Anew year is as good a time as any to get your finances in shape. If not confident of doing it yourself, it's best to take the help of a financial planner or advisor. However, it is important to do your homework before you entrust your hard-earned money to someone, even if he claims to be an expert. Here is a checklist of questions to separate good advisors from bad ones:
How do you profile customers and identify products?
Customers have to find out the process followed by the planner in profiling a customer. The advisor should be able to identify the current cash flow, life states and goals of the customer. This might include understanding the customer's risk profile, income and expenses, and plans for marriage, children's education, retirement and so on.
Investors need to know the process followed by the advisor in identifying products. An advisor has to show proficiency across multiple product levels and should be able to recommend products across asset categories such as mutual funds, insurance and direct equity. "Advisors have to show a mastery of a range of investment products and be able to separate the good products from the bad ones, based on the risk, time-frame and general characteristics of the product," said Srikanth Meenakshi, director, FundsIndia.com
Can I talk to your existing clients and evaluate products recommended to them?
Investors should ask client references from advisors. The next step is to ask some of these clients about their experience with the advisor. What are the kinds of products he had recommended? How satisfied are they with his plans? Is the advisor only focused on a few products or believes in employing a single formula or does he recommend products across the asset spectrum? Does he recommend products based on a standard risk profile such as conservative, moderate and aggressive, or does he customise plans based on specific needs, situations and goals of the client?
The investor can look at some of the standard recommended products by the advisor and do a reference check on the quality of these products by browsing through independent websites such as Value Research and so on.
How will you charge me?
Indian investors often shy away from discussing fees with advisors. That should not. Investors need to figure out the advisor's remuneration structure - are these compensated by manufacturers, clients or both? If both, what is the percentage of fees paid by manufacturers? If a certain amount is remunerated through manufacturers, investors need to ask if this compensation is based on the amount invested by clients or the type of scheme. If a Securities and Exchange Board of India-registered investment advisor, he cannot receive compensation in any other form from any person other than the client being advised. "Advisors have to be open and frank about commissions on the products they sell. Good advisors will not try to underplay the commissions they get from manufacturers," said Meenakshi.
Investors might have to do some homework on the commissions paid in the market. For example, agents selling an equity scheme might get paid a commission of 1 to 1.5 per cent upfront and 0.5 to 0.75 per cent as trail commission in the subsequent years. Commission for term plans can be five to 10 per cent of the policy premium. A good advisor's commissions will stay within this band.
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How often will you review my portfolio?
Investors need to know how often the advisor will audit and review the portfolio. Will it be periodic? If so, bimonthly or quarterly? Is it dependent on achieving a goal or based on a specific event? For example, if there's an unforeseen event like the sudden fall in global crude oil prices, will the advisor recommend a change in strategy? Will my advisor call me or do I have to get in touch with him? "Some advisors just send a portfolio update. Instead, they should explain the investment philosophy, shed light on the rationale for buying, selling or sticking to a particular stock or fund and discuss the current external environment with the customer," said Manoj Nagpal, CEO, Outlook Asia Capital.
What is your investment mantra?
Ask the advisor about his investment philosophy. Does he believe in any particular philosophy that is likely to influence his decisions? Does he follow one or more gurus such as Warren Buffett or Peter Lynch? For example, if your advisor is a proponent of value investing, he is likely to focus on buying cheap and insist on a certain margin of safety. What factors does he take into consideration before recommending a product? Is he a believer in staying fully invested at all times? What does long term mean to him? What are the typical holding periods he recommends for different asset classes? Does he have any particular exit strategy for investments? What are the software research tools that he employs? Does he use his own proprietary research tools or rely on outside research for recommendations? Is he comfortable with relying on automated models like quants to aid his research?
Are you a fiduciary?
There are dime-a-dozen advisors in the market. Not all might be authentic or have enough expertise to dish out sound advice. Even distributors today have a minimum certification from a recognised body such as Insurance Regulatory and Development Authority of India or Association of Mutual Funds of India. So, it is desirable for an advisor to hold additional professional certifications such as certified financial planner, certified financial analyst, CA, and so on. All the better if your planner is a Sebi-registered investment advisor. This will ensure he acts as a fiduciary, someone who manages assets for the benefit of the other person, rather than for his or her own profit. "A fiduciary is responsible for selecting the best, and not just a suitable product, for his client. He is legally bound to put the interests of his clients above everything else," said Suresh Sadagopan, a certified financial planner.
Have you come under any regulatory scanner?
Google can prove your best buddy in doing some quick reference checks. Find out if your advisor has been involved in any breach of regulatory guidelines. Has he been pulled up by Sebi for any unlawful or unethical actions? Have any of his former clients filed a case against him for mis-selling, excessive churning or fraud? You could also directly contact his peers or past clients to know the reputation he enjoys in the market.
