• Ankur Kapur, CFA, CFP

Where to find trust worthy financial advisors?

Some investors want to work with ethical and professional advisors, who are well qualified to understand the nuances of investment products and have a deep understanding of asset allocation. It’s extremely important to know who is your suitable financial partner.

Investment Advisor

Post India’s liberalization, it has taken almost three decades to create a massive size ‘mass-affluent’ section in India. These are investors who have annual income levels between 50 lakhs – 7 crores.


Like any other capitalistic reform, this has also led to a wide income gap. On one side, we have people who can’t have 2-times meal per day and on the other hand, we have people who travel to foreign destinations over the weekend. This gap is bound to increase due to the capitalistic nature of liberalization. We will continue to add more and more people in ‘mass-affluent’ section of society.


Often the first asset bought by this group is a ‘real estate’ for consumption. Based on my experience, it usually takes 5-7 years for them to pay off the home loan and get serious about investing. Depending upon the business cycle their asset class preference would wary. If the markets are doing well, they want to invest in equities and if markets are doing bad they want debt instruments. Rarely, they would take on another loan to buy a second property.


Three decades back, it was hard to imagine someone being debt-free in their early 40s. The primary reason was that income levels were low and the majority of working life was spent servicing a home loan and kids’ education with some amount left for retirement. Even with low-income levels, earlier generation was able to save because their lifestyle expense was limited.


A traditional insurance policy or even a mutual fund is NOT sufficient to meet the needs of ‘mass affluent’ investors. Note that the reference is not for first-time investors who have just started working. Mutual funds can work as an effective way of getting started for the retail investors who have a monthly surplus of less than Rs 1 lakh.


However, when the income level increases 2x or 3x of the expenses, there is a need for planning. This will ensure that all the important financial needs buckets are getting filled. This also ensures that these individuals can achieve financial freedom much earlier in their lives than traditional retirement age.


There are a variety of financial advisory or financial planning firms that have emerged over the last five years. You may not find these firms or individuals in small-town but most of the big cities such as Bangalore, Gurgaon, Delhi, Mumbai, Pune, Chennai etc. have plenty of options. CFAs/CAs/CFPs are all relevant qualifications but these individuals must be SEBI regulated as well.


Although trust is established over some time. But there are ways to assess whether their working style matches your financial needs.


1. How does the advisor get paid?

A fee-only advisor will be paid by you and does not get commissions for selling products. A fee-based advisor makes money off the products they are recommending and get paid by asset management companies. There should not be any difference in the quality of advice from an ethical fee-only or a fee-based advisor. However, to avoid complete conflict of interest with your objective, a fee-only advisor may be preferred.

Most of the banks are product pushers and may not qualify as either fee-only or a fee-based advisor. A relationship manager (RM) typically gets paid based on their quarterly/annual sales target and may not look out necessarily for your interest on an ongoing basis. Alignment of interest is critical for a long-term successful relationship.


2. How will your relationship work?

A good financial advisor will tailor advice to you based on your needs, rather than on his perspective of how to invest. Ask the advisor how he thinks about managing his own money. That way, you can be on the lookout for strategies that are too aggressive, too conservative, or too complicated for your personal needs.


Advisor stating that they will achieve a certain return without considering your financial situation is a red flag. Advisor providing strategies on making short-term gains is a problem too.


3. What’s the investment philosophy?

This will give you a perspective on whether an advisor has relevant experience in dealing with your kind of financial situation.

4. Who are your typical clients?

This will give you a perspective whether advisor has relevant experience in dealing with your kind of financial situation.


5. How will you invest my money?

There is no “one size fits all” strategy for investing, but there are still some very good guidelines that smart investment advisors will follow when building your plan. They will tailor a person’s investments to several factors important to that person, including:


Age - Investments appropriate for a retiree don’t always make sense for a 30-something (and the reverse is true, too).


Risk tolerance - No matter what the potential return, if you’re not comfortable holding a position because of its risk, it’s not the right one for you to hold. On the flip side, if your advisor is going to be too conservative for your needs, it could cost you in potential long term returns.


Investing goals – Advisor must consider your needs and pay close attention to meeting those goals.


6. What asset allocation will you use?

Asset allocation is the key and is the single most important aspect of portfolio management. What is the methodology used by an advisor to arrive at the asset allocation? There is a room for a lot of investment options, the key question is in ‘what proportion?’.


7. How often would you rebalance the portfolio?

After asset allocation, rebalancing is the next important step for successful portfolio management. If the advisor does not have a sound framework around rebalancing the portfolio with minimal buy/sell of the investments, then the potential result is not optimized to take advantage of the market dislocations.


8. How will you manage my accounts for taxes?

An advisor should be able to help you analyse the tax aspects of any proposed investment.


9. How often do you buy/sell products recommended in the portfolio?

An advisor should not be buying and selling frequently. Minimum holding period should be three to five years for any investments (barring any unforeseen circumstances) to avoid transaction costs and potential tax outflows. A financial advisor should not be frequently asking you to add new investments in the portfolio.


10. How do you measure success?

A strong financial advisor will measure success based on how well your plan is progressing against the goals you laid out when you set it up. That advisor should also be willing to share how you’re performing against a relevant benchmark that depends on your timeline and risk tolerance for those goals. If your performance is significantly off track vs. your goals or the benchmark, that advisor should be willing to work with you to come up with strategies to try to get you back on track.


For your more immediate needs or if you’re not comfortable with the volatility of a stock-heavy portfolio, a more conservative benchmark should be used. “Am I keeping up with inflation?” might be the right benchmark for the money you expect to spend in the next few years, for instance.


These pointers can get you started to evaluate your financial advisor. Options are plenty and growing, not all will fit your requirements. Do your due-diligence before you engage with any financial advisor.

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