“I would suggest you invest your savings amount into this new mutual fund that’s been launched – it’s a credible company, and the fund has high growth prospects”. Have you heard your family’s financial advisor say this? If you have recently decided to invest, but have no clue about how investment products work, you would be inclined to accept such financial advise readily. But there are five questions you should always ask your financial advisor.
Most of us have felt unsure about making investment decisions based on an agent’s advice. At times it is out of sheer laziness and disinterest in managing our money. But mostly it is because we don’t know what are the right questions to ask.
To top that off, there is no single agent for our multiple financial needs – an insurance agent for insurance, a broker for stocks, a banker for mutual funds and loans, not to forget, a friendly ‘neighbourhood’ advisor who has a new tip every week. While every investment product has its unique features, how does one find the ‘right match’? It starts with the five questions you can ask your financial advisor to understand if they are truly putting your interest first.
1. Are you a fiduciary?
The financial industry is crowded with ‘agents’ (over 20 lakh insurance agents and over one lakh mutual fund distributors) – not ‘advisors’. How are they different? Well, advisors charge a fee for their advice, which ensures they offer unbiased advice customised for you, while agents offer ‘free’ advice and earn a commission from the products they sell. Imagine visiting a doctor who offered ‘free’ advice, but was earning only through their prescriptions. They would be tempted to offer the highest commission medicines.
A ‘fiduciary’ is a Registered Investment Advisor (RIA) in India, who is mandated by law (SEBI) to put the client’s interest first – and hence, not allowed to ‘distribute’ any financial products. They offer unbiased advice, based on customer requirements since they are not allowed to earn from the sale of any specific products.
2. What are your fees and do you earn any commissions?
Next time your banker pitches in a new investment product, feel free to check how much commission would they be making on it. No, it’s not rude. In fact, it’s a mandatory disclosure required by regulators to ensure greater transparency in the financial industry. If your agent is reluctant to answer, simply check on the bank website for commission disclosures.
Below is a sample of the general insurance commission disclosure by ICICI bank on their website. This transparency is critical to ensure your agent is working in your interest, and not theirs.
3. What is the risk involved in this product?
While making investments, we tend to get lured simply by the high returns. After all, who doesn’t want to get rich quick? The overlooked truth is that return and risk are two sides of the same coin. ‘High risk, high return’ is the secret of making the right investment choices for yourself.
Ask your advisor not only about the best returns, but also the worst returns made by the product over the last three year, five years, and 10 year periods. Ask them how these poor returns have compared to other products in that category. Ask whether you could lose 100% of your investment – yes or no? Check on the credibility and years of experience, which the company offering the product has in this line of business.
An experienced and well-intentioned advisor would carry out a ‘risk profiling’ exercise before recommending any product. This exercise helps the advisor to identify your unique risk-taking ability, given your current life-stage, your existing investment profile, your understanding of financial markets etc. Someone who is 24 years old, with no family responsibilities, earning a high salary might have a higher ability to take on risk in their investments compared to someone who is nearing retirement or has familial dependents. Each of us has unique financial needs – which is why to get the maximum from our investments, our financial advice needs to be tailor-made to those unique needs.
4. When should I exit these investments?
Most of us are enthusiastic about making fresh investments, including our agents. We regularly get advice on being disciplined and systematically investing every month, and so on. But how do we know when to exit? After all, every investment must have an end goal. More than timing the market, the focus must be on exiting to meet our goals. An experienced advisor would start with your financial goals – what do you need the money for and when do you require it. They would not only have a plan for your entry but also a plan for when to exit and how.
Ask your agent about their approach towards exiting an investment. Do they suggest a staggered exit? Do they have a plan for your monthly income needs? Do they suggest you stay invested in high-risk products as you near a critical goal like your child’s education fund? The right answer would be the one which is logical, based on past data and appeals to your situation.
5. How frequently will we review these investments?
Change is an inevitable part of life, and it is no different when it comes to our investments. Having an advisor who is accessible and has a pre-decided review calendar for your investments is a must. Ask your advisor about when they suggest conducting the next review of your investments. Ask them to block a specific time slot – either quarterly or every six months – to discuss the progress of your portfolio.
We might slack in periodically reviewing our portfolios, but it’s the job of a good advisor to keep us updated through regular portfolio statements, sharing market updates, and proactively connecting about any regulatory changes which could impact our investments. Clarity on review plans would ensure that a long-lasting relationship is built with the advisor.
Having a good financial advisor, just like a good personal trainer, can make all the difference to our financial health. However, if we don’t know what we need from our advisor, it can be impossible to find a suitable advisor.
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