Your journey towards your financial goals begins with a proper financial plan and to implement and monitor your financial plan you need the services of a financial advisor. The challenge is to choose the right financial advisor. Obviously, you not only require a financial advisor of competence and integrity but also require a financial advisor who is committed to travel with you and catalyze your journey towards your long term financial goals. What are the questions to ask a financial advisor and can we shortlist the best 5 questions for your financial advisor? What are the qualities you must look for in a financial advisor and how to draft a questionnaire that drives you towards these conclusions? Here is a 5-point financial advisor questionnaire that you must administer to your financial advisor before actually signing up with him for your long term financial planning..
1. Can you explain your investment philosophy and your investment process?
While you will surely check your financial advisor’s market credibility and his academic and professional credentials, you also need to delve on the softer aspects. Firstly, what is your financial advisor’s investment philosophy? Obviously, you do not want a financial advisor who shoots from the hip and is too rash. You also do not want a financial advisor who is too conservative and makes your portfolio sub-optimal. Above all, your financial advisor should be flexible to change his strategy with the changing market conditions. Secondly, what do we mean by the investment process? This is very critical and tests the methodology followed by your advisor for identifying investments, short-listing specific investments, methodology for monitoring investments, process of review of investment portfolio etc. These factors can be judged over a few introductory meetings with the financial advisor.
2. What are the services that you will provide me?
Remember, financial advisory is a very broad term. Hence you need to get down to specifics of what the advisor will provide and a sample of how the advice will look like and how it will be delivered. You do not want your advisor to just give you a macro picture. You also want him to facilitate the process of investment and insurance and also help you get the best deals in the market. Check if the financial advisor will also provide tax advisory and tax filing services. Most advisors will provide that as an add-on service. Also check if your advisor will assist in creating and registering a will. These may appear to be routine items but it will avoid any confusion in understanding and put you on the same plane as the advisor.
3. What are the reports and MIS that I will get as your client?
A financial advisor is expected to provide you a number of analytical reports on your portfolio and also market intelligence on how to tweak your investment strategy. Get clarity on the various reports that the advisor will provide and also obtain samples of these reports for your records. You need regular reports on your portfolio performance, need for rebalancing, asset quality of your portfolio, returns on your portfolio, benchmarking against goals etc. Have a complete clarity on all the MIS reports that your advisor will provide and let that be documented and also made part of the agreement with your financial advisor.
4. How many clients do you service on a continuing basis?
This is a fairly loaded question and has multiple implications. Firstly, you need to be sure that there are a substantial number of clients who trust the particular financial advisor. After all, financial advisory is a business of trust and you need to be convinced that you can trust your financial advisor. Secondly, you need to understand if your financial advisor is regularly adding clients or losing clients. This is indicative of the advisor’s competitive positioning in the market. Lastly, you also need to be clear if your advisor is spreading his services too thin across a large number of clients. That means service quality could suffer, the personal touch could be lost and the service offering could be commoditized. All these matter since financial advisory is ultimately a long-term relationship of trust.
5. What are your charges and how do you charge?
This is probably the most important question that you need to ask and get clarity from your financial advisor. Firstly, let us look at the nature of charges. Is your financial advisor going to charge a fixed fee each year or is it going to be a percentage of your assets under advice (AUA). Also get clarity on any hidden charges which are not clear at the outset. Get clarity on what will be part of the fee and what will be the additional reimbursements. We now move on to the more critical aspect of where your advisor gets his revenues from. Why is this second part of the question so important?
There are two types of financial advisors. There are advisors who charge a fee to the client and then there are advisors who are paid commissions by the product originators (mutual funds, insurance companies etc.). The latter situation is best avoided. It is better to hire a financial advisor and pay for the services as it will ensure that the advisor centres his advice round your needs. In case the advisor is being paid commissions by the product originators the advisor may have a greater incentive to push specific products. The focus will shift from your needs to product selling. This is a very important and subtle question for which you require a clear answer!