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Do you really need a financial advisor?

Everyone seems to have an opinion on the economy, usually an extrapolation of how they are doing financially. If they are getting lots of job offers or business clients, the economy is good. If they are struggling to cover their household expenses, inflation is too high. But is this enough to know what to do with your finances? How do you know if you need a financial advisor?
Financial advisors can play different roles. It’s up to you to decide what help you need. Here’s how I define the three main roles financial advisors can play:

Personal coach

Most people procrastinate when it comes to both physical and financial fitness. Just as you hire a personal trainer to boost your physical well-being, your financial advisor can help improve your financial shape.
Research shows the main reason for procrastination is not knowing how or where to start. A personal trainer not only helps us get started, but also motivates us to build good habits. So, if you’re young and don’t have any major physical or money issues, a personal coach is enough to keep us in shape.

Family doctor/advisor

You go to your family doctor when you have an illness or accident. She can diagnose your problem and refer you to a specialist if you need one. Doctors have the experience to diagnose issues before they become acute. If you have financial problems, it goes without saying that you should definitely have an advisor.

But it’s also a good idea to get an annual financial checkup when you take on financial responsibilities, even if you can’t see any obvious problems. Your advisor will work with you on your financial goals and diagnose you if you’re falling behind. She can prescribe simple financial products like mutual funds to help achieve your goals.

Medical/investment specialist

Once your family doctor identifies an issue, she refers you to a specialist, such as a cardiologist or neurologist. Similarly, a financial advisor may refer you to a specialist who has deeper expertise in specific types of investments, a lawyer to help with estate planning or a family governance expert, etc. Often, financial advisors work with in-house specialists so you don’t have to go to a different firm. But if your financial situation is complicated or urgent, you may want to get a second opinion from another specialist.

How do you choose a financial advisor?

You should select your financial advisor based on your circumstances and the role you want her to play.

If you are young and generally financially fit, i.e. you don’t have dependents or liabilities, you should look for a personal coach to drill good habits into your life and keep you on track. While some technical knowledge is necessary, what you should really look for is whether you like them and their coaching style. Do they explain the basics and generally motivate you?

If you’re reasonably self-motivated, you can consider ‘robo-advisory’ services. These are online tools and investment services aimed at the young and financially fit who don’t require personalized attention. They are not really robots – mostly, they serve up algorithmic, pre-determined portfolios suited to your age and risk profile.

As you take on more financial responsibilities, you need someone who takes the time to understand your personal circumstances and tailors a financial plan just for you. Remember, a family doctor is supposed to pre-empt issues by asking you a lot of questions. Similarly, your financial advisor or financial planner should ask you a lot of questions to really understand your goals, emotional relationship with money, risk profile, etc.

Some advisors use complicated-looking tools and calculators to estimate the cost of your goals – make sure they can explain the assumptions. Ask them if they have access to specialists in investments, tax and law for wealth protection and estate planning, etc.

Look for the globally recognized Certified Financial Planner (CFP) qualification, but a word of warning – it appears the CFP has varying standards in different countries, so it’s not a completely reliable indicator of expertise.

If your financial advisor starts recommending anything more than simple mutual funds that invest in blue chip or diversified stocks and government bonds, you should insist on getting a copy of their ‘investment philosophy.’ The investment philosophy should summarise the core beliefs of the advisor or their firm – how financial markets behave, if and how it’s possible to extract returns above market indices, their research approach to selecting funds and stocks, and how they measure performance and manage risks.

If you don’t understand something in the investment philosophy, you should meet the investment expert who wrote it. Remember, if a person can’t explain it simply, it probably means they don’t understand it themselves.

Look for the globally recognised Chartered Financial Analyst (CFA) qualification – considered the gold standard in investment qualifications – or at least a Master’s degree in finance. Based on my experience, I don’t believe an MBA in finance covers investment issues deeply enough, but individuals may well make up for that by reading widely. Interestingly, investing is an area that anyone can enter at any age and master on their own, without any formal qualifications – if they have the right attitude.

In addition to the specific suggestions for various roles, I recommend asking any advisor for their service offer (what’s included and what’s not), all fees and commissions, disclosure of conflicts of interest (including any international trips for ‘research purposes’) and client references. You can also ask if they work with a particular type of client so they are likely to understand your circumstances better.

I insist that all advice, medical or financial, is put in writing. Written advice is mandatory in some countries like Australia, but not in others like India. I think it’s a good practice. It allows you to study it at your own pace without pressure. It’s also good to have in case of disputes.

Note that financial advisors can either operate as brokers/dealers/distributors, or as registered investment advisors. The former gets paid through commissions, the latter through client fees. The choice of business model doesn’t make them superior in itself, but an RIA does have to follow a higher ‘fiduciary’ standard, meaning they have to put clients’ best interests ahead of their own. I think if they disclose all commissions and conflicts of interest, and provide written advice backed by a coherent investment philosophy, the broker/dealer/distributor model can work.

Financial advisory services are tricky because it’s a relatively new profession compared to medicine, and therefore isn’t subject to global standards. But if you think about your own needs and choose a financial advisor accordingly, you can form a rewarding partnership with them.


**Mutual fund investments are subject to market risks, read all scheme related documents carefully


Hansi Mehrotra, CFA is a financial educator who writes and speaks on various platforms, getting named as a ‘Top Voice for Money and Finance’ on LinkedIn for 2015. Hansi has more than 20 years experience in financial services.



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