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3 Mistakes To Avoid While Choosing A Financial Advisor - Outside View by PersonalFN

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3 Mistakes To Avoid While Choosing A Financial Advisor
Mar 4, 2017

Have you ever opted for the services of a financial advisor?

If you are reading this article, then the answer would probably be a "yes". You either opt for his/her services regularly or you may have consulted him/her at least once in the past.

Your financial advisor could be the next door neighbour, a close friend, a relative or even a newspaper which you follow diligently to make your financial decisions.

But has it been a thoughtful choice with thorough due diligence?

One may retort: What Due Diligence? Why do I need due diligence to hire a financial advisor?

We believe hiring a financial advisor can be challenging and it isn't as easy as hiring a plumber or a painter.

Yes, we mean it!

Why? Because...

When you hire a plumber to fix the pipe or a painter to paint your house, you would know whether your decision was wise or not in a matter of hours or days. But it isn't the same case when you hire a financial advisor!

If you pick a bad one, you may not realize it for years. You may go on relying on his/her services, until you realise that you fell way short of achieving your financial goals; without time to correct the course.

What should you do in that case? How could you spare yourself any financial heartache?


Avoid these 3 common mistakes when selecting a financial advisor and you'll be on your way to financial wellbeing.

  1. Not doing enough research: What would you do if you were to get married? Will you marry the first lady/man who comes along? Or will you try to get to know him/her better?

    The answer is a no brainer...

    Of course, you would spend time with the individual to get to know him/her better. After all, it is your life's happiness that is at stake and you wouldn't like to tie the knot with an individual who doesn't resonate with your views.


    Now that's exactly the kind of approach to follow while hiring a financial advisor!

    It is weird that most individuals don't have a set of questions to ask a financial advisor before associating with him/her. They prefer the "first come, first serve" approach when selecting a financial advisor.

    But isn't this approach completely absurd?

    How can you just park your money with an individual you hardly know?

    But then you may argue,"The financial advisor was referred by a close friend and my friend will always have my best interest in his mind".

    Maybe yes. But while a referral is the first step to building trust, it is important that you evaluate the advisor on your parameters before signing up with him/her. Questioning the advisor's approach is a smart investor's way of taking precaution and treading cautiously.But then, how would you evaluate the financial advisor?

    By asking him/her a series of questions, like a job interview that matter to you, such as:
    • The number of years of experience in the personal finance space the advisor holds
    • Does the financial advisor use technology to disseminate information? Or does he/she still follow the age-old methods of communication?
    • Is he/she a sole proprietor? Or does he/she have a professional team in place.
    • What is his/her educational qualification? Is it in-sync with prominent personal finance qualification such as the Certified Financial Guardian (CFG)? Likewise with his/her employees - are they well-qualified and experienced to guide you?
    • Does he/she use any software to evaluate a financial product? Or does he/she just give advice based on suggestions made in a newspaper?
    • How does he/she stay updated on the changes in the personal finance space? Is he/she associated with any professional organisations?
    • How frequently will he/she would review your portfolio?
    • Ask the financial advisor for at least 3 references of individuals whom he/she has serviced, and make sure to ask these references at least 3 areas where the advisor can improve his/her service. This will give you a better understanding on the respect the advisor commands among his/her clients.
    This list isn't exhaustive. However, it's a good starting point. You can add other questions to this list that you think appropriate.

    Do make it a point to check the answers of the financial advisor and see if they are in sync with what you expect.

    Make sure to flag the answers you don't understand and ask the advisor to explain these in a layman terms. Those advisors who can communicate in a simple easy to understand language, free of jargon immediately build trust and confidence with their clients.
  2. The second mistake to avoid is...

  3. Not knowing how the financial advisor will be compensated? Financial advisors in India follow any of the three revenue models:
    • Pure commission model - Here the financial advisor is compensated based on the commission he/she earns from the financial products that you invest.
    • Pure fee-based model - Here the financial advisor is compensated by the fees you pay for his advice and avail his/her services. He doesn't earn any commissions on the financial products you invest.
    • Fee + Commission model - The financial advisor is compensated by the fees you pay for his advice and avail his/her service + the commissions he/she earns on the financial products you invest.
    Now that you know the three models, have you ever wondered how most financial advisors in India are compensated?

    The most common model in India is the Pure Commission model. Most investors unknowingly prefer to associate with an advisor who follows this model.

    A naive investor believes that since he/she isn't paying any money from his/her pocket, there is no downside to associate with advisors practicing the pure commission model.

    Do you really think that there is no downside? Think again...

    It is in an advisor's best interest that you purchase/ invest in financial products that earn him/her more commissions; at the cost of your financial goals.

    These type of advisors (misrepresent themselves as 'advisors'; in fact they are nothing but agents) mostly recommend traditional insurance products for all your financial goals. After all, insurance companies do offer some handsome commissions. This vested interest leads to mis-selling.

    Now that you are aware, would you associate with an advisor who keeps his best interest ahead of yours?

    No, isn't it?

    So, ideally, you should approach a financial advisor or a financial planner or a CFG practicing on pure fee-based model.

    Since he charges professional fees (just as a doctor, chartered accountant, architect and lawyer etc.) for his/her services, in most likely case he would put your interest at fore and handle your money with as much care as he would while managing his own money. So, therefore chances of mis-selling reduce drastically.

    Always consult a SEBI Registered Investment Advisor (RIA) who are subject to audit, legal compliances, and ethical code of conduct. If they are found in contravention of the provisions laid down by SEBI, they can even lose their licence to practice (just like any other professional). You can find a list of these RIAs here.
  4. The third and the last mistake to avoid is...

  5. Associating with a relative or a close friend as your financial advisor: Yes, we recognise how controversial this statement sounds.

    Like most individuals, you trust that a relative or a close friend would be the best person to act as a fiduciary.

    After all, you know him/her since a long time and he/she wouldn't take you for a ride.

    But, that is exactly the problem while associating with a close friend or a relative!

    You let your "smart investor" guard down and that is detrimental to a healthy professional relationship and your financial wellbeing.

    When you work with a close friend or a relative, you tend to make decisions based on emotions rather than rationale. You trust blindly and don't do the much needed due diligence before signing up with them.

    Ask your childhood friend for his business history, experience and credentials etc. and he/she may take offence; fail to ask a full set of questions and you remain unsure you have the right expert.

    There is more than money at stake when you do business with friends and family. If the decisions taken by the friend or the relative do not bear the kind of results you had hoped for, you will end up losing a close relationship too.

    If you still want to go ahead with the relationship, make sure to factor in the extra value of your friendship into your decision making. Remember, you'll lose a lot more than just money if a relationship with a friend or relative turns sour.

So what is the best way to avoid all these mistakes?

Is there an online platform/resource where you can associate and compare financial advisors?

Well, there is...

We invite you to explore www.certifiedfinancialguardian.com

All the CFGs (as they are called) listed on the website have gone through an intensive program emphasising not only on the different areas of personal finance, but also on the importance and essence of developing a financial planning advisory based on the principles of ethics and integrity. Connect for the right advice.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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