Signs of a good (and bad) investment advisor 

Indian investors get their investment advice from many sources. Though SEBI regulations require investment advice to be dispensed only by RIAs (registered investment advisers), in practise, investors rely on relationship managers from their bank, their broker, tax consultant, insurance and mutual fund agent, wealth manager or even finance professionals in the family or neighbourhood for regular ‘advice’. But how do you know if your advisor is focussed on your financial well-being or is looking out for his own incentives? Here are some signs that will help you understand.

Suitability before products

When calling you, does your advisor launch straight into which mutual fund, ULIP or insurance plan to buy without talking about your financial position or risk appetite? That’s the sign of a product seller and not a financial advisor.

A good advisor, before getting to specific products, would take time to understand your income and savings potential, assets and liabilities, risk appetite, goals and family dynamics thoroughly. It is such profiling that results in suitable product recommendations. Suitability is an important concept in financial planning. Financial products, on their own, are not particularly bad or good, but they need to be a good fit for the investor who’s buying them.

A 25-year-old should probably not be signing up for hefty annual premium payments for 10-12 years to secure guaranteed income from an insurer. A person on the verge of retirement probably shouldn’t be investing the bulk of his PF maturity pay-out in equity funds. An advisor who doesn’t tailor his product pitches to the investor’s situation or risk appetite is ignoring suitability. This is a sign that he is pushing the product that earns him the highest commission, rather than recommend what is good for the client.

A suitability assessment would require your advisor to periodically ask questions about your income and savings, your outstanding loans and investments, your family size and dependants as well as your financial goals, before getting down to product choices.

Saying no

By starting early and saving enough, you can put most reasonable financial aspirations within your reach. But ‘reasonable’ is the key word here. All of us have limits to how much we can achieve with our given levels of income, savings and investing horizon, while dealing with unpredictable market conditions.

At 30, with ₹25 lakh in savings, do you have dreams of retiring at 40? Do you hope to fund your daughter’s Ivy League education in 10 years’ time with a ₹5,000-SIP? Do you believe that your equity portfolio will double in five years’ time? A good financial advisor would frankly let you know that these goals are unrealistic and that you need to tone down your return expectations. A bad one will egg you on to invest in risky products while going with your unachievable goals.

A good advisor should also actively discourage you from making ill thought-out financial decisions that can hurt your future. It could be signing on as a guarantor for your friend’s multi-crore home loan, or cleaning out your retirement kitty to fund your son’s overseas degree. A good advisor is one who says no at the right times to safeguard your interests, even though he may displease you as a client.

Know Your Client

A good advisor, before getting to specific products, would take time to understand your income and savings potential, assets and liabilities, risk appetite, goals and family dynamics thoroughly

No-commission products

Sometimes, products that earn your advisor low or no commissions are a good fit for your goals. If your advisor has your best interests in mind, he would still recommend them, despite his earning low incentives.

For retirees seeking god risk-reward today, the post office Senior Citizens Savings Scheme and LIC’s PM Vaya Vandana Yojana are two plans that should rank ahead of debt mutual funds in terms of delivering regular income with low risks. RBI’s Retail Direct platform, which allows retail investors to directly buy into government securities, today offers superior returns to bank deposits. Passive equity and debt mutual funds offer a significant cost advantage over active funds and may deliver better returns.

Most of the above products offer low or nil commissions to the intermediary. If your advisor is willing to feature them in his recommendation menu, that’s a sign that he has your best interests at heart.

Sells and cash calls

Like the lamp seller in Aladdin, financial product companies and their agents love to convince investors that they should constantly be trading in their old products for newer, shinier versions. Investment webinars, presentations and calls are all about how the time is just right to be buying some product. But there’s very little advice going around on the right time to sell or exit from specific products or asset classes.

In equity or mutual fund portfolios, underperformers need to regularly weeded out to be replaced by those with better prospects. Your investment returns from equities can be significantly higher if you book profits when valuations are sky-high and add positions during a fall. Holding cash or gold when markets go to irrational extremes, can save you a lot of pain.

This makes it important for your financial advisor to alert you to selling opportunities as often as he flags buy opportunities. If your advisor sometimes tells you to hang on to cash because there are no good opportunities in the market, take that as a good sign.

Sticks to expertise

Planning out someone’s financial life can be a pretty exhaustive exercise, requiring expertise in everything from tax planning to arbitrating family disputes to knowing the laws on succession and estate planning.

A single financial advisor may not be an expert in these multiple areas. Rather than double up as jack of all trades, a good advisor will alert his client when his queries are outside his areas of competence and refer him to a competent expert.

Published on

April 16, 2022

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Divyansh Singh

Talks about #technology #innovation #investing and #business.

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