Just like we have a Doctor for our physical problems, we should ideally have Financial Advisors for our financial problems. A financial advisor/planner is a professional who helps you deal with various personal financial issues through proper planning and guides you through all your financial decisions throughout your life.
As a concept ‘financial advisor/planner’ has been in existence over several decades in the western world and in modern times, this role has turned into a well understood and highly specialized profession. In the developed markets financial advisors/planners would be similar to the family GP (general practitioner or family doctor) advising their clients on wide faceted money matters ranging from opening a simple bank account to buying into real estate to making of wills and estate planning to planning taxes among others.
Just because we know what a mutual fund is or few tax laws or we can buy and sell stocks on stock market, it does not mean that we don’t need a financial advisor. Typically caught up in our day-to-day work, most of us are typically puzzled when it comes to managing our very own prosperity, specially, with such technicalities in each decision & numerous varied choices for each financial decision. With little access to real time information and lack of ability to interpret and use financial/legal information, most of us are not equipped to take qualified decisions.
As a result we need to look for qualified guidance and get the support of a professional consultant who can choose what is best for us.
Now, deciding on having a need for a financial advisor is one challenge and getting a suitable financial advisor is a bigger challenge.
With all the clutter in the Indian Insurance & Investment industry, it is no surprise if you have encountered one of the 50 lakh individuals who are working as “financial advisors” and have a similar story to tell.
Well, someone had rightly said “To a man with only a hammer, every problem looks like a nail.”
For all your financial needs be it – saving, children education or your retirement planning an insurance agent will be ready with a policy. Also the agent obviously will only promote his company’s product and may not even know much about other company’s offerings. Similarly, with mutual fund agent he will hate to talk about post office schemes, corporate FDs or Bank FDs.
For that matter even if you are dealing with Banks & other large financial institutions, the story is not too different, where your “Relationship Manager” comes up with the next best mutual fund NFO or event at times an insurance NFO at Rs. 10.
If your advisor has done the same… BEWARE. It is time to change your advisor.
Warren Buffett quoted “Wall Street is the only place people ride in a Rolls-Royce to get advice from people who ride the public transport.” That’s true in India also. I have seen many people taking advice from employees of banks & other financial institutions, who, have just joined after completing their management course & will pose that they know everything related to investment world & they are masters in it, while most of these advisors have possibly not invested their money at all in the very investments that they propagate.
A proper financial advisor on the other hand is a Doctor of your personal finance, who will very closely study each aspect of your financial life cycle, he will understand your risk appetite, your cash flows, personal taxation, your future goals, your future needs and requirements, your insurance requirement, your investment needs and finally come up with a financial plan and recommendations which will take care of each aspects in total.
Financial advisors will make you understand reasoning behind every suggestion he gives you, he will make sure that you agree and understand everything, so that in future you can take similar decisions yourself.
Has any advisor ever told you to repay your loan first & then think of investments, or you should keep some amount for emergency needs in a savings bank account or liquid fund or bank fixed deposits?
Finding a good advisor is time consuming but this will have an overbearing on your financial success in the long term.
But, how do we choose the most suitable advisor?
You should look for following qualities in a financial advisor:
> Competence / Knowledge
> Experience / Pedigree
> Confidence / Honesty
> Your level of trust & comfort with the advisor
What NOT to look for in a financial advisor:
> Magic (financial advisor is not some magician who will fix all your problems and will make a financial plan which will try to achieve all you want)
> Promise of returns (Too good as per normal markets)
> Instant results
A proper Financial Advisor will follow one principle – “people have one thing in common that they all are different”.
He will look at almost every aspect of client’s financial situation. That’s the only way to give truly customized, comprehensive advice.
He will have a powerful knowledge and technical comprehension of the modern changes & developments in the industry & globally.
He will be professionally qualified with ample experience. It is an added advantage if he has had corporate experience as a personal banker or in corporate finance, investment banking & private banking.
Off course, we all want ‘the best Financial Advisor’ for us but how much to pay to a Financial Advisor?
This is a debatable topic, still let’s try to understand and find out how much do financial advisors deserve:
Financial Advisors in US and Australia gets as much as $150 to $200 per hour (ie: Rs 7,500-10,000 per hour). Financial advisors in India cannot ask for that kind of money for two reasons:
- They will not get it.
- Financial advisory is relatively new in India and there is still no standard procedure or standards in terms of services.
There are two ways a Financial Advisor makes money:
- By pure consulting & advising (Upfront fee based)
- Through commissions from products sold to clients (Product commission based)
- Combination of 1 and 2
In India most of us, don’t value consulting and hence financial advisors are having a hard time getting clients whom they can charge on pure consulting basis, therefore what has happened is most of them make money through commissions from selling the products.
Hence, as there is no free lunch, hence if the advisor is not being paid consultancy fee, you will naturally be advised products that earn the advisors most commission, whether these investments are suitable to you or not is anybody’s guess.
Now in India, people will literally laugh if a financial advisor charges a fee on an per hour basis, it’s just not what we can imagine. Imagine doctors asking per hour fee or lawyers or any consultant. We Indians like to pay one time fees or lump sum fees, that’s the model India runs on. A good financial plans takes around at least 14-18 working hours minimum (strongly focused and distributed across several days). From that stand point a price in range of Rs. 15,000k – 25,000 seems reasonable for a full financial plan. The financial plan needs to be reviewed every year if not every quarter with your changing needs, hence a year round review on an annual basis is also a cost that you will need to bear which could be between Rs. 5,000 – 20,000 pa. depending on the scope of activity and monitoring involved.
So is this cost justified, or is this money not better off invested or saved? This is a question that crosses most of our minds, however I have seen in the long term this fee of say an average Rs 10,000 pa. is possibly the most well spent money.
I had a client, with whom I had lost touch for more than 1 year as he had relocated overseas. Out of the blue I got a call from him, seeking an appointment. He carried a file with him & when I heard the issue from him & saw the documents in it I was taken aback. Just before going overseas, an insurance agent known to him, approached him with an insurance plan and he was reluctant but signed all documents and applied for a Rs. 1,20,000 ‘one time’ premium insurance plan.
Once he came back to India after 8 months, he saw his bank account & his policy documents and he lost sleep, as the agent (to earn his commission) had made the Rs 1,20,000 as quarterly premium (ie: Rs 4,80,000 annual premium) and the more shocking condition was that the policy had 100% charges in the 1st year, so all the money he invested in the 1st year would de deducted as charges.
He lost close to Rs. 3,60,000, which could have been avoided had he had a proper paid financial advisor even at Rs 20,000 a year made sense.
Another example of the cost-benefit is sought in excellent estate planning which aids future generations to enjoy household money & legacy without standard conflicts and disputes which can cost a large amount in legal costs apart from the heart-burn in the family.
So what you have to look for while hiring a financial planner is that he should be preferably an independent financial advisor and should be charging advisory fee. He should not be employed with some mutual funds or insurance company and has no compulsion of executing the plan through him. There should be freedom in client’s hand that he/she can execute the plan from anywhere he/she wants. As an additional service financial advisors can give an option to have financial plan executed through them, but it should never be compulsory.
Another issue one faces in hiring a Financial planner is “Trust”. You need to have some level of trust with financial advisor and for that you need to interact with him, spend time with him, get references from family and friends. A financial advisor is expected to be your friend philosopher & guide for life.
Salient features of a good advisor are:
> GOAL ORIENTATION
Qustions to ask yourself while slecting an advisor are:
> Can I imagine forging a long-term relationship with this person?
> Is this person good at explaining things in terms that I can understand?
> Do I feel that this person has a good understanding of my personal circumstances?
> Have I disclosed everything about my financial situation?
> Am I happy with the structure of fees or commission that I am paying?
> Is the financial adviser independent, tied or multi-tied?
> What qualifications do they have?
> Can they provide testimonials from existing clients?
> Do they charge fees, earn commission or a mixture of the two?
> Do they offer ongoing advice after the initial consultation?
> Can they offer the level of service that you require?
> Do they offer personalised advice or use generic financial planning models?
> Do they offer a wide range of services, or do they have links to other specialists in areas they do not cover?
Try to find a good advisor that’s right for you & will show you the right way forward.
A full service Financial Advisor/Firm should ideally assist you in most of the following services:
> Personal Tax & Accounting
> Insurance & Investment
> Banking & Loans
> Retirement planning
> Estate Management & Legacy Planning
> Legal Services & Real Estate
> Wills, Power of Attorney, Certifications, Valuation
Responsibilities as a Client:
> To communicate clearly & honestly with your advisor, to enable him to understand your financial circumstances, investment objectives & risk profile.
> To ask questions about financial matters, that you don’t understand.
> Be realistic in your expectations.
> To track & monitor your investments based on your changing priorities.
What to expect from your Financial Advisor:
> To be competent & ethical, and to act in the best interest of the client at all times.
> To deal with you fairly, honestly, transparently & in good faith.
> To determine your financial needs, objectives & risk profile.
> To make recommendations consistent with the needs & risk profile.
> To disclose all risk associated with recommendations.
> To regularly review & provide feedback & statements.