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6 things to check before you appoint a financial advisor

So, you have decided to go ahead and use the services of a financial planner to manage your money and advise you on all matters related to it. Before you finalize an advisor, remember that the way your investments perform in the market maybe out of your control, but who you choose to advise you on money matters is in your hand.

Here’s how you can find an advisor, who not only manages your money but also keeps your investments on track:

Are they adequately qualified and/ or certified?

You need to ascertain that your financial advisor is:

  • suitably qualified to advise you
  • certified to dispense the advice
  • and has the requisite regulatory permits to sell you specific classes of products

A brief checklist of qualifications and certifications are listed below.

  • Should be a Certified Financial Planner from the Financial Planning Standards Board (FPSB) of India OR
  • Be certified by the Association of Mutual Funds in India (AMFI) with an AMFI Registration Number (ARN) to advise you on mutual funds and
  • Certified by Insurance Regulatory & Development Authority (IRDA) of India to advise you on insurance products

Being a chartered accountant (CA), or a Chartered Financial Analyst (CFA) holding the charter, or an MBA (with a specialisation in finance) from a reputed business school is a bonus though not an absolute necessity.

Are they employed with or affiliated to any organisation/ company?

This is important for the following reasons:

  • It addresses any conflict of interest regarding the products they could recommend or push if aligned to specific product providers (even if he isn’t paid a commission on the sale of those products).
  • Ensures continuity of services in case of non-availability of an advisor or your relocation to a different city.
  • It forms a strong basis for investment and product research, data-backed decision making and a stronger, time tested investment philosophy which are less prone to individual views, whims and preferences.

How will they be remunerated for services rendered?

Typically advisors (individuals or companies) are either remunerated by the buyer of the products (as an advisory fee) or the seller (in the form of a sales commission).

In the former case, the advisor is a pure advisor acting in your interest. They charges a fee and recommend the best products with your interests at heart. They should be advising you to go direct and buy online (this is usually the least expensive way to invest).

In case of the latter, beware! The advice you are about to receive is possibly a sales pitch in the garb of free advice dispensed to close the product sale. The advisor is being remunerated by product seller for the product sold to you. In essence, it is your money but they don’t think of it that way.

This is not to say that all commissioned agents don’t act in your interest. Many are transparent about the commissions they make on the product. In fact regulations mandate advisors to disclose the commissions they make. What often remains undisclosed are the hidden costs, the marketing spends (read jaunts for the high performing insurance agents in Tashkent, Bangkok, or the fancy car that they may get) in addition to the mandated commission. Such costs show up as marketing expenses in the product provider’s books.

What is their experience and track record?

It is important to make sure you aren’t their guinea pig. Make sure there is a strong track record of advisory. Ask them about what advice was given to clients prior to and post various market events. Then make sure to get references and independently verify that it was actually done as claimed.

For instance, do they really follow the “buy, hold and don’t panic” philosophy they espouse, when there is a market crash. And secondly, do they churn the client’s portfolio every time a new fund is launched or do they follow the flavour of the season as mandated by their employer (when employed with an advisory firm).

Make sure the kind of clients they advise are similar to you in terms of family structure, wealth, income, asset distribution and goals planned for. This is to make sure they understand your money related problems and have the requisite experience advising in similar situations.

What is the range of services offered and how it will work?

You need to assess whether their services are holistic. A comprehensive offering could have a bouquet of services like:

  • A financial health check-up
  • A realistic assessment of financial goals
  • A detailed review of your financial product portfolio
  • A understanding of the financial protection required (risk cover like life, health, home, personal accident insurance, emergency fund)
  • Tax planning services, often extendable to payments and filing
  • Product purchase assistance/ execution

Some advisors may even ask for a power of attorney to execute trades/ purchases and sale of products/ securities on your behalf. You need to be comfortable with what you prefer to do yourself versus what you can leave to an advisor. Additionally, you need to evaluate the ability of the advisor to deliver some or all of these services.

Mostly financial advisors are likely to provide a limited range of services based on their expertise. However, you should have a strong preference for personalisation of specific services to suit your needs rather than a broader range of cookie cutter services which attempt a “one size fits all”.

How easily can you access your information?

When managing money, “ignorance isn’t bliss”! Healthy scepticism (of advice received) accompanied by periodic checks of your wealth portfolio (to ascertain that everything is on track) prevents unpleasant surprises.

Typically, most advisors provide access to electronic interfaces which readily permit clients to access information about their money. Some even permit clients to execute their own transactions. Lack of transparency about the state of your money and long “blackout periods” are undesirable.

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