It’s a problem of plenty. We all know that Indians love to give advice, so it follows that there will be enough and more pundits keen to help you make sense of your finances. Some offer advice on specific investment assets, others take a broad view of your financial matter and assess every aspect of your financial life. Then there are the fancy tags like investment advisor, wealth manager, income-tax consultant, or the now ubiquitous financial planner. Given this sheer range of choice, how do you decide who is best geared to take care of your money? Here’s a checklist that can help you zero in on the best person for the job.
Experience: A surprising number of people just rely on word of mouth, entrusting their money to whoever handles their neighbour’s. So, carefully perusing any financial advisor’s work experience is very crucial. It might be far cheaper, but also more dangerous, to avail yourself of the services of a fresher because there are chances that he’ll job hop or opt for a career change, leaving you high and dry and scrambling for a new genie.
Take an insurance agent, for instance. Though the insurance regulator has recently asked agents to continue serving an insurer for at least three years, it’s better to avail the service of a full-time employee as he would take his profession and services more seriously. He would be there when you need him for things like renewal of the policy or a change in your address or even help you in claim settlement. “Insurance is a complicated contract. Therefore, a policyholder requires a fully dedicated professional with at least three years’ experience for this job,” says Rahul Aggarwal, CEO, Optima Insurance Brokers.
If you need an advisor who can give holistic advice, scout for one who has been through at least one market cycle, typically lasting 4-5 years. Says Vishal Dhawan, a Delhi-based financial advisor, “During this period, a financial advisor has seen ups and downs, which the client can take advantage of.” Taking advice from someone with less experience could wreak havoc on your financial goals and cause monetary loss. For instance, a greenhorn may put around 80 per cent of your money in equities at one go, just because you hinted that you are okay with risk.
Fee model: What is the point of hiring an advisor if his fee leaves you with a much smaller investible corpus? Typically, advisors work on three types of fee models—a fee only model, a commission-based model and a combination of the two.
Under the first, you only shell out for the advice rendered. The second model works on a commission basis, so you don’t have to pay any fees. The advisor makes money through the commission received on the products recommended and sold to you. The fee plus commission model combines the two. For instance, if an advisor fee is Rs 20,000, you are required to pay just Rs 10,000 as the rest is recovered from commission earned on selling the product. However, with the recent ban on entry load for mutual funds, advisors are only earning trailing commission (from the second year onwards) and passing on the same to their clients in a combination model. When choosing an advisor, try and pick one who offers a fee-only model, so that you can be sure of receiving unbiased advice that is not coloured by the commission the advisor earns from selling products that might not suit you. “A fee-based advisor has a client’s interest in mind,” says Veer Sardesai, a Pune-based Certified Financial Planner.
However, the fee charged will vary depending on the client’s financial portfolio, services required and advisors’ work experience. “If an individual has accumulated a lot of products in his portfolio, all of them need to be checked. That requires a lot of time and effort and, hence, more fee. On the other hand, an individual who is just starting out has much less in his portfolio and it is, therefore, easier to handle and rejig his portfolio with the right products,” adds Sardesai.
Says Vikas Vasal, Tax Partner, KPMG, “The fee also depends on the kind of assignment you are giving to the advisor, and his work experience. If there are large stakes involved, then you need the help of a large advisory institution. But if your issues are less complex and simple, such as filing your returns, a tax preparer can do that for a nominal fee.”
Also, advisors with more experience tend to command a premium. “Our annual financial planning fee for individuals in the Rs 10 lakh category is Rs 25,000. For a basic financial plan, however, we charge Rs 5,000,” says Sardesai. If this sounds like a lot, and you simply want guidance on which direction to head, consider paying a planner who charges by the hour.
Ethics: A good financial advisor should have integrity and ethics. Transparency is the key. You should be able to ask him to disclose the commission on various products recommended by him. If he is transparent, he will disclose the money he is making on it and the rationale behind recommending a particular product. Otherwise, you might end up with duds in your portfolio.
Rakesh Aulaya, a Mumbai-based public relations manager, found that his insurance agent underinsured him by selling him high-commission but low-cover plans. Luckily for him, he did some reading and also approached a planner, who suggested ways in which he could get adequate insurance. “I was underinsured to a large extent. While my financial advisor explained the rationale behind a particular investment and let me decide, my earlier agent was interested only in earning commission,” says Aulaya.
Reputation and references: Before signing on with an advisor, check his reputation in the market. The simplest way is to ask him for references from some clients. “Speak to at least 3-4 people and get their feedback before entrusting the advisor with your portfolio,” says Dhawan. It’s best to talk to clients and find out how far they have reached in meeting their short-term or long-term goals by following the road-map prescribed by their advisor. It will tell you about the advisor’s effectiveness in achieving results. If the advisor is affiliated to an institution, make sure that it is not involved in any scandal. Also insist upon a non-disclosure agreement from the advisor.
Stability: Experts recommend choosing an advisor who runs his own practice, instead of one employed by a bank or brokerage. Assume you opt for the latter and develop a rapport with him; the advisor, on his part, understands your needs and works towards them. If he leaves the institution, chances are you will have to start from scratch with a new person. That’s what happened to Ankit Aggarwal, who opened an account with a brokerage house. He was happy with the relationship executive he was dealing with. Problems cropped up when the executive left and Aggarwal was assigned a new one, who was not as understanding. “It was the time when the markets started tanking and I wanted to buy some stocks. But the new person didn’t offer any advice. So I approached my previous broker for some tips,” says Aggarwal.
Research and support services: The right advice is backed by the right research. It’s important for a prospective client to understand the advisor’s research capabilities. Failure to do so would result in wrong product selection for meeting one’s financial goals.
A financial advisor should take into account quantitative as well as qualitative research. For instance, in recommending a mutual fund to a client who wants high returns, an advisor should also examine the stocks the fund manager is concentrating on in his portfolio. An advisor’s work doesn’t end with doling out advice. His work is to guide a client through his entire financial plan. For this, it’s important to be accessible and let the client reach him easily.
Flexibility: Your investment philosophy may differ from your advisor’s, but he should be patient enough to listen and accommodate some of your preferences. “An advisor shouldn’t be too rigid in his approach,” says Jaideep Lunial, Director, Wealth Gyan Financial Planners. For instance, if you want to buy a house in two years time and also want to take 100 per cent exposure to equities in a shaky market, the advisor may not agree with you as it clashes with your goal. If, however, the goal is distant, he might go with your choice considering your overall risk appetite and other criteria. “If we think the client’s choice is harmful for his own goals, we will refrain from giving unethical advice,” says Zankhana Shah, a Mumbai-based financial planner.
(Additional inputs by Kamya Jaiswal)
Courtesy: Money Today