How Does it pay to engage a financial advisor
Many investors believe they don’t need professional advice to handle their finances. But the turmoil witnessed in recent months may have changed that perception. The equity markets have been rocked by the pandemic, and debt markets are hit by defaults.
I wish to bring real life stories. Here, (with no names), I bring various stories on whether one needs a financial planner or wealth advisor to be able to weather such tumultuous phases. If you wish to know more about real life stories, continue to read more about our clients and their stories in this blog.
Without naming individuals, can you give us 2-3 anecdotes where clients (or other people) have suffered financially because they did not take advice from an expert? Though we understand that you will not divulge names, please give some details of what happened, how much loss was incurred, and what you would have advised them in the situation.
A client aged 61, had part of his investments done with us, based on a financial plan, especially for his retirement planning. The plan Cleary indicated investing in conservative hybrid funds for 7-10 years. The client understood and kept the portfolio going for the first three years. Now in the 4th year. With our firm’s process drive approach, risk profiling and systematic investment-based approach, the client were told to redeem from conservative hybrid mutual funds in July 2019. He refused. Giving logic of capital gains theory and his assessment, he decided not to go by our recommendations. He informed that he would shift in April 2020.
Now in April 2020, as the market slides, his funds eroded by more than 20%.
He started partially blaming us and more followed.
We charge our fees every quarter. For the January to March fees, he asked us not to charge for this gone by quarter. We informed him that this is not possible and a very unprofessional and impractical response.
This finally led to that client withdrawing his mutual funds. We repeated that he is booking losses at this stage in April 2020. We requested him to continue for a few months and not “book loss”. He didn’t listen…
Our advice was clear that redemption at this stage is a clear booking of temporary loss. Not only was this act unreasonable, but moving away from our financial plan recommendations.
He booked a loss in most of his funds but did make a so-called profit or gain in the other funds. Overall, he didn’t lose or gain much.
Many people think that their portfolio is too small to be handled by a financial planner/wealth advisor. Do you believe there is a threshold for portfolio size, beyond which people should hire an advisor?
As financial planners, we do come across such questions. Small or big for us divided into two categories
- These are our niche category clients which we want. Those who can pay our financial planning fees and have say 50 lakhs and above of AUM (asset under management) to manage. They are mostly young married couples, with young children and are working in the corporate world. They have fixed goals and income- expenses are also apparent. They understand the value of a financial planner and the benefit that a financial planner brings to them.
- All the rest fall in this category. These could be odd requests from our networks, family, friends. We don’t look at their threshold minimum AUM, but both are concerned with the right investments based on their clear goals, time horizon and risk profiling test. They can afford to pay our fees and understand the value of investing after proper due diligence.
Still, to answer this question, while taking up clients, sometimes it’s not the threshold! We have advised clients with nil investments to do! Why? They had very specific identified financial planning challenges to be addressed. They hired our firm to deep dive in all those areas where they were in deep trouble! Here are some more examples:
- Buying a house for Rs. 5 crores for young married couples with no investment to be done. They wanted to know how much worth house do they afford?
- A young married couple with one daughter. In business, they started doing good in their new business and now wanted to plan their daughter’s education and their retirement. No past investments were there. After looking at their goals and income less expense levels, we advised them to start a monthly systematic investment plan (called also as SIP) in direct mutual funds. All other aspects of financial planning like life and general – health insurance, contingency fund and “WILL” were also covered.
- A young divorced woman came to us for restarting her financial life. With no immediate assets to manage, we advised her to start SIP for her contingency fund and retirement goal. (Today, she has reduced her monthly expenses by over Rs. 2.0 lakhs, earlier being spent on binge shopping)(Today, she runs a SIP of Rs.1.5 lakhs). Four years later, another goal was added called wealth creation when she started doing well in her profession, and there was a lot of additional amounts to invest.
- A middle-aged individual approached us for financial planning. He had no past investments and had kind of no spare money to invest also. Also, he had earlier on burnt lakhs of money in misguided advice. The so-called financial advisors ( sorry to say, non-qualified financial quacks) had advised him stocks, real estate and similarly (mis-sold) sold him many investments opportunities which finally led to complete erosion of his entire life’s wealth. He hired us as his financial planner for:
- Debt management: Numerous current running personal loans were troubling him. He wanted to know the clarity on prepaying or continuing them.
- Start SIP for his contingency fund
- Start SIP for his retirement goal
- A well to do CEO of a Fortune 500 company came to us for pure advice. He had been investing only in real estate and some stocks. Real estate worth Rs. Five crores were never going to see the light of the day! His stock investments too, were not going to tune green! He wanted to know what should be done going forward.
All the above five people are real-life examples of people who should take advice from a financial advisor, even when they had zero or nearly no portfolio to manage. So, I believe when one wants their money to grow and work for them, they certainly need an advisor to handhold and help them achieve their financial goals. A financial planner is a mentor who helps you set measurable goals; a vigilant instructor who helps in each financial decision which affects your overall financial goals.
What are the common mistakes that an investor is most likely to make if he manages his money himself? Can you cite some examples from your experience?
1): Deviates from his financial plan. As that was the base of investing, he goes after returns most of the time.
2): The client doesn’t understand the rebalancing of his portfolio during the market up’s and downs. We have seen this kind of erratic investor behaviour.
3): Redemption of long term investments done by the client in equity mutual funds (direct option), suddenly looks a big profit or a significant loss, due to market conditions. The client is directionless and starts chasing his own (short term) myopic vision!
Not having a contingency fund for all emergency cash needs like the recent COVID situation. When the client is not having this separate goal-based investment, he uses the long term investments (which may be down due to market situations). He redeems and doesn’t remember to replenish it also, (without the advisor around!)
Even financial planners and wealth advisors are known to deliberately mislead their clients (insurance salesman are a perfect example). And certifications and association with the organisation are not fool-proof. How can an ordinary investor know a good advisor from a bad one? What are the red flags to watch out for when one hires a financial planner/wealth advisor?
- Being a registered investment advisor, our firm doesn’t sell any products ( insurance or regular mutual fund scheme(s)), which may have any remuneration for our firm.
- We don’t emphasise on investing through us as we give a financial plan, risk profile test report, recommendations for investing based on his goals and time horizon criteria.
- We charge a fee for our advice. This fee is based on what are his challenges, benefits that he would derive from our advice and how much he can afford! Since the fee is being charged for pure advice, the client knows that he is free to invest outside with any bank, distributor or agent.
- Looking at our sample financial plan and our presentation, our prospective client understands the difference between a doctor and a chemist. Role of an investment advisor is to look at macro and micro levels of his client’s investments.
- If the advisor is not charging a fee for his advice, the client should foresee that he is going to “sold” (rather mis-sold) some investment product. He should not fall into the prey!
- The client is approached by a relative or a friend or the bank, under the disguise of a financial planner. With no registration and compliance, the client cannot expect any process-based approach to his financial planning and subsequent investments. Our firm Registration with SEBI, ensures all such procedures, due diligence, compliance and grievances redressal system also.
- Red flags are evident from the following questions:
- Are you registered with SEBI as a registered investment advisor? Show the certificate.
- Are you a CERTIFIED FINANCIAL PLANNER?
- Do you charge fees for your advice?
- What’s your experience in this field, and do you have any testimonials from your clients?
- The client should ask for investments to be done in direct option in mutual funds. Now if the so-called advisor refuses or shows inability or fans ignorance or shows no interest, do not proceed.
- Check for an independent psychometric test to get your aptitude for risk-taking ability. If none, then understand that this advisor doesn’t have any risk-based suitability assessment report to suggest the right investment assets.
- Check out the advisor’s research and methods of evaluating investments. A qualified CFP understands the ratio’s on his own. Check out the process of checking if the future investment’s tracking systems and procedures of eliminating non-performing investments vehicles.
By now, you my dear reader, would have realised the main issue! So ahead and take appropriate action and don’t get misled!
Make yourself abundtly clear on what you want and how to proceed. Your knowledge and your time spent now, will be called your wisdom. Use your wisdom.
May your get all the hoy of investing and happiness combined.
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Trust that my advise above would have helped you get “paid” to engage a financial advisor
Taresh Bhatia is a CERTIFIED FINANCIAL PLANNER (CFP) and a partner in Advantage Financial Planners LLP. A firm registered with SEBI as Registered Investment Advisor (RIA) Contact details: +919810144683, email@example.com
Note:CERTIFIED FINANCIAL PLANNER CM and CFP CM are certification marks owned outside the U.S. by Financial Planning Standards Board Ltd. (FPSB). Financial Planning Standards Board India is the marks licensing authority for the CFP CM marks in India, through agreement with FPSB.
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