Do you need a Financial Advisor

Who is a financial advisor?

Financial advisor is a person who help investors in undertaking investmentdecisions to achieve a desired goal.

There are generally 2 types of financial advisors – mutual fund distributors and registered investment advisors (RIAs). Mutual fund distributors are registered with AMFI and sell mutual fund products to investors. They get a commission from the Asset Management Company and usually do not charge any fee to their customers. RIAs are registered with SEBI who offer investment advice to investors. An RIA may offer a broader basket of products to investors including mutual funds, PMS and other products. Unlike mutual fund distributors, RIA charge fee to their customers for the services rendered.

Do you need to have a financial advisor?

If you are an evolved investor and are confident of taking the right investment decisions, then you may opt for not having an advisor to handhold or guide you through the investment journey. Mutual funds do offer direct plans wherein an investor can invest without an advisor. However, you should consider several factors when deciding to go direct versus investing through a financial advisor. As the mutual funds are subject to market risks,investing in the wrong product can harm your financial interests. You need to make sure that you are investing in the right product that is suitable for your financial needs.

How does having an advisor benefit you?

• A financial advisor will help you with your risk profiling based on your financial situation, financial goals, your age and your risk taking ability. Knowing your risk appetite is important for making the right investment decision.


• Your financial advisor will have knowledge of different mutual fund products, their risk / return characteristics, taxation and other relevant points. He / she will be able to advise you about the right product for your specific needs.


• A financial advisor will help you in executing investment transactions like buy, sell (redemption), switches, SIP, SWP and STP etc. These transactions can be done either offline (paper based) or online. If your transactions are mostly offline (paper based) then investing through a financial advisor can save a lot of time (getting application forms, submitting forms, cheques and other documents at the AMC or RTA office etc.).


• You need to be KYC (know your client) compliant to make mutual fund investments. If you are first time investor in mutual funds, your financial advisor can help you get your KYC done.


• Patience and discipline are the two most important emotional attributes of successful investors. However, markets can be very volatile making your investment journey bumpy from time to time. Investors often make wrong investment decisions in moments of stress causing harm to their financial interests. Good financial advisors help their clients remain calm and disciplined in stressful situations.


• Financial advisors can help you track and monitor your portfolio performance and take corrective actions if required.

When should you do a DIY approach?

Direct investing has its benefits in terms of lower cost. However, there is also the risk of making wrong investment decision in absence of professional advice. Here are some pointers that can help you decide whether you can have a DIY approach:-

• Do you have sufficient experience in investing?


• Do you have sufficient knowledge of different asset classes, mutual fund products, risk profiles and return potential?


• Do you have knowledge of equity and debt markets? How they behave in different investment cycles and interest rate environments?


• Can you devote sufficient time to study capital markets and different market indicators on an on-going basis?


• Can you devote sufficient time to research different mutual fund products, compare different schemes and select the right scheme based on your specific needs?


• Can you devote sufficient time to monitor your portfolio performance objectively on an on-going basis? Do you have access to and knowledge of different portfolio performance evaluation tools?


• Are you comfortable carrying out all your transactions online?

You should be honest with yourself, when answering these questions. If the answer to all the above questions is yes, then you can invest directly. Otherwise, you should engage with a financial advisor.

What are the qualities to look for in a financial advisor?

Before we discuss the qualities of a good advisor, we will discuss a concern which some investors have. Since mutual fund distributors get commissions on schemes sold to the investor, can he or she sell a wrong scheme just to earn higher commissions? You should know that the regulations are very stringent in this regard. If a Mutual Fund distributor sells a scheme that is not suitable for the investor that would qualify as “mis-selling” which is an offence and the penalty for the same is very stringent.

Let us now discuss some basic qualities that you should look for in financial advisor since you have invested your hard earned money with him / her.

• Is he / she trustworthy: Does your financial advisor put your financial interests above any other consideration? It is difficult to judge a person based on limited interaction. You need to have a few meetings with him / her before you start working with your advisor.


• Is he / she devoting sufficient time to you: Some investors prefer to work with advisors who have fewer clients, while others prefer advisors who have large practices and many clients.Irrespective of the size of the advisor’s practice and how much you want to invest, your financial advisor should devote sufficient time in understanding your needs. Is he / she spending enough time asking you questions about your risk appetite, your investment need, tax situation etc. or is / she rushing to close the transaction? Your advisor should schedule regular meetings with you to discuss your portfolio performance / review. If he / she do not do that for whatever reason, then you should take the initiative to schedule the meetings and see his/her response. At the end of the day, it is your hard earned money.


• How honest and transparent he or she is with you: If your advisor has made a fund recommendation, has he / she explained why the recommendation is suitable for you in a language that is clear and simple for you to understand? Does he or she schedules regular meetings to review and discuss your portfolio performance? If your portfolio / schemes do not perform up to expectations, does your advisor explain the performance? A portfolio can underperform due to market conditions or wrong decisions. Advisors are also human and can make wrong recommendations. If your advisor is truly honest with you, he / she will admit if they made a wrong recommendation. They will learn from their mistake and make better recommendations in the future.


• How much your advisor does hand-holding for you: Different investors need different types of hand-holding depending on their investment experience and knowledge. First time investors and less experienced investors need more hand-holding. Advisors need to spend more time explaining investment rationale and also guide through troubled waters when need arises. Even experienced investors may need hand-holding in volatile markets. Bear markets are the true test of financial advisors. Are they responsive to your queries and concerns? A good financial advisor increases engagement in bear markets because this is the time when their clients need them most.


• How much he / she works to keep alert about all changes: Financial advisors are likely to be more informed about developments in capital markets, new products, regulatory and taxation changes etc. than average investors. Good advisors will be proactive in informing their customers about potential opportunities, risks or changes, so that the investor can make appropriate decisions.

Conclusion

In this blog post, we discussed about financial advisors, their roles in helping investors in their financial goals, pros and cons of having a financial advisor and attributes of good financial advisors. The decision to engage a financial advisor ultimately rests with the investor. If you think that you can manage your mutual fund investments all by yourself based on the points we have discussed in this post, you can opt for direct plans. However in our view, a large percentage of investors in our country, especially new investors, need the services of a financial advisor.

A final advice – you should educate yourself about investments and mutual funds even if you have engaged a financial advisor. We have discussed the attributes of a good financial advisor in this article, but unless you have sufficient knowledge yourself, you will not know whether your advisor is doing a good job or not.

Additional reading – importance of a financial advisor

Issued as an investor education initiative by HSBC Mutual Fund