For good advice, find the right adviser6 min read . Updated: 03 May 2016, 07:59 AM IST
While word of mouth remains the best way to look for an adviser, there are other sources of information too
Your path to wealth creation is not just about choosing a good financial instrument. If you can decipher the right instrument and have time to manage your money consistently, then you can invest directly, like buying a direct plan in a mutual fund (MF) scheme. But if you need help in sifting and sorting, or don’t have the time to track your portfolio, then you need a skilled adviser to guide you. A good financial adviser can be a valuable resource to have. So who is she and how to find her?
We can classify advisers into two kinds, based on the services they offer. A plain-vanilla adviser is just a little better than an execution-only distributor. She offers basic advice on scheme selection, does your paperwork and helps you invest in MFs, and also in other instruments such as tax-free bonds, debentures and in post office savings instruments. She earns her commissions from the product manufacturers, such as fund houses. There are various qualifications, the least of which could be a certificate by the National Institute of Securities Markets. They do not charge any fee.
The second type of adviser offers more sophisticated advice and is registered with the capital markets regulator, Securities and Exchange Board of India (Sebi). They are called registered investment advisers (RIA). Before 2013, this was a dispersed lot. Different financial planners had different levels of service; some charged fees, some did not; records were maintained in different ways; and so on. In 2013, Sebi asked such advisers—especially those who called themselves financial planners and offered advice across products—to register with it. The regulator also prescribed some minimum standards that they have to adhere to. Such advisers charge fees from clients.
Ask friends and family
The best way to look for a financial adviser is to ask around for references. Ask your friends, neighbours, colleagues and family members for a good distributor’s or a financial adviser’s name. “Nobody chooses a doctor or a chartered accountant without a reference. (Similarly) reference is also the key to choosing an adviser," said Vinod Jain, principal adviser, Jain Investment Planner Pvt. Ltd.
A financial adviser who sells only MFs, typically, earns trail commission on the schemes she recommends. But if she recommends or advises multiple products, she needs to be an RIA. She could charge a fee, though there are a number of planners who aren’t yet registered. make sure you know what sort of an adviser you are looking for.
But will references guarantee you a good planner?
Sadique Neelgund, founder, Network FP, a firm that trains aspiring financial planners, said, “Most investors are currently dealing with the wrong kind of financial planners, agents or relationship managers, who are pushing products under the disguise of good advice."
Apart from the fact that new financial advisers may be inexperienced, even many experienced advisers “appear to have not grown in their thought process," said Anup Bhaiya, managing director and chief executive officer, Money Honey Financial Services Pvt. Ltd. So what should one do?
Bhaiya suggests that one do a little bit of digging around first. “Apart from asking a distributor about the number of years she has spent in the industry, also see her talking points. May be, a couple of transactions later, you will be able to see things more clearly. Ask intelligent questions. Try and decipher what she says. Do her thoughts and conversations have client interest in mind? Or is the conversation only around selling a product? That is an important aspect to look at," he said.
Rohit Shah, a Sebi-registered RIA, and founder and chief executive officer, Getting You Rich, a financial planning firm, added: “Ask open-ended questions; those where the answers are more about perspective that about a ‘yes’ or a ‘no’. Things like how many clients has she been able to retain in subsequent years, what will the fees be second year onwards, and so on."
Browse the Internet
Another way to zero in on your financial adviser is to search on the Internet (see graphics). This method is still evolving, though. Sebi’s website may be difficult to navigate as you have to browse names by first letters. MoneyUncle.com was launched on 30 April 2016 and offers only Mumbai-based planners. However, in future, it may expand to other cities. Akshay Dedhia, co-founder of the website said the firm “meets and analyses distributors who we enlist based on their qualifications and processes."
Another website, www.advisorkhoj.com, asks you to choose the type of adviser you want and your area pin code, and then give you a list of names and contact details closest to you. Dedhia said that once you enter your requirements, the website will match you with advisers it feels are best suited to you.
Do double check with other databases like the ones from FPSB and Network FP platforms to ensure that you are getting the entire set of advisers. Both these portals offer more choice. Network FP, for instance, is a comprehensive search engine that helps you look out for an adviser based on area of expertise (such as financial planning, or creation of Wills and trusts), or products (MFs, direct equities, insurance, and others), or type of licensed adviser you want (registered with Association of Mutual Funds of India, or Sebi or a qualified insurance agent).
According to Neelgund, an adviser’s qualifications are also checked before enlisting. A declaration of ethical practices also has to be signed.
But is an Internet search the best way to find a person whom you will trust with your money?
“Referral is always the best way to find a good adviser but that does not mean one should not be open to approaching 2-3 more advisers from various credible sources," said Neelgund.
Kavitha Menon, a Mumbai-based financial planner, says she gets all her clients through referrals, but a “credible Internet search portal" is also a good resource. “It could be a mix of both. Ask your friends and refer to a list. Meet with 2-3 planners and see who matches your requirements," she said.
Fee or free?
A plain-vanilla distributor does not charge fees. However, her role is of a basic distributor who gives minimal advice and simply executes your various transactions. Most of the financial planners and Sebi-registered RIAs charge fees. While the fee charged varies, typically, it is between 5,000 and 25,000 in the first year. Sometimes, this does not include the first meeting that you have with your planner where both get to know one another. Once the adviser signs you up, the fee clock starts ticking. Some advisers also charge a nominal consultation fee for the first meeting. From the second year onwards, advisers usually charge fees as a percentage of your overall corpus.
Distributors mostly offer investment products and won’t really get into overall financial planning. That is where RIAs and CFPs come in. And hence the fees. Some evolved distributors, though, might also help you with a basic financial plan.
You need to keep your requirements in mind when you choose your planner. If you want a full financial plan, stay with an adviser. “You should pay your financial planner. If you want good advice and service, do not expect free service. If it is coming free, it may not be good for you," said Menon. “The cost of good advice is always lesser than the cost of mistakes that one makes in the absence of good advice," said Neelgund.
To make the cost structure better for you, the investor, Sebi now allows RIAs to offer you direct plans of MF schemes. Direct plans come with a lower expense ratio as the distributor’s commission will not be embedded in the scheme’s net asset value. This works to your advantage as now you will not pay twice—to your adviser as well as to the MF. Any financial product or service should be bought only after due diligence. The same holds true for financial advisers. Ask around. If that doesn’t work, search the Internet. But whatever be your medium, the basic dos and don’ts remain the same. Ask questions till you are satisfied with the answers, and only then take a final decision. After all, in some ways, it is a close relationship.