Do your homework before picking a financial planner

The Economic Times

Choosing a financial advisor is like choosing your family physician. Once you are associated with him, it is difficult to restart with another.

You have decided to do long term planning for yourself, but a big question remains: how does one choose a financial advisor? Here are a list of attributes that an advisor should have.

Credentials

Finance is a matter of trust. The most important element in your relationship with your financial advisors is the trust that he can build with you. To gauge his ability to win your trust, you should check his experience, client references, educational background and affiliation with national and international professional networks.

A lack of experience may be compensated by references from clients who are satisfied. Many advisors insist that they cannot share the names of their clients to protect their confidentiality. However, there is no better endorsement than a satisfied customer. Becoming a financial advisor does not require any specialised degree or designations, though some such degrees are available. A good background in finance – through an aspirational degree like an MBA or CA – and a sharp perceptive mind is sufficient! Similarly, while not a must, an affiliation with professional networks helps prove the mettle of the advisor.

Planning process

There are two aspects to judging the planning process of a financial advisor: the sophistication of his planning tools and the quality of his research. Discuss with the advisor your needs and observe whether he has a process for solving your issues or offers rule-of-thumb based answers. The most common examples of this are: you should have 10 times your salary as your insurance or you should have 100 minus your age as allocation in equities. While rules-of-thumb provide a starting point, the advisor should be able to take into account your special needs and circumstances. Check with you advisor on how he proposes to solve problems specific to you.

Quality of research will increasingly distinguish an advisor from his peers. Whether it is the finesse with which he helps you put a financial number to your milestones or the skill to account for volatility in your portfolio (and explain it to you!), the ability of the advisor to draw upon his research is critical. Check if the advisor runs an independent research. Ask him if his research can be back-tested or validated.

Fee structure & support

Advisors make money by not just selling advice but also from the commissions that they get from funds and insurance that they recommend to you. Some advisors are fee-only advisors (more so in the US than in India) who are not interested in the commissions but in the revenue on advice. There is a clear trade-off in choosing your advisor: a fee only advisor may not offer your execution support while an advisor dependant on commissions may not be working in your best interest!

Ask your advisor if he can help you invest in the various asset classes. Can he help you invest in mutual funds? Will he get you the claim settled on your insurance? Will he help you find a good deal on your home loan? He should be able to do this if he has a tie-up with various product manufacturers (AMC, insurance companies, banks). If he has tie-ups with just one or two service providers in each category, check whether his research is biased towards the same providers!

Ability to service you

You need to know how important you are for the advisor. Typically advisors operate in a particular segment: salaried employees, women financial planning, retirement solution, etc. Check if your advisor has specialised knowledge to deal with your circumstances. Note also the typical profile of the clients of the advisor: ask yourself if you are too big for the advisor to handle (and hence, he may not be able to service you properly) or are you too small (and hence will not receive your fair share of attention?)

Define the scope of your assignment with the advisor clearly: Check with your advisor on the amount of time he will commit to you over a year. Will he personally spend the time with you or will he assign a para-planner for this purpose? How frequently can you call him and seek his advice?

Exercise your choice wisely

Choosing a financial advisor is like choosing your family physician: Once you are associated with him, it is very difficult to restart with another. The advisor has resident knowledge about the peculiarities of your financial situation just like a doctor knows about your allergies when prescribing medicines. Take time and invest effort in choosing your advisor: it will be worth it!

Author is director, PARK Financial Advisors, Mumbai

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