THE wealth-management market in India may have a target size of 42 million households by 2012 against just about 13 million in 2007. Indians will have $1 trillion to invest by 2012, with the country's robust economic growth driving a four-fold surge from just about $250 billion in 2007. According to a report by international consultancy firm Celent, India will require many more wealth managers with the number of potential clients and size of manageable wealth both expected to quadruple through 2012.
According to Wikipedia, a financial advisor is a professional who renders financial services to individuals, businesses and governments. Ideally, the financial advisor helps the client maintain the desired balance of investment income, capital gains and acceptable level of risk by using proper asset allocation. Financial advisors use equity, bonds, mutual funds, real-estate investments and insurance products to meet the needs of their clients.
The decision on choosing the right advisor with adequate competency, skill and knowledge always rests with the investors. Investors tend to choose an institution that is a better known brand. However, that does not offer any guarantee of better results. A more rational approach is to do a thorough due diligence of the advisor. Ideally an investor should look for the following before on boarding an advisor:
Qualification, Experience & Background: Is your advisor qualified to manage your wealth? Does he have the requisite experience to understand and advise you on various asset classes to optimise returns while managing risks? Right from providing unbiased advice to effectively managing clients' portfolios and making it tide over micro- and macro-adversities, the role of an advisor cannot be undermined for a healthy investor community. Like other professionals — doctors, lawyers and chartered accountants — where fiduciary responsibility goes without saying, financial advisors need to achieve that status, as there is a huge inherent conflict in the product distribution and commission based model.
Several companies are increasingly focusing on recruiting quality talent from the best business schools, increasing attention on training modules to ensure that the best talent reaches the investor. However, there still is a large skill gap that needs to be filled in order to ensure that the advisor community imbibes the much needed confidence in the investing fraternity.
Systems & Processes: Are the firm's systems and processes in place to safeguard your wealth through appropriate risk management and investment mandate? Following best practices, clear explanation of product features without ambiguity, query resolution turnaround, correct and timely communication of one's holding in various products will be a few important features to look for.
Advisor Incentivisation: How is the advisor earning fees or revenue? This can be very critical to the products being suggested. If he is earning a fee on sales then the psyche will be inclined towards pushing a high-commission product irrespective of the impact it can have on the investor's financial health.
Client References: If the advisor has been suggested by a close friend or a well-wisher and if they are personally satisfied with his/her service, it might be prudent to probe further and engage in a dialogue. If an advisor has contacted you directly, running through a checklist might be helpful in assessing the advisor.
There can be different filters to assess an advisor. Besides the broad four areas discussed above, here are a few more that could be useful while evaluating an advisor; his or her understanding of your individual needs and requirements, spending enough time with the advisor before you start, appropriate mapping of your risk profile and an asset allocation approach and plan.
Constant and rational questioning of the advisors presentation may also bring out the truth, as well as bring in a level of comfort in the relationship.
In more recent times a trend is being seen where large investors are moving into long term partnerships with a single firm through a family office mandate, entering into a fixed fee/advisory model. This in turn helps investors consolidate their entire portfolio across multiple advisors, creating an asset register and an investment-policy statement thereby standardising metrics for measuring performance as well as managing risk.
This wealth-structuring solution ensures alignment of interest, allowing the advisor to choose any product from the industry, without bias.
