Recently at a party, I met a 55-year-old woman and her grown up children. As we got talking, I learnt more about the family. Her children had studied abroad, her daughter had a destination wedding recently and the son was in a steady job for some years. Inevitably, once they got to know that I am a financial adviser, they were curious to know about the “best investments” to make. The mother had the usual traditional investments like gold and endowment policies and had currently mortgaged her property to get loans for the wedding, which was planned through a wedding planner. However, the son wanted to invest in markets but was not willing to pay an adviser. He was also circumspect of the “margins” made by financial advisers.
I was amazed to hear them say that one should not trust advisers because they only work for money. I wondered if wedding planners or brokers, through whom they invested in property, did not work for money or get fees for the services provided? Even when one buys gold jewellery there are charges like wastage and making, which can sometimes work out to be even 20% of the overall value. Why does one not question the jeweller on the high margins? I doubt wedding planners work at less than 10% margin.
Somehow, people are willing to pay fees in some form for almost everything they buy—including groceries, movie tickets (convenience fees of 10%) and flight tickets (convenience fees of 3%)—but are not willing to pay for financial advice that will help them manage the most important asset they own, their money.There are many reasons why people don’t want to pay financial advisory fees:
a) they feel that they don’t have enough money to be managed by an adviser,
b) they are confused and not sure about what the adviser is recommending,
c) they don’t know where to cross-verify what the adviser is saying, and
d) given that most individuals were investing in traditional instruments, they don’t see the need for an adviser.
The main issue, however, is that only a few have made market-related investments and have little understanding of the same. Most people do not know how to assess the suitability of a financial product for their portfolio and neither do they know what are their portfolio returns. Though many believe they are planning their finances, seldom do people really create a formal financial plan or even execute the same.
In my sessions, I have seen that for most participants financial planning is about choosing instruments based on what friends are investing in or comparing fund recommendations on a couple of websites and choosing the common suggested funds on these sites. Nowhere is there a structured approach to planning investments.
Given that returns on traditional investments are no longer attractive and market-linked instruments are the only option to beat inflation, financial planning has become even more important. Hence, people need to change their attitude towards financial advisers.
Identifying a financial adviser who will suit you is not an easy task. There are advisers who work on commissions and those who work on fees only. Advisers could be from banks, financial institutions or be functioning independently. In my opinion, independent advisers are the best as they are in the business for the long term and hence come with more stability and optimal advice.
To start, one can check with family, friends or colleagues if they have been using an adviser whom they could recommend. There are also some sites that provide a search on advisers by PIN code. Once a connection has been established with an adviser, an initial background check is recommended. This would include checking:
Work experience: How long has she managed wealth of clients? It is advisable to choose one with at least 10 years of continuous experience as a financial adviser. This way, she would have experienced various market cycles.
Types of clients handled: Is the adviser is handling similar net-worth clients?
Style of management: If you have come to the adviser through a reference, check how proactive she is. If the adviser is recommending frequent changes in portfolios, one must stay away.
One should also clearly ask the adviser how she is getting paid. No one works for free. If they are not charging fees, then it is built into the product being bought. If that is the case, ask the adviser how much goes towards commissions. As such, fees between 0.5% and 1.5%—depending on the asset class being invested into—should be reasonable. ‘Fee only’ financial planners are preferrable.
Finally, before staring a relationship with an adviser, it is important for individuals to be informed investors. For this, they would need to spend time educating themselves on personal finance.
For example, before investing in a house one tries to find information about the lucrativeness of the property. It’s the same when one has any high-value purchase like a gadget. People spend time reading about the features and comparing various brands.
To get over the issue of not being sure about the adviser’s recommendations, it is advisable to learn the basics and be clear about what type of products one wants to start investing in. No one would want to be in a situation like mystery novelist Martin Cruz Smith, who said, “As a novelist, I tell people stories and they give me money. Then financial planners tell me stories and I give them money.”
Mrin Agarwal is financial educator; founder director, Finsafe India Pvt. Ltd; and co-founder, Womantra
Original Source:
*Photo credit: iStock
Source: Article written by Mrin Agarwal in Livemint on Apr 27, 2017
Original article link: https://www.livemint.com/Opinion/OjjuHWD8wvQvs9Deozxe8M/If-you-pay-fees-for-everything-else-why-not-for-financial-a.html