Wikipedia says a financial planner or personal financial planner is a professional who prepares financial plans for people. These financial plans often cover cash flow management, retirement planning, investment planning, financial risk management, insurance planning, tax planning, estate planning and business succession planning (for business owners). I agree!!
Now let’s be honest, when one is going to trust someone with something which is more often one of the dearest thing in his life it’s going to be an important exercise. The thing we are referring to here is one’s personal wealth. In this article we will try understanding not just the things that one should look for while choosing a financial advisor but also talk about a few characteristics that are not very relevant.
In an information driven world that we are living in there is hardly any publicly available information that you can browse through to determine the individual that you should be approaching when you are deciding upon the person who will later decide for your wealth.
The usual modus operandi is:
- Ask a family member of friend: I must say, this is simple and effective, seriously. But comes with one question, how do you know what works for them is going to work for you. However, I do agree, what other option to you have?
- b) You walk into the branch of the financial institution of your preference and ask for a financial advisor: Fair enough. Let me guess how did you arrive at your preference. From there advertisements, buy finding the size (the bigger the better), branch is closer to your home, that institution has a salary a/c tie up with your company etc. Now that you have decided, I suggest you think again. Do you really feel that your reason of choosing them is right, forget correct.
Now there could be other paths as well but they are less taken, so we will limit ourselves to these options. Anyways the purpose of this article is not to find faults but to chart a better path.
I am not even punching holes in the already existing ways chosen by investors. I am also not trying to feed the doubts in your mind about your existing advisor if you chose one of the above ways. On the hind side if the guys you chose turned out to be better for you. Good, you are the lucky one. Again not, correct but lucky and you can celebrate it.
See, at the start I mentioned that you are choosing someone for something dear to you. Now answer yourself, would you feel satisfied if you chose the same method in choosing a spouse for yourself or for your son/daughter (this is of course if they would allow you). Choosing a financial advisor is very similar, only that at the end of selection there is no marriage ceremony.
Things that an investor should actually consider
Qualification: It’s a very important parameter. Listen to all the qualifications that the advisor has with an open mind. The regulatory authorities in India mandate the advisors to be NISM and IRDA certified to sell investment products. A majority of us these days are MBAs and some of us are CFPs. You can definitely find people with other qualifications as well (CAs, CFAs etc.) but it’s very rare.
Having said that, do bear in mind that you need to have an open mind. If you have ever had a look at NISM and IRDA course material, you will agree that these certifications are more of a formality. It takes very little merit to clear these certifications.
A lot of websites give a lot of importance to CFP. It’s not a mandatory qualification in India. If you ever google the topic of this article, you will come across a lot of prominent websites, which will stress upon this qualification. Here is an important statistic to it, almost 70% of first time takes of this exam pass it. Other way of saying it is almost all who are a little serious about it, pass. Mind you almost all of them are working professionals, you do the imagining about the amount of time they would have been able to invest. Simply put it is an easy exam.
Coming to MBA, well that is a serious qualification no questions about that.
I am not for once trying to demean the importance of educational qualifications/certifications. The point is, soak it with a pinch of salt. This information is important but not decisive.
- Experience: I cannot say anything about experience that you don’t already know. This is beyond doubt an important point. More experience means that the individual would have seen more market cycles, has met several clients, knows more products, is better networked etc. However never get blinded if the person advising you is elder to you or elderly.The salt and pepper could be deceptive and does not guarantee the integrity of the advisor. The individual might be pushing his agenda than yours.
- Institution and its size: People think the bigger the organisation, the more known a name, it’s that much more reliable. Of course, it must be so because it might have been doing the right thing to have ultimately grown so big. Right? Wrong. A lot of you of your perception that you carry about an organisation is not yours but instilled upon you but some serious professionals. It’s called advertising. Never decide the organisation based on its size. This could be very damaging. I am also not saying that the smaller organisation is better. Simply put, this should not be a deciding parameter at all.
- Fee Structure: The most common structure is where the professional does not charge the customer directly but receives commissions from the fund houses. In other cases, people charge on transactions, some also charge based on performance and some charge a fixed advisory fee irrespective of who you choose to invest with. What would suite you are highly subjective. It will depend on you size of wealth and the instruments that you choosing to invest. Honestly if you are going to invest anything below INR 1Cr, don’t bother with too many options, just stick to the simple option where you invest under the broker code of your wealth manager and he gets directly paid from the fund houses. Others, will have to put some thought in chosing the fee structure. Don’t let a great investment opportunity pass in case it’s a little expensive. Don’t be fixated. Weigh your options like the type of investment, return expectation etc. and then decide.
Networker/Services: By this I mean the products and services that the advisor could offer you. You see these professionals come from a lot of organisations and a lot of them work independently as well. The professionals coming from large organisations (banks/broking houses) have to work under the framework set for them by these organisations. Independent professionals however are free to choose their own spread of services.
As an investor, it will definitely be more helpful for you if you choose you go with someone who can serve you on a variety of aspects. It reduces your running around as you have a one point contact. However, don’t forget to determine that when that individual is offering other services, is he or his organisation really capable of fulfilling those requirements.
Also, always have a check. Sometimes depending on one individual for everything might leave you vulnerable. You don’t have to start acting too nosey, just being cautious will do.Area of expertise: This is a very important aspect. A few advisors specialise in a particular category of clientele. Some are retail managers, among retail as well some specialise only to cater to the needs of NRI clients, some are only interested in ultra HNIs; where as a whole different set of individuals cater to the requirements of institutional clients. Knowing this is an important point as it determines the understanding that the advisor has in the profile of investor and the kind of products that he is dealing with.
To go places and do things that have never been done before – that’s what living is all about.
In the end remember that there is no fixed formula to get it right, it is not binary. Having some checks is important as it helps you filter. Share the whole information but don’t give the whole wealth under management at one go. Give a portion, observe the person for some time, then give the rest in phases.
These are all the very few points that I could think of and I will leave the rest to the imagination of anyone who is reading this.
Hope for you this was useful.
"Planning is bringing the future into the present so that you can do something about it now"-Alan Lakein