With entry load gone, you will now have to shell out money from your pocket to hire a financial advisor. Make sure you hire the right one
STRICTLY speaking, an individual doesn't need an investment advisor to make an investment. Imagine, you know the product you wish to buy and you know where to buy it from. All you need to do is to write a cheque, fill in the relevant document and submit it to the respective registrar. There are a host of websites like Sharekhan, icicidirect and so on which facilitate online investments. Even individual AMCs provide online investment. So, then who needs a financial advisor?
The question merits serious attention in the current milieu, where financial advisors are almost an endangered species. Ever since the Securities and Exchange Board of India (Sebi) banned entry load on mutual funds from August 2009, the survival (or more importantly the availability of their service for investors) has been a hot debating point. Entry load is the upfront charges levied on the investor when he invests in a mutual fund. So every time you invested in an equity mutual fund, the distributor (that includes your advisor, too) would earn 2.25% as upfront fees. So if you invested 10,000 in an equity mutual fund the distributor would get 225 as upfront fees. In addition, he gets a trail fee, which could be 50 a year. Trail fee is the commission that a distributor gets from the fund house, usually on a quarterly basis while the money is invested. Under the new structure, the trail fee is still available while the upfront is gone. Upfront fee was the bread and butter of lot of distributors. With investors hesitating to pay advisory fee, the whole distribution scenario changed. Lot of independent financial advisors (IFAs) who depended on upfront fees for their livelihood shut shop, while others refuse service to small investors.
This is why selecting a financial advisor is a tricky task these days. Especially, since you have to cough up money from your pocket to hire his service.
Do You Need A Financial Advisor?:
Every investor should have the services of a financial advisor or financial planner. Here are some reasons why taking care of his investment needs is not an individual's cup of tea. To start with, Indian markets are globalised and affected by the vagaries of the global financial markets. Currency movements, floods, politics… almost anything could affect the financial markets. As an individual investor, it can be very difficult to keep track of everything that is happening around. Added to this, there are various asset classes, be it equity, debt and gold to choose from. Within these asset classes too, there are various products available. What percentage should they constitute, when you should buy or when you should switch or sell, is something very difficult for an individual to do on his own. It is impossible for an individual investor to monitor all assets on his own.
A financial advisor or certified financial planner (CFP) is one who guides you on all your investment decisions. He is your financial doctor or guide in the vast financial jungle. Broadly, the advisor offers three services. The first includes understanding the customer, his existing finances and future needs and making a financial plan for him. The second role is execution, wherein the advisor helps you in buying, selling redeeming and such other operational aspects. The third and final service is periodic review and timely advice.
Choosing Mr Right: Today, there is a vast plethora of choices available. You have online websites and discount brokers who merely help you with your transactions, with IFAs, financial planners and private bankers. There are financial planners who could make a detailed financial plan for you for 2,500, while if it's a more sophisticated product, the fees could extend up to 15,000. Once your plan is done, you could execute it through the same person, or use another organisation. Based on the size of your portfolio and your needs you could choose one. Another important aspect to look at how much time an advisor can devote to your portfolio. "Are you merely one of his clients or one of his important clients who also make a difference to his job is what you need to understand," says a wealth manager, who refused to be identified as he is not authorised to talk to the media.
Your relationship with your advisor is of complete faith and trust. You should choose an advisor who has your interest foremost, passion for investing, analytical skills, access to local and global resources, insight and research. Your and the advisor's interests should be fully aligned. It is important to get your advisor right and compensate him accordingly. He should be competent, understand all products and asset classes, belong to an organisation of repute. You could check his past track record and experience and even ask for references. You should check the pedigree of the organisation he comes from.
You pay professionals such as lawyers, doctors, tax advisors, accountants — so why not pay a financial advisor? It makes sense to pay a reasonable fee and get quality advice and service, rather than losing a portion of your wealth due to incompetent and poor advise. However, while sophisticated clients would pay fees, at the lower end investors are reluctant to pay that. It is a chicken and egg situation.
So, if you are a total layman and new to financial markets, you could go with these financial planners, or with relationship managers of smaller distributors.
At the high end there are private bankers, who do charge a fee. However there is no hard and fast rule and most of them are pretty flexible about it depending on the ticket size and relationship size. So the fees could vary anywhere between 0.5-2% of the asset size. So, if you have a networth of more than a crore, you could try out private banking services where you could avail the services of an experienced relationship manager, who can take care of your investment needs.
MEMORANDUM OF UNDERSTANDING
Some points to remember while looking for a financial planner
1 Hiring a financial advisor is advisable, as investing on your own could
be risky
2 Do not hesitate to pay for services, if you want quality advice. If you do not pay for his services, the advisor may try to sell you products where he gets a higher commission which is detrimental to your interest
3 It's not mandatory to hire a Certified Financial Planner (CFP). However, it is essential that you go with an advisor who has experience in the financial markets
4 Review your financial plan once a quarter, rebalance when
necessary
5 Websites offer you convenience, zero paperwork, model portfolios, and give you the opportunity to chat with fund managers. If you are net-savvy, try using them
6 Larger organisations can invest more in research, which IFAs may not be able to do. On the flipside, large organisations may demand a higher client ticket size to give you higher level of services
CHANGES IN DISTRIBUTOR COMMISSION PAYOUT
Ø Earlier
Distributors received a 2.25% commission on the invested amount from the AMC
Advisors often sold products where commission was higher
Big investors would often get the entire commission as cash-back
It was a product-centric approach with no financial planning or long-term approach
Ø Now
They are supposed to take advisory fee from the investor
Advisor research and work out investment plans that keep in mind the interest of the investor Cash back abolished
Now to justify fees advisors offer value-added services like financial planning
