Financial Advisors & You

In personal finance space, there are a lot of people who call themselves as financial advisors. However, it becomes difficult to identify a true financial advisor from myriad choices, forget demanding appropriate services from them. DSIJ explains different types of financial advisors and the services that you should demand from these advisors for a great service experience.



Every one of us is blessed with or has acquired one or other set of skills that make us better than others in that field. They have skill sets that make them expertise on the subject and they take better decision in that field. Financial advisory is one such subject where financial advisors are supposed to make informed and better investment decision on behalf of their clients.

He is the person who advises you on various financial aspects and sometimes even on the taxation and legal aspects as well. May it be an insurance agent or a mutual fund distributor or even a stock broker, all of them call themselves as financial advisors. Although, they don’t deal in every aspects of your personal finance to call themselves as financial advisor.

A true financial advisor is someone who should guide you not only on insurance and investments but also in other key areas that impacts your personal finance. Then there are some species in the personal finance world who call themselves as Independent Financial Advisors (IFAs). Here they not only create financial plans for you but also help you to implement it. They deal in great amount of products such as mutual funds, insurance, bonds, stocks, etc. Even the major part of their revenue comes from the commission they get from the products they deal in, rather than advice they give through financial plans. Currently majority of the investors invest through them.

Now there are other kind of financial advisors who are regulated. They are regulated by SEBI (Securities and Exchange Board of India) under SEBI Registered Investment Adviser (RIA) Regulations Act, 2013. They claim to act in investors’ interest and have a fiduciary relation with them. So, now the question is that who is the real financial advisor? And the answer to your question is your requirements and what service you are looking for. Not just services but there are various things that you should demand from financial advisor which we would discuss in a bit. Before we begin it is important to understand different kinds of financial advisors and why at all you need to hire a financial advisor.

Why hire a financial advisor?

Managing your own money and investments, for many, may seem like solving a complex mathematics equation, which is difficult to understand and solve. Making important financial decisions on money and investments becomes a difficult task. It is not only about the understanding of the subject, but also, the behavioural bias one has towards various financial products that make investment decision irrational or sub-optimal. For example if you are a fan of insurance products, chances are high that you may mix insurance and investments that may not be the best investment decision. So, for such situations you need a financial advisor, who will handhold you and help you control your emotions and reach your financial goal.

Following are some of the reasons why you should hire a financial advisor. 




Time : Time is money and you need time to make money, save it and grow it. To manage your money and invest it in the right manner you need to dedicate a lot of time. So, financial advisor does these things for you for a fee. Hiring a financial advisor helps you to dedicate time towards your work (where you are skilled and do best) and family rather than worries of money.




Expert advice : Anything regarding health we consult a doctor, for legal things we consult a lawyer, etc. why? This is because they are expert in their particular field. Likewise, financial advisor too is an expert in the field of investment, insurance, etc. So, hiring a financial advisor would ensure you would be getting an expert’s advice.




Coach : Nothing is better than learning. Financial advisors often act as a coach and teach many personal finance concepts. These learning’s would help you to take financial decisions wisely.



Complex issues : There are times when you may come across a complex financial issue such as high debt, low income, complex financial goals, etc. requires expert’s advice. In such situations, financial advisor come to your rescue. So, this becomes a good reason to hire a financial advisor.

Types of financial advisors

There are various financial intermediaries who call themselves as financial advisor. Following are some of the major and popular types of financial intermediaries who call themselves as financial advisors.

Insurance agents : As mainly insurance agents deal majorly with your risk management part with the help of various life and non-life insurance products available. They even deal with some of the investment product such as ULIPs (Unit Linked Insurance Plans) and some retirement products like annuities. Therefore, they call themselves as financial advisors.

Mutual fund distributors : Mutual fund distributor, as the name suggests are the ones who distribute mutual funds. So, when you think of investing in mutual funds, they are the once who sell mutual funds for commission. Though, these days you can invest in mutual funds through various ways. They just don’t sell mutual funds but also give investment advice and help you in designing your mutual funds portfolio.

Stock brokers: Stock brokers are those who help you invest in stocks and even in bonds. These days they also distribute mutual funds. They get brokerage or commission from the investments that you make through them. They often help you to build your stocks portfolio and also provide their proprietary research report to help you make investment decisions.

Independent Financial Advisor (IFA) : These are those financial advisors who deal and advice on multiple financial products right from stocks to mutual funds to PMS (Portfolio Management Schemes) to AIF (Alternative Investment Funds). They also have various services like financial planning, tax planning, estate planning, etc. Said that, they get their majority of the revenue from commissions or brokerages on products that they recommend.

Registered Investment Advisers (RIA) : They are quite similar to the IFAs apart from their revenue structure. Their only revenue is the fees they charge to their clients. They are fiduciaries as they are regulated by SEBI. Rarely do they have any conflict of interest. There are 2 kinds of RIAs one is fee-based who charge fee on you AUM (Assets Under Management) and the other being fee-only who charge flat fee only for the advice given and not based on AUM.

Robo-advisors : Robo-advisors are those who claim themselves to be technologically advanced and based on certain algorithms they come up with products that would suit your requirements. Currently majority of the robo-advisors make their revenue from commissions on the products sold via them. There is no human intervention whatsoever. As of now there is lot of hype about it. However, one thing is for sure that they can only aid financial advisors, but can never replace financial advisors. They are similar to the tablet commuting which was thought of replacing laptops but failed miserably.

Things that you should demand from your financial advisor 

Qualifications : Does a degree or certifications matter? Not at all. However, a person with a certification in that particular field adds comfort as he/she is supposed to have a deep knowledge in that field. For example if a person dealing into stocks advisory having CFA (Chartered Financial Analyst) is ideal. Similarly person dealing with personal finance being a Certified Financial Planner (CFP) is an advantageous. These certifications are highest qualifications in their respective fields. It is similar to doctors. Would you take medicine from a person who is not qualified as a doctor? Of course not. You would take it from a doctor and who is an MD. The reason being you don’t want to risk your life. Likewise, you also won’t be adding risk to your money and financial wellbeing. That is why demanding a qualification from a financial advisor is a wise decision.

Services: This is one of the major and crucial things that you should ask your financial advisor. The reason being you would be deciding on hiring a financial advisor on the basis of services that he/she is going to provide. Their services should match your requirements. If you need any consultation on investments then you would hire a financial advisor dealing in to investment advisory. However, if you need any consultation on money then you would hire a financial advisor dealing in personal finance space. So, demanding a service from a financial advisor is a must. This would usually happen in your first meeting itself.

Fees and charges : One of the basic things that you should be demanding from the financial advisor is how much he is going to charge for his services. Fees and charges are that part of the entire process where the financial advisor should be charging reasonable for the services rendered and you should be reasonable in your expectations. At all there must not be any hidden charges. You should ask them for all the charges and fees well in advance before taking their service. This will ensure smooth service experience.

Revenue : This is also one of the important points to demand from your financial advisor. Now you may be wondering why you need to know how he earns. This will help you to understand whether there is any conflict of interest present or not. If your financial advisor receives commissions from the product manufacturer for the products sold to you, then they do carry a conflict of interest. However, if the financial advisor’s only revenue is the fees paid by you then, such advisors hardly carry any conflict of interest. Though, this doesn’t mean that advisors those receive commissions would act against your interest, but there is high room for them to do so.

Regulation : Falling under regulation is something that makes financial advisors more of a fiduciary. This means that they are governed by a law. Presently, RIAs are fiduciary as they are governed by SEBI and they are bound by SEBI RIA Regulations Act, 2013. Here, RIA needs to get registered with SEBI. On the other hand, IFAs are not directly governed by SEBI and they don’t need to register with SEBI to become an IFA. Regulation matters as this helps you to take decision in terms of trust.

Kind of clients : Asking the financial advisor regarding the kind of clients he is serving can help you to gauge quality of service that you might receive. If he is targeting a particular market say HNI then his experience is in servicing HNIs. Similarly, if he/she is dealing with doctors then he has experience in dealing with them which might affect the level of service that he can give to someone who is not a doctor. The reason being the financial solutions required by doctors might be different from someone who are not doctors. So, it is important to demand from the advisor the kind of clients he serves.

Sample report : As this being a service, you cannot have a physical product that you can check before purchasing. Here you can demand a sample report from your financial advisor. This will give you the overall look and feel of the report that you might be getting from the financial advisor. Through this you can gauge the quality of service that you can expect from the financial advisor. One more thing to note is that not just demand a sample report but also ask the advisor to explain you the same.

Review : The service that you receive from a financial advisor is not a permanent thing and neither your life. There are various life events like birth, death, marriage, divorce, etc. which can affect the advice given by the advisor. So, it is important to demand a review from the financial advisor. Not just that but also you should demand a review periodically to know the progress and actions that you might need to take.

Investment philosophy: Investment philosophy is something which is one of the reasons for the investment outcome that you might see. It is important for you to understand the investment philosophy adopted by the financial advisor. Some may believe in strategic management, but some may believe in tactical management. So, asking for the investment philosophy and getting it understood by them is wise.

Guaranteed returns : You should definitely demand from your financial advisor for guaranteed returns on equity investments. If they say that they will give you the same, then you need to hire some other financial advisor. The reason being no one can give you guaranteed returns specifically for the products that are market linked as market can never be predicted.

References : This part comes when the trust of the financial advisor is in question. At such a situation you may ask for a financial advisor for some of the references for his/her existing clients. So that you can contact those clients to understand the quality of service provided by them. So, if you think that the financial advisor doesn’t seem trustworthy then surely go ahead and demand for references. Here you need to note that, the references should be from those whose testimonials are not available on their website.

Conclusion

As we have seen the different kind of financial advisors, why to hire them and what should you demand from them. The things that you demand from them helps you to get good experience from the services that you receive. Not just that but you would also be able to find a financial advisor who is able to fulfil your requirements. You should consider all the abovementioned things before hiring or firing a financial advisor.

These things would also help you to get most of out of your financial advisor. The role of a financial advisor is not limited only to make their client aware of different investment alternatives along with the product access and trade execution, and leave them to their own. This is how many of the financial advisors might be working; however, all investors would prefer their investment advisers to act selflessly in the clients’ best interests in making informed investment recommendations.