“I would suggest you invest your savings amount into this new mutual fund which has been launched – very credible company & the fund definitely has high growth prospects”. Sunita was listening to her family’s advisor – but she was thoroughly confused. She had recently decided to invest her savings but had no clue about how investment products worked. She thought, “Well, everyone trusts him – let me just go with what he is saying.” Without further questions, she agreed and signed the many forms she was handed over.
Sunita is not alone. Most of us have felt unsure about making investment decisions based on the agent’s advice. At times it is out of sheer laziness and interest in managing our money. Mostly, it is because we don’t know what are the right questions to ask our advisor!
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 ‘neighborhood’ advisor who has a new tip every week!
While every investment product has its unique features – how does one find the ‘right match’?
Ask your financial advisor these 5 questions to know if they are truly putting your interest first :
- ARE YOU A FIDUCIARY?
Most of the financial industry is crowded with ‘agents’ (over 20 lakh insurance agents & over 1 lakh mutual fund distributors) – not ‘advisors’. How are they different? Well, advisors charge a fee for their advice, which ensures they offer unbiased advice customized 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.
- What are your FEES – 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. Well, if your agent is reluctant to answer, simply check on the bank website for commission disclosures.
Here 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.
- 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 quickly! The overlooked truth is that return & 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 3 years, 5 years, 10 years.
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 risks in their investments compared to someone who is nearing retirement.
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.
- 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 & systematically investing every month, and so on.
But how do we know when to exit? After all, every investment must have an end goal to meet. 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 that is logical, based on past data, and appeals to your situation.
- How FREQUENTLY will we REVIEW these investments?
Change is an inevitable part of life – 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 when they suggest conducting the next review of your investments.
Ask them to block a specific time slot – either quarterly or every 6 months – to discuss the progress of your portfolio.
We might slack in periodically reviewing our portfolio – but it’s the job of a good advisor to keep us updated through regular portfolio statements, sharing market updates, 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 the ‘right fit for us.