How to choose a financial advisor

To select an investment advisor, there are a few things one must be aware of first. So, let's start with the very basic.

Who are Investment Advisors and what they do?

Investment Advisors or Financial planners advise clients on how best to save, invest, and grow their money. They can help you tackle a specific financial goal — such as readying yourself to buy a house or planning a vacation to an exotic destination — or they could give you a macro view of your money and analyse the interplay of your various assets in your portfolio. The best investment advisors help you plan for your advice you on a range of financial matters.

Don’t confuse planners with stockbrokers — people who call to trade stocks, or with an accountant who can help you lower your tax bill, insurance agents who might be selling to you different complicated insurance policies, or the person at your bank urging you to buy mutual funds. A financial advisor is someone who will help you create more wealth along with reducing financial risk over the long term. They can give you a game plan that puts you on track to achieve your financial goals.

Financial advisors don’t come in a one-size-fits-all package. They get different degrees and certifications. They come from diverse backgrounds and offer a wide range of services including explaining to you confusing jargons and helping you pick mutual funds.

In Simple terms, an investment advisor will help you with all types of investment planning. That means they can help you with everything from budgeting to saving for retirement.

Why you need an Investment Advisor?

Hiring an investment advisor is equivalent to hiring a Chief Financial Officer (CFO) for you and your family. You want to use a disciplined process to find someone who you can work with for many years. Finding the right person or firm may take some time, but this investment of time will be well worth in terms of your peace of mind once you realize you made the right choice.

Most people believe that they can manage their money completely on their own, which is similar to repairing your broken car on your own. In both areas, doing it yourself is a brilliant idea for some, and a flawed plan for many, many others. Mastering personal finance requires many hours of research and learning. For most, it’s not worth the time and ongoing effort.

As you get older, busier and wealthier, your financial goals – and options – get more complicated. The investment advisor can save you time and can help you remain disciplined about your financial strategies. A dedicated advisor will make the moves for you or badger you until you make them yourself.

Types of Investment Advisors

Some financial advisors offer financial planning services and not the investment management services, while some manage investments but can’t help you much in financial planning. Some have expertise in retirement income planning. Whereas others focus on wealth accumulation — for folks who won't be retiring for another ten or twenty years.

There are several different types of advisors with various titles, designations, and certifications but here are the ones to know:

Certified Financial Planners (CFP)

A CFP is an individual who has cleared all the CFP exams and has met all of the requirements of the Certified Financial Planner Board of Standard, which includes a minimum of experience. CFPs also have to complete continuing education requirements to maintain their CFP status. CFPs generally have a broad knowledge of financial planning, including retirement, insurance, investment, taxes, and estate planning. However, the CFP designation does not guarantee that they are an expert in all area; generally, they are specialized in a particular area of financial planning.

Registered Investment Advisers (RIAs)

An RIA is a firm or an individual that is registered with a State regulatory body, such as the Securities and Exchange Board of India (SEBI).

Stock-Brokers

These advisors represent the brokerage firm which has the license to sell securities (i.e. stocks and bonds)". They are usually referred to as "full-service brokers", because they (as well as the analysts) do all of the trading, advising, and analysis for the client. They typically charge brokerage on the securities they sell. Also they get commissions or fees from mutual funds.

Insurance Agents and Bankers

They are neither investment advisors nor financial planners but they can be licensed to sell mutual funds, stocks, bonds, and/or variable annuities that can be used as investments. Insurance companies and Bankers can also provide financial planning services.

What Type of Investment Advisor is best For You?

To select the best investment advisor for your situation you need to know what type of financial advice you need, and what services a potential advisor provides.

If you only need some basic advice on investing, and nothing complicated then you may benefit by using a brokerage firm. They get paid commissions but are usually reasonable.

Make sure that your broker withholds the suitability standard. They recommend and sell only those investment types that are suitable for you and your goals. However, it should be noted that brokers are not legally bound to provide you the best or least expensive investment types. Also, brokers usually recommend load funds or funds with higher expense ratios comparing to market, the reason being their preset commissions with the fund houses. This can lead to a conflict of interest.

If you want unbiased investment advice or help with your ongoing financial planning, your best option could be a Registered Investment Adviser. This is because, you will pay them and advisory fee. This way they would suggest financial products that are best suited to your needs and not because they receive high commissions from the fund houses.

RIAs are required to uphold a fiduciary standard of care, which is more expansive than the broker's suitability standard. In different words, an RIA is legally required to put the interests of the client ahead of his or her own. You'll pay ongoing fees to the advisor and in turn a good RIA can save on expenses by investing in products like low-cost mutual funds, which are often the best-performing funds.

In the end, whatever advisor or planner you use, it is wise to use one with a certification, such as a CFP or similar discribed above.

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Things to keep in mind while hiring a financial advisor

1. Education, Qualification and Certification

Review your advisor's educational background, qualifications, and experience, to learn how is he different from other advisors. In particular, seek advisors who have demonstrated that they can actually apply their knowledge to develop an optimal strategy for you.

An advisor's website and opinion articles can be a good starting point to learn about their qualifications, investment style, and thought process. You can get detailed information on independent advisors registered with their states or the Securities and Exchange Board of India (SEBI). Also, try to glean what steps an advisor has taken to continue to increase their knowledge base in personal finance. One way to gauge this is through the various certifications they may hold. Specifically, take the time to learn about both the upfront requirements needed to attain a certification and the ongoing requirements for maintaining the designation.

For example, the Certified Financial Planner designation (CFP®) is considered the gold standard in financial planning circles. To get the CFP® designation, planners must take extensive, specialized coursework, pass a six-hour exam, and accrue three years of relevant experience. Every two years, members must complete at least 30 hours of continuing education.

Other common designations include Certified Public Accountant (CPA) and Enrolled Agent (EA), for planners that may specialize in accounting and taxes, Chartered Financial Analyst (CFA), for advisors that specialize in portfolio management and investing, and the Accredited Financial Counsellor (AFC®), for advisors who may focus on financial coaching and counselling.

2. Fees and Conflicts of Interest

Identify how an advisor is compensated to gain a better understanding of their potential incentives and conflicts of interest. Typically, advisors are paid through 1) client fees ("fee-only"), 2) commissions or 3) a combination of both ("fee-based").

So from now on, if you interact with someone calling themselves a financial advisor, make sure you understand how they are being compensated. More conflicts of interest arise when commissions are involved. It becomes harder for the advisor to stay independent and put client interests ahead of their own.

Advisors generally use one or more of the following models for charging their clients:

Commissions: This is usually paid to the broker whenever they execute a trade. This commission works like a fee added to the client's overall trade amount. For example, if the trade is to buy ₹1,00,000 in shares of a particular stock, and the commission is ₹1000, the total trade that you bought is ₹1,01,000.
Fees: Some advisors are not compensated through commissions but rather charge fees to the client based on the services provided. Some advisors charge fees based on the annual AUM (Assets Under Management) or they would charge a one-time fixed fee for the service rendered. For example, an advisor might charge a 1.00% AUM fee. If the client's assets under management are ₹10,00,000, the annual fee would be ₹10,000 or if the client simply wants one-time financial guidance, the advisor will charge a fee that is disclosed in advance.
Salary plus commissions: Many advisors, usually employed at banks and insurance companies, are paid a base salary, along with the variable commissions based on the products sold by them.

3. Types of Clients that Advisor caters to

If most of the adviser’s clients are high net worth individuals or corporate, he may not be able to give you financial advice that is tailored to your own personal needs. You might also encounter financial planners who cater exclusively to the rich with not less than ₹1,00,00,000 to invest. Some planners prefer to deal with just big accounts rather than beginner clients. One can always look for a planner catering to his needs and thus suitable for him.

4. Plan & Portfolio Review

It is essential that your portfolio and plan is reviewed at least once a year under normal scenarios and sooner during important life stage events like birth, marriage, divorce, career change, and pre-retirement years, among others. Also, how frequently and the way communication is to take place is important. It can be discussed over the call or mail for minor issues, and in-person meets, if it requires a longer discussion over a critical issue.

5. Investment Philosophy and Returns Calculation Procedures

A proper investment strategy that is process-driven and managed by a professional team should be in place and it should be customized according to your personal needs, risk appetite, constraints, and goals. The investment adviser should be able to ensure that the overall portfolio delivers returns that will help in reaching your financial goals. This investment philosophy should be pre-decided and you should get an update if any change occurs in the investment procedures.

Similarly, it is important to know the method that the advisor is using to calculate the returns and to ensure that the method remains the same throughout the investment horizon. Also, the returns the adviser is promising are considered after taking into account inflation, taxes and fees. Otherwise, the inflated returns will be misleading and would not help you reach your financial goals.

6. Run a background check on your planner.

It is important to know if your advisor has ever been charged against any crime or more importantly has ever indulged in practice against the capital market. Consider this step with utmost importance and thoroughly check his past records. If he has been found guilty in the past or has any cases pending, then it is suggested to avoid that advisor.

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