asked why, I realised that they were promoting those funds for their own good, not because they suited my interest,” says Gowri Sivaprasad, director of engineering with an MNC in Bengaluru. Never hesitate to question the rationale behind an adviser’s strategy.
Also, question the charges. Check whether the adviser will earn only through fees or through a combination of fees and commissions. According to Ranjeet Mudholkar, principal advisor, FPSB India, only 23% of all CFPs globally follow the fee-only model. From 1 August, Sebi has made it mandatory for mutual fund distributors to reveal the commissions that they get. Make sure that the adviser follows this rule.
Get a package deal: Too many cooks definitely spoil the financial broth. If you use two planners, their investment philosophies might clash. “Often, a complete diagnosis of the clients’ finances is not possible as clients deal with multiple advisers and there is no uniformity in the financial plan,” says Batra. Once you have zeroed in on the adviser, make sure he does everything you are paying him for.
Beware of ‘guaranteed returns’: Making astronomical assumptions might look good, but they make no sense. Returns from equities cannot be guaranteed. Ensure your planner has realistic expectations of returns while formulating a strategy.
Get it in writing: When Hyderabad-based Uday Kiran Reddy approached a financial planner, he was only looking for a strategy. “I wanted to execute the plan myself. But the planner said that, in such a case, he would not share the names of specific products,” he says. This is why it is best to get the terms of interaction and the advice in writing. Also, remember that you can complain against an unethical adviser only if you have written proof of wrong advice.
Read up: You can spot a problem only if you know what it is about. Hiring an adviser does not mean that you can wash your hands off your finances. You must be clued in to ensure that your interests are not compromised. If not, your investments will make only the adviser richer.
Minoti Chakravarty-Kaul, 69 (retired, Delhi)
Why she doesn’t trust any adviser: “Though I was too old for it, I was misled by an agent to invest Rs 6 lakh in a pension plan. He promised returns of about 30% in a year.”
Where she went wrong: She did not do a background check on the agent as some friends had used his advice. Nor did she research about the product or get a second opinion.
