Today the financial advisor is as important as your family doctor, your family lawyer and your family priest. The role of a financial advisor is critical as they hand hold you through the journey from planning your goals to fructifying your goals. While delineating your long term goals, creating the investment matrix and monitoring your plan come later, the first challenge is to select your financial advisor. While there are no hard and fast criteria, here are 7 basic rules you can use to zero in on your financial advisor..
First, check that the financial advisor is statutorily certified..
Today in India it is essential for professional financial advisors to be certified by the relevant body. They have to be registered with SEBI as financial advisors and they should also have cleared the CFP examination. There could be a counter argument that academic qualifications are not everything, but they do go a long way! For example, an individual who has gone through the stringent KYC process and who has cleared the CFP exam is not only strong in domain skills but will also bring the academic rigor into the entire process. Secondly, you are not statutorily permitted to advise clients unless you are certified and your credentials are updated on a regular basis. You are going to be with your financial advisor for the long haul and you surely do not want someone who is likely to get into compliance related problems with the regulator.
What is the pricing model of the financial advisor?
There are quite a few pricing models of the financial advisor. The first is the plain vanilla fee structure which includes an upfront fee and an annual maintenance fee. This is the most preferred structure. There are some financial advisors who may try to get you into profit participation models. Such methodologies may not be transparent on paper and hence are best avoided. Lastly, there are those advisors who also double up as agents for principals like mutual funds, insurance companies etc. Such advisors have vested product interest and are best avoided. Let the remuneration terms be clearly spelt out in the contract.
Put down the entire gamut of services on paper and sign off..
This is a very important step. Get down to deliverables. Ask your financial advisor to put down deliverables on paper like number of reports, number of advisory packages, frequency of reports, contents of such packages etc. The more transparent you are with the advisor in the beginning there are likely to be lesser confusions in the future. Above all, ensure that deliverables are measurable otherwise performance can become a matter of opinion. That is a recipe for differences of opinion. Focus on the integrity of the financial advisor; it matters a lot in the long run..
Get samples of previous plans and talk to some of their clients..
There is nothing like getting a feel for the real thing. Ask the financial advisor to show you samples of actual financial plans made. Of course, let them have the discretion to mask the actual client name in the interest of confidentiality. Also cross check the actual service standards with a couple of genuine customers, ideally some client you know personally and not introduced by the advisor. Your acquaintances are likely to be more objective. A good reputation and a bad reputation tend to spread fast, and that is something only a live feedback can capture.
Is the financial advisor transparent about risks and returns..
The last thing you want in your financial advisor is a smart salesman who shows you only the rosy picture of financial planning. Remember that all financial instruments are about a risk-return trade-off. Be cautious of financial advisors who shoot from the hip or tend to be too aggressive in projecting returns on assets. The more conservative you are, the better it will be for you. Secondly, prefer a financial advisor who apprises you of the risk of your financial plan in detail. Financial planning is about planning and providing for your risk and you must focus on a financial advisor who has an in-depth and transparent understanding of risk.
The devil lies in the detail, so read the fine print..
In any contract, a lot of serious stuff is hidden in the fine print. Therefore take your time and go through the fine print. If required, take second legal opinion from a competent lawyer before signing on with a financial advisor. There are a lot of finer points that are mentioned in fine print. For example, the financial advisor may have kept the leeway to invest in structured products and other high risk products. You need to understand the downsides of the same. Similarly, there may be hidden charges that are not obvious in the actual contract. Be aware of all these finer issues.
Does your financial advisor have diverse experience?
It is often said that in a dynamic and ever-changing financial share market, too much of experience can be a baggage. That is true. But it is also true that you must prefer a financial advisor who has diverse experience across different cycles of equity and debt. For example debt funds will be consistent outperformers when interest rates are being cut. Similarly, a financial advisor who has only lived through a bull market will never know how to handle the equity portfolio when markets are falling. You need a financial advisor who has experienced cycles of the equity and debt market which makes the experience more rounded.
As mentioned earlier, when you choose your financial advisor, integrity matters a lot. You also need to be clear that the goals of the financial advisor are aligned to your long term goals. After all, this is an important and long haul relationship.