In a recent article, we shared 3 simple approaches that can help you determine whether you need a financial planner/advisor. But once you decide you need one (or already have one), how do you know whether he or she is giving you your money’s worth, if not more?
Personal Finance advisors who manage money range across a broad spectrum of names. A few of these are Financial Advisor, Investment Consultant, Wealth Advisor, Financial Planner, Relationship Manager, etc. Unfortunately, while there are certifications and qualifications* that can help customers determine whether the advisor is actually an “expert”, the awareness about these are very low and the average customer has no clue about these.
* Some (but not all) of these qualifications are CFP (Certified Financial Planner, issued by Financial Standards Planning Board, USA), CWM (Chartered Wealth Manager, issued by American Academy of Financial Management) and RIA (Registered Investment Advisor, issued by SEBI).
So, how can a customer determine whether the “advisor” is qualified to give him advice and is experienced enough to be able to manage his investments? Here are 3 easy ways for you to check whether the financial advisor is right for you.
- The advisor asks you “What’s the goal/purpose for the investment?”
In our experience, most retail investors start investing as and when they have savings, based on advice that they get from whoever they know. Many a times, they discover the need for an advisor when there is a “penny-drop” moment in their lives, usually due to some realization eg. need to plan for child’s education, lost a significant sum of money in some investment, etc.
- In either case, a genuine advisor will try to understand your goals and aspirations. Money is usually itself never the purpose (for investing), it needs to be put to good use to achieve some personal milestone for you.
- It’s the job of a good advisor to understand your current financial health, and where needed, suggest re-structuring for your existing investments to align with your goals
- Lastly, a good advisor will prioritize your goals and create an overall financial plan for you, that will act as your financial road-map
- The advisor says “I need to know more about you to suggest the right investments”
While the phrase “every customer is unique” sounds cliched, it is something that definitely needs to be borne in mind when it comes to personal finances. Your personal experiences with money, along with your financial health determine your risk-profile which, when combined with your goals, makes you unique.
- A good advisor will spend time understanding you and your personal experiences with money, so that over time, he is able to address your fears and concerns about money.
- He will help you understand your risk capacity (your financial ability to take risk) and your risk tolerance (the risk you are willing to take basis your personal experiences/biases), which together form your risk appetite
- He will then suggest the right “Asset Allocation” as per risk profile and accordingly invests across asset-classes, while keeping in mind your goals. He will also come back to tell you basis your risk profile if some goals are unachievable, unless you are willing to take some higher risks
- The advisor says “I charge a fee, my advice is not free”
For us as advisors, one key moment when we know that a customer may not be suitable for us, is when we talk about fees. Quite a few customers balk at the idea of paying a fee, understandably so, when there would be many so-called “financial advisors” who don’t charge.
- A good financial advisor is as much a qualified professional as a respected doctor, lawyer or chartered accountant is. He therefore charges a fee for his time and advice
- That said, a good financial advisor also clearly explains the value that he would be able to deliver for the fee that is getting charged, so that the customer understands clearly what he is getting
- Lastly, a good financial advisor operates in a structured manner – recorded/documented conversations, in-writing recommendations along with rationales, periodic reporting and pre-planned financial reviews, all of which mean that the number of hours that the advisor puts in for you behind you is far more than the mere conversations that he has with you
So, next time you feel the need to hire a financial advisor, and are short-listing one, understand how many of the above boxes does he or she tick? Alternately, use the above to understand for yourself whether your current financial advisor meets the grade, or do you need to find a new one.
Image Credit: Tim Graf, Unsplash
Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.
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