A good financial advisor adds to your happiness. She takes away the stress of decision making in investments which is significant.
Choosing a right investment advisor could get stressful, more so if you already have an ‘advisor’ and you need to change for any reason. Most people prefer to be in the ‘default’ mode. “Why bother when things are running somewhat okay?”
But having seen numerous portfolios saddled with sub-par returns, it is important to review the portfolio on a quarterly basis in a clinical and emotion-free manner. In Hyderabad, when you evaluate such an advisor do check their track record of rebalancing periodically.
Ask them for their audited portfolio returns. Dont just go by what they claim. Model portfolios are nice to look at but unless you verify actual returns that the advisor themselves have experienced, it is difficult to trust them.
Beginners, are somewhat lost on whom to approach for advice. So naturally, whoever has access to the person, which happens to be banks or ex-bankers in most cases end up being the investment advisor. And inertia is a powerful force. Avoid this trap. Approach a person or firm focused only on providing advice, not those who push products for a living.
Seasoned investors (or those who have amassed a reasonable amount of wealth) are quite ‘happy’ with the current investment advisor even if they are being charged opaque fees and are saddled with relatively low returns. This is obvious because the distributors not only take a commission but also provide advice that works best for the latter. The commission is just a small cost compared to the much larger cost of buying products like close ended funds, new fund offerings, excessive equity products at the wrong time, funds from a ‘sister fund house’ etc. This list is quite long.
To help ease out this decision, here is a 12 point checklist.
1. Is the Investment advisor who speaks to me daily/monthly registered with SEBI?
Having a SEBI Registered Advisor ensures that there is no conflict of interest on the advice you get. Here too, one has to make sure that the advisor has no affiliate (parent company, co-subsidiary) or related party (spouse, sibling, parent, relative) who is a distributor.
2. Is the Investment advisor paid a fee that is not clear or unknown to me?
Go for an Investment advisor who takes afee upfront. Yes, it is painful to pay something ‘out of your pocket’ but do realise that you are anyway paying several times more ‘from your account’. You are also likely losing out much more by way of poor performance.
3. Can I trust this person with honest advice?
You can review the past three investment advices given to you and apply the test of ‘what is in it for the advisor’ If anyone of them fails, then you know that you need to look for an alternative.
4. Does the Investment advisor have a track record of performance?
Compare what the distributor or advisor has delivered compared the market returns. You will be surprised to see what you get after costs, commissions, brokerage, and taxes.
Check for rolling returns over different time periods. This will ensure that the performance is realistically viewed, rather than get impressed by recent performance.
5. With a new advisor, won’t I be saddled with too many people I need to talk to?
Yes, having just one person who is a trusted advisor and who performs well is the best thing to have. If trust and performance are both assured then there is no need to have more than one. Sadly that is not the case for most people.
The electronic Consolidated Account Statement (e-CAS) provided by NSDL pulls all your folios and demat accounts together for one simple view. In case of family succession planning and continuity, the e-CAS is a very handy tool. You need not to be dependent on the bank or wealth manager to just know what is where. This also makes it easy to migrate to a new investment advisor and hence reduces the burden of tracking things.
6. Has the advisor suggested me to buy close ended funds?
If your Investment advisor shows interest in you buying unknown stocks, penny stocks, series funds or closed ended funds, then it is a warning sign. Such instruments have high risk or front loaded fees which reduce your investment corpus even before the clock starts.
7. Has the advisor suggested me to buy NFOs?
New Fund Offerings are launched by fund houses to show something new and entice clients to invest more in their funds. However, there is no track record to see how they are performing vs the peer group or the benchmark. Besides these are also pushed hard by adding sales incentives that reflect in higher expense ratios. A trusted advisor would wait to see how a fund performs and once there is clarity on that, see what kind of portfolio they are investing in and then consider them.
8. Have they advised me to reduce equity exposure when markets are expensive?
A distributor who goads you into buying more and more equity may be interested in the high commission or brokerage payout they get. Debt funds pay much less. I actually heard this from a reputed ‘wealth advisor’ whom i will not name: “End of the day we have to run a business”. Not surprising; these businesses also cost a lot as they have to maintain high bonuses, expensive office space, large sales force etc.
9. Will my advisor change without my knowledge and will I be forced to work with a new/unknown person?
This is the bane of dealing with most banks and larger distributors. The ‘wealth manager’ generally sticks around for an average of 18 months before they move on to a different division or company. This breaks your relationship cadence with them, even if the senior comes in and promises that a new person will be there to take care of things.
10. Does my advisor promote products from the same group?
I have seen portfolios, that had 40% or more mutual funds from a fund house promoted by the bank or institution. While they may make efforts to appear objective, anything above 25% is not in your best interest.
11. Does my advisor have targets and is he or she under pressure to meet targets?
You will get to know if there are calls at the end of a quarter to make some additional investments. They may even appeal to make a favor; after all, he is just an employee.
While one must definitely help a young person climbing the corporate ladder, one must also pause and look at the big picture to see if there is a pattern to the whole thing.
12. Does my advisor or his group ever recommend ULIPs / insurance mixed investment products to anyone?
I can count this from my personal experience. Years ago, a wealth advisor from a large bank’s Securities arm pushed me hard to buy certain opaque products. When I resisted, I was asked to buy a ULIP citing that it is very convenient to switch from debt to equity ‘free of cost’. That was the turning point for me, making me realize how deep this problem really is, and how much of investor wealth is getting diverted.
While savvy investors may not be succumb to such products, it is worthwhile to consider if the firm makes any such pitches to other clients. This could reflect on the culture and target setting prevalent there.
Conclusion:
Ultimately, a portfolio has to be managed professionally and honestly. Better performance on your portfolio will add to your satisfaction, and help allocate money better to society. Check for the SEBI Registered advisors in Hyderabad and take a judicious call.
Happy Investing!
