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When it comes to looking for a financial advisor who can guide you through mutual fund investing, the smartest thing to understand first is where the advisor makes money. Is it from the fund company whose products he is pitching? Or is it a fee that you will be paying? This is actually the most important question when choosing a financial advisor. The reason is simple. You would have heard the saying, "He who pays the piper calls the tune." The advisor will work in the interest of whoever is paying him.
The problem of choosing a financial advisor is the most complicated in personal finance. Of all the personal investment problems that readers mail me about, the ones that I find impossible to answer with certainty are the ones about needing a financial advisor. As someone said in a movie, the answer to that question is a definite 'maybe'. Actually, it's even more complicated than that. Most investment questions can be answered by evaluating the saver's needs and cross-matching those to the characteristics of the various types of investments available. Questions about whether you need a financial advisor are different.
However, our first principle of figuring out who pays the financial advisor has also been sabotaged by a new joker in the pack. The problem is that most of the new fintech outfits do not fit this model. If you ask them who pays them, the answer is that, in this sense, nobody pays them because they are venture-funded. Almost every one of them pitches direct plans, meaning they do not get commissions and don't charge you any fee. So if no one pays these pipers, whose tune do they play?
One of the problems with choosing an advisor is that a bad advisor is not just neutral in the impact on your investments but negative. That's the commonest problem, and not just in India. Some time back, I read an article in the US Edition of Bloomberg.com on the widespread damage done to the finances of those who used the service of professional financial advisors. In a particular study, researchers posing as prospective clients approached many financial advisors for counsel regarding their existing investments. These investments represented ideal low-cost, diversified portfolios that investors should actually maintain. However, an astounding 85 per cent of the financial advisors suggested alterations to the portfolio that were objectively worse but would yield higher commissions.
In India, numerous regulations exist for financial intermediaries, yet financial advisors consistently act in their self-interest. Regardless of the type of investment - be it insurance, mutual funds, or stocks - advisors' behaviour is predominantly driven by the incentives they receive. A vast array of regulations applies to each sector, but none have proven entirely effective in deterring poor advice. The explanation is straightforward: no financial product aligns the interests of the salesperson with those of the saver/investor. The seller (both the organisation and individual) profits from the transaction itself, while the saver reaps benefits if the financial product choice proves accurate over time.
As I pointed out upfront, this is not an easily solved problem; in fact, many savers will not be able to solve it. There is no particular class of financial advisor - from the smallest one-person operation to giant banks - that is immune to it. However, it's easier to find a sincere advisor in the former than the latter. The one antidote is to make an effort and become more knowledgeable, essentially, be your own advisor. I won't pretend that it's easy, nor that everyone has the time and the inclination to do it. However, it's much easier now than it was earlier.
Think of the qualities of an ideal financial advisor. One is knowledge of investments and the skill and the processes to implement that knowledge. The other is complete commitment to the investor, the complete trust of the investor, and a deep awareness of what the investor needs. Even if you are a little short on the first part in the beginning, other advisors are likely to be severely short on the second part! All in all, it's likely to work out better if you do it yourself.
Suggested read: The best advisor
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