When we approach professional advisors for help with managing our money, our most basic expectation would be that the engagement makes a material difference to our financial wellbeing. Therefore, we tend to set lofty standards when judging the calibre of the results achieved by our advisors over the course of the engagement. But, we often forget that as clients, we too play a vital role within the engagement. Therefore, it is vital for us as clients to play a more active role during our advisory engagements so that we always have access to the right quality of financial advice. Therefore in today’s post I’m going to share a set of pointers that we need to be wary of before getting into and during an advisory engagement, so that our advisory experience matches our individual expectations from our engagement.
The first thing to take care of when looking to work with a professional advisor is to understand the evolution and current state of investment advisory services and the advisory ecosystem in India. Going back 4-5 decades to the 1970s and 1980s, the concepts of investment advisory and financial planning were largely unknown and non existent in India. Back then, the most popular investment products included bank deposits, pension schemes and insurance policies. Therefore, most individuals of that era had to work with bankers and insurance agents to gain access to those products and the associated counsel. A few decades later in the mid to late 1990s and early 2000s, stocks and mutual funds began gaining mindspace among investors. As a result, people also began turning to stock brokers and mutual fund distributors to meet their needs for advice. But there was one common problem with the services offered by all these intermediaries. They all had their own products to sell, and so they simply pushed the products that were most profitable for them without much concern for the investors' interests. It also meant that there was minimal specialisation, if any, in the advice imparted. This lead to the advent of Independent Financial Advisors (IFAs) who offered specialised advice in exchange for a commission on the products they sold. But the commission element again left scope for conflicts of interest as advisors would only push those products which fetched them the highest commissions. All of this changed with the advent of SEBI Registered Investment Advisors since 2013. It paved the way for fee only financial planners who charge a fixed fee for their time and don’t sell investment products to their clients. It has made the advisory practice a lot more transparent for investors while ensuring that they recieve highly specialised and cost effective advice that caters to their needs. So it is clear that investment advice has evolved from being generic to being highly specialised and individual centric over the years.
The next aspect we need to have clarity on is our own competence and level of knowledge with regard to our finances. This would give us a clear understanding of what our advisory needs are before looking for an advisor and entering an engagement. If we are able to devote enough time to our finances and are financially savvy, our main requirement when working with advisors would be a professional and objective second opinion on the way we manage our money. This means that we would need our advisors to work with us on a much more strategic level, rather than looking for them to simply recommend a set of investment products for our portfolios and managing the same. Such an engagement would involve creating a more robust structure for our finances to protect the wealth we may have already created and build on it in the future. This may also involve creating a channel for us to transmit our wealth on to our families and/or chosen charities through the creation of a trust or a legally registered and enforceable will. So in such a case, our advisors would need to go beyond the stereotypical role of an advisor and play the role of organisers and facilitators.
If on the other hand we do not have the kind of knowledge or the time required to manage our finances ourselves, our advisory needs would be completely different. In such a case, our advisors would need to handhold us from the beginning and help us with everything right from helping us set our financial goals to budgeting and setting up systems for cashflow management, assessing our insurance needs, deciding our asset allocation strategies for various goals and then ultimately helping us create and manage our investment portfolios. Therefore the role of our advisors in such a case would be a lot more traditional. They would initially play the role of partners and educators before ultimately transitioning into the role of facilitators. Clearly communicating our advisory needs right at the beginning of our engagement would mean that our advisors would clearly know what is expected from them over the course of the engagement right from day one. This would automatically contribute to improving the quality of our experience over the course of the engagement.
The quality of investment advisors, the advice they impart and the regulations that govern the advisory ecosystem have certainly improved over the years. But there is still a lot of ineffective and unscrupulous advice available. Being able to spot bad investment advice is therefore vital for clients to have a satisfactory advisory experience. And to be able to spot unscrupulous advice, we as clients must first educate ourselves on the basic features of the most widely propagated investment products and categories, as well as the reasons for investing in them. Let us take life insurance for example. The basic reason we purchase life insurance is so that our financial dependants do not have to face a financial crunch caused by the loss of our income in case of our untimely death. Also, term insurance is the only life insurance product that is both cost effective and stays true to the essential purpose of life insurance, since it acts a pure risk cover without a return component. Now, let us say that an advisor asks a 75 year old client who has retired having no financial dependants and all his financial affairs in place and to buy an endowment life insurance plan. There are problems with this piece of advice on multiple fronts. Firstly, a non term plan is being recommended to the client. Secondly, most (if not all) endowment policies neither provide adequate life cover relative to the premium payments they involve, nor do they generate returns that are worth mentioning (effective returns of 3-5% over the course of the policy). And most importantly, the fact that the client has retired, has sufficient financial stability, and has no financial dependants means that there is neither an income nor dependence on it. Therefore, the very need for life insurance in such a case is completely negated. Entering an engagement with a basic level of financial literacy would therefore alert us to potentially unscrupulous advice over the course of an engagement. Also, if our advisors try to sell us a product or idea we find hard to understand without educating us with the rationale behind the call first, we must take it as a telltale sign of unscrupulous advice.
The essential takeaway from everything that has been covered so far should be that we as individuals looking to begin an engagement with professional advisors have an equally important role to play as their advisors in ensuring a fulfilling advisory experience for ourselves. We need to have a clear understanding of the current state of the advisory ecosystem so that we have a reasonable idea of what to expect from an advisory engagement in terms of the mode of service delivery and the relevant costs involved. That would allow us to pick the right kind of advisor for our needs. We must also be clear on what our advisory needs are and clearly communicate the same to our advisors so that they know what is expected of them right from the beginning of the engagement. This would allow our advisors to play the right advisory role effectively. Today the advisory industry is highly evolved and investment advice delivered focuses on being highly specialised and client centric. Also, the advisory system is stringently regulated. So there would always be competent and relevant advice available, provided we look for it in the right places. But this does not mean that unscrupulous advice has been eliminated from the system completely. Therefore, we must ensure that we bring a reasonable level of financial knowledge and nous to the table, so that we are able to identify and protect ourselves against unscrupulous investment advice. All of this would ensure that we have access to the best investment advisors and advisory experience in light of our needs.