Finding the right financial advisor – Six qualities to look at

After my last post, you would be in a good position to know how to start investing. In case you have not read it yet, you can find it here.

A couple of incidents over the last few days prompted me to write about this very sensitive issue – how to choose the right financial advisor.

The first incident happened when I visited a private bank who claims to ‘understand our world’ to deposit a cheque. As expected, the staff at the counter asked me if I am interested in making some investments in ‘savings plan’. Without disclosing my profession or background, I played along and asked the senior banker for more details about the plan. He asked me to invest in a ULIP (Unit Linked Insurance Plan) with a lock-in for five years. I raised subtle objection about high charges on ULIP as compared to mutual fund. The response was shocking – he just claimed that ULIP returns are superior to mutual funds and I get ‘free’ insurance as an add-on benefit. Any guess why he was so eager that I buy an ULIP – the bank would have earned between 6% to 10% as commission as against a maximum of 1% by selling a mutual fund.

The second incident was an unknown person calling me and asking me to help him become a mutual fund distributor. Upon enquiring, I found that a good friend of mine referred him to me. I just asked him why does he want to become a mutual fund distributor and his answer evoked a mixed response of shock and anger. He calmly said, “Mutual Funds are in trend right now and I also want to earn commission by selling them”. Nothing wrong in earning money, but that cannot be your sole motive to become an advisor.

The financial advisory business has always been in a sorry state with advisors putting their interests above those of clients. It has always been seen as an easy way of earning quick bucks. But then, the issue is how does an investor identify a genuine advisor amidst the crowd of agents waiting for an opportunity to fleece their customers. Here are some pointers that may help you choose a right advisor.

  1. Independent:

    Choose an advisor who is independent and does not represent any institution. An advisor who is representing an institution like a bank or a broking company is always driven by internal targets. These targets are always in the form of revenue that the company earns. Invariably, he is under pressure to achieve his targets and he will always try to sell products that give the company a higher revenue which implies that your money has not reached the right investments.

  2. Transparent:

    An advisor should be transparent with his clients. The clients should clearly know how much would the advisor be earning through the client’s investments. Advisors earn in two forms – fees paid by the client and/or commission received from mutual fund / insurance / broking companies. In a fee based service, the advisor earns a fixed fee for his service and there is no additional incentive from him at the time of transactions. This works ideally with clients having a mid-sized portfolio. For investors who are new, the fee-based service would not be feasible. In such cases, the advisor should clearly indicate the amount of commission he would earn on the transactions made by the client. Any advisor who hesitates in doing this is not being transparent and hence cannot be relied upon.

  3. Experienced and Certified:

    It is important to choose an advisor who is experienced. A fresh graduate might have all the knowledge about investments but no wisdom. And when it comes to money matters, wisdom always pays. Also, look for an advisor with professional certifications. An advisor who is certified by a professional body is far more reliable and you can expect him to advise professionally.

  4. Made Mistakes:

    Yes! It may sound strange, but look for an advisor who has made mistakes. An advisor is also a human and hence would have definitely made mistakes. The key is to admit them – a professional advisor will never hesitate to admit his mistakes and will make no effort to claim he is flawless.

  5. Deep Understanding:

    An advisor would have a deep understanding of you – your family, your goals, your lifestyle and even your favorite color! The deeper the understanding, the better will be the financial planning. Most advisors don’t tend to take this seriously and at best create a superficial bond with their clients.

  6. Clear Strategy:

    Your advisor should have a clear strategy to manage your finances. If the strategy is clear and precise, there would be minimal tweaks in your investments. Many advisors often convince their clients that it is important to churn the investments every few months – a strict no-no. Unless there is a major change in market conditions, your portfolio at best might need an annual rebalancing. Remember, more the transactions, more the commission to the advisor (assuming non-fee-based service).

So go ahead and choose an advisor who fits the above six qualities. An ideal one is an individual who will always ‘Put your interests first’.

 

Posted by Alok Chhajer

8 comments

Very well written and in such simple language, that anybody can easily understand

Alok Chhajer

Thank you Supriya! My objective is always to simply the complexities and hopefully this article will help readers find such advisor easily too!

Dhimant Ganatra

Good one Professor. I would like to add Technology expertise to the 6 points. I like an advisor who can show me visualisation of my portfolio over and above the XIRR.

Alok Chhajer

Absolutely sir! Unfortunately, most advisors have trained clients not to look beyond absolute returns.

Amiya Ranjan Kumar

Its really insightful article and helps one into the world of savings and investment… Also the need and ways of getting the right financial advisor.. at times that could be the difference between the wealth building and money making…
Good one… Keep writing on diverse issues of financial planning and let us get enlightened…

Alok Chhajer

Thank you!! Am glad you found it insightful!

Shashikanth S

Hits the nail on its head. Immaculately comprehended and your experience in the field shows. These simple tips helps the investors as well as keeping the faith in the industry alive. A lot of clients I used to meet were ones who were spurned by investing in ULIPs hearing the triumphant claims of their advisors and who had subsequently lost trust on every other advisor as well. Please keep churning out quality articles like these sir.

Alok Chhajer

Thank you Shashi! I will definitely continue to write what is right!

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