How would you react if I ask you this: do you need financial advice?
Very rarely do I get a straight answer to this question; it mostly tends to bring about feelings of ambiguity and wariness instead. Ambiguity because, well, what really is financial advice? It can range from the latest stock tip to a sophisticated plan for the next 20 years. And wariness because – you probably wonder what I’m going to sell you if you say yes.
And therein lies the rub. Despite all the free ‘advice’ flowing our way from the bank relationship managers, stock brokers, insurance agents and mutual fund distributors, as investors, we’re never sure of the choices we’re asked to make. “Am I just buying a product or getting holistic advice on my financial well-being?” We have no clarity on what we should expect when dealing with ‘advisers’ and no standards to judge them against.
Indian regulators, fortunately, have woken up to the retail investor’s distress. The SEBI Registered Investment Adviser (RIA) Regulation, 2013, while still seen as an evolving model, is actually leading the way amongst all Asian markets to drive transparency and standardisation in financial advice. The regulation holds the key to finally dispelling the ambiguity and lack of trust surrounding advice.
But accepting and adopting this change will also depend on how well we, as investors, understand our need for financial advice. And on whether we are able to differentiate between the opportunistic or generic advice that we perceive to be free, and qualified, professional, personalised advice that can truly move the needle on our financial well-being.
So, is Your Adviser Advising You?
Financial advice should help you solve a problem. It should get you from point A to point B in terms of your financial situation. You have a certain amount of savings today (point A), you need to save for your child’s education abroad (problem to be solved), and will need a certain corpus of funds by the time your child is old enough (point B).
Is Your Adviser Really Advising You?
But this advice is not as simple to give as it sounds. Why?
- Advice that works for another family may not work for yours, because your savings, lifestyle and constraints are different. The rate at which you can achieve a goal, without compromising your current life, will be unique to you – and you need someone who is willing to take the time and effort to study and understand this.
- You’re never really chasing one financial goal at a time. Retirement, children’s education, emergency funds, are all concurrent demands. How much to save for each? And how? How much risk are you able to take – and how much risk is acceptable for a particular goal itself? These are complexities that require a qualified person to look at your finances holistically and help you make informed decisions.
- Making one single investment is not really complex. But building a portfolio of investments is. Asset allocation and disciplined rebalancing have proven to deliver long term returns. This requires the adviser to understand the market conditions well without succumbing to market sentiments, take corrective actions promptly and be an expert in multiple asset classes.
- You will invest over a few decades in your life, and all of the products you invest in, be it insurance policies, equities, mutual funds or bonds, come with hidden costs that eat into your returns. The late John Bogle, legend of low-cost investing, estimated that hidden costs ate away as much as 2/3rds of an investor’s return over the long term. The right adviser will focus on getting you low-cost products that do not compromise your returns and risk exposure. He will disclose fully all the hidden costs to you and advise you on how to reduce it.
- The term long-term investing is easily mis-understood. There is no fill it-shut it-forget it solution when it comes to investments. Each investment, however solid, needs to be reviewed periodically for the risk and return it brings to a goal. You need an adviser who will do this regularly, with no expectations of further or new investments from you.
- Market changes affect each investor, and each goal, differently. Which is why working on generic advice in times of market movements often does more harm than good. Opportunistic advice, that rides on your fear – or greed – to sell newer investments instead of offering an unbiased opinion on the right course of action, is far worse.
Would you still say that your ‘free’ adviser advises you?
Empowering Yourself With The Right Advice
Once we understand the commitment, expertise and integrity required from a financial adviser in giving unbiased advice that is purely in our best interest, it is a fairly logical conclusion that this cannot be had in the ‘free’ advice model. Only when an adviser’s source of income is transparent and comes only from you, will they be free of any bias in recommending investment products or investment actions. It is critical that there is an alignment of interests where the adviser is not incentivised by product providers to sell you any product.
Neither are they driven by the need for frequent incremental investments, nor will they shy away from recommending a withdrawal or exit if your portfolio strategy demands it. A fee-based adviser is equally happy servicing low-cost products as it benefits you, while having no impact on their own income.
With SEBI’s RIA regulation, investors are further assured of a certain standard of service:
- All Registered Investment Advisers (RIAs) are expected to have professional qualifications in financial planning, capital markets, economics or other related areas, apart from basic graduation. This is to ensure that they can do more than basic risk profiling for investors, take a 360-degree assessment of your financial health, and build portfolios with the right asset allocation.
- RIAs operate under a strict code of conduct as defined by SEBI: they can only offer advice that is in the investors’ best interests and have to disclose any conflict of interest while doing so. They have to maintain detailed records of clients’ risk profiles, goals, portfolio performances and all advice given, and are subject to audits by SEBI.