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How to choose the best financial planner

How to choose the best financial planner

A financial plan is only as good as the adviser who draws it up. So ensure your financial security is his only motivation.

Imagine your doctor prescribing a drug only to gain an incentive offered by its manufacturer. The consequences can be fatal. What if your financial planner is doing the same?

Your financial adviser must be familiar with your financial profile. This allows him to choose the best possible plan for you. But could you trust his judgement if he also gets paid to sell financial products? Of course, endorsing a policy or a fund is not a red flag in itself. There is a sizable section of investors who want product recommendations.

"Mis-selling of this kind tends to be higher if the adviser is associated with only one product category or firm, say, selling insurance plans of one life insurance company," says Kapil Narang, chief operating officer, Ameriprise India.

This single product might be then sold without analysing its compatibility in a portfolio. Even if the type of product suits you, you might be advised to buy a plan without comparing it with other products available in the category. Bancassurance is also a channel where we find such instances.

Malhar Majumder, a CFP and FCMA (Chartered Institute of Management Accountants, UK), says, "The initial idea was noble. Banks with huge networks and trusted positions were to help distribute financial products evenly across the country."

"However, what happened was that the management, to show immediate profits, pushed their employees to sell products that generated more revenue. So mutual funds (before entry load was removed) and insurance products such as Ulips, which had a frontloaded commission structure, were sold indiscriminately."

Sebi recently released a concept paper that aims to distinguish financial advisors and distributors. The paper states that anyone who receives remuneration from the manufacturer will be called an agent and only those who receive all their compensation from investors will be advisers. So, a financial adviser cannot take a commission for recommending a product.

However, it is not yet implemented. There are currently no parallel rules in the insurance industry. However, early this year, insurance regulator Irda drafted guidelines on a concept called 'prospect product matrix' to curb mis-selling.

The regulator wants life insurers to adopt a standard Irda 'proposal cum needs analysis' form. This was to evaluate if a product will suit a prospective customer's needs based on factors such as risk profile, investment goals and investment experience. It was to be followed by all agents and brokers. Irda had then given a compliance date of the first of April of this year, but it too is not yet implemented.

"Insurance is sold through local agents who represent the company and not the client. It should be the other way round. Anyone who sells a policy should represent the client," says Narang of Ameriprise.

Regulations are more like guidelines now and it might be some time before strict measures are implemented. It is therefore best to look out for the red flags. Here are some.

Credibility and qualification: Certifications from Amfi and Irda are essentially a licence to sell a certain financial product, while a certified financial planner, or a CFP, is a qualified adviser. It is important to distinguish the two. Better to pay for good advice that act on free advice that is biased. Ask for references and check with existing clients to authenticate his advisory status.

Business model and size: What is the source of his income? Is financial planning his profession or a part-time source of income? If he suggests a product, you have the right to enquire if he gets a commission on the sale. You need to be wary if the adviser gets cagey about disclosing details.

Vivek Rege, a CFP and MD of VR Wealth Advisors, says, "The size of operation, such as office premises, staff strength, etc., will also help gauge his reliability."

Planning, not selling: Scrutinise if his advice is a sales pitch or a financial plan. An adviser recommending a product without asking about your financial goals is major warning signal. Pushing a product without being able to tell you why it suits you better than other similar products is another sign.

Portfolio management: A financial plan should be re-evaluated periodically. Even so, it is essentially long-term planning. So, frequent churn of a portfolio, especially longterm investments such as insurance and mutual funds, is a definite warning. There must a reason to change an investment plan.

"It is odd for your portfolio to have a number of similar products or for you to be pitched new investments too often," says Narang. If you are smart and stay alert, sieving the good from the bad should be relatively easy.

Unmask the Poser
Smart questions to ask a financial planner and the answers he should be giving you

Q. What qualifies you to be a financial adviser?
I am a certified financial planner (CFP) or I have a certificate from Irda/Amfi/National Institute of Securities Markets. (A CFP is better qualified to manage a portfolio).

Q. Do you have relevant experience?
Yes (Make sure you are not the guinea pig. The years do not matter so much as the kind of exposure and profiles he has handled in the past).

Q.Can you give references from current clients?
Yes (Speak to at least two existing clients to ensure you get quality service).

Q. Will you draw up a service agreement? Will the advice be given in writing?
Yes, and the advice will be recorded in writing.

Q. Is my fee your only source of income? Do you get commissions for the products you recommend?
Client fee is my only source of income. I do not earn commissions on the products I recommend.

Published on: Nov 24, 2012, 12:00 AM IST
Posted by: Navneeta N, Nov 24, 2012, 12:00 AM IST