First of all let us understand who is a Financial Planner. Financial Planner is the person who does Comprehensive Financial Planning for the individual which includes

  • Insurance planning both life and health
  • Retirement planning
  • Goal based Investments in different assets classes mainly in Equity and Debt.
  • Children education and marriage planning
  • Real estate management
  • Debt Management etc.

Till last decade common man relates a word advisor to Insurance advisor/Agent only, who sells Insurance products. Then came Mutual fund distributors who sell regular plans. The main thing to consider here is that these persons are attached to the particulars Insurance company/companies or AMC/AMCs. There main objective was to earn commissions received from the particular products.

As the model is commission based lot of miss selling has been happening since long. Only those products were marketed and sold to the customers where agents we’re getting huge commissions. If you look at the insurance products our parents were having are mostly traditional insurance policies such as money back, endowment plan, whole life plans where insurance and Investment are mixed. Commissions received from these traditional products were huge. But whether customer’s need was satisfied? The answer was No. Big NO. Returns from these traditional polices were very less sometimes less than inflation and customer was under insured as he may be able to pay huge premiums for higher sum assured. Same pattern was found in mutual fund distributors too. Dividend payout options were suggested to customers even if not required, sectorial or thematic mutual funds were sold without checking the risk taking ability of the clients. At the end Customer was at loss as his Interest was not taken care.

In 2013 SEBI came with the Investment Advisor Regulation which has introduced a new version of the Investment Advisor that is RIAs i.e. SEBI Registered Investment Advisor who works as Fee only Investment Advisor. He/she will act in a Fiduciary capacity towards its clients and shall disclose all conflicts of Interests as and when they arise.

The main purpose of introduction of this regulation is to protect the interest of Clients. RIAs have to keep arm length distance with distribution channels and their only earning is from the Fees clients pay. They won’t receive any commissions from Insurance companies or Mutual fund AMCs or any other entities. So the advice given by RIAs are totally unbiased and customer centric. They sit with the customer side of the table not the other side/ front side of the table. It means all the suggestions provided will be purely based on keeping customer’s interest on upmost priority and each and every suggestion will be personalized keeping individuality in mind.

It is always better to hire SEBI Registered Investment Advisor(RIA) as your financial planner who has a valid license from SEBI to work as Investment Advisor or Financial Planner.

How do they prepare client’s financial plan?

  • First of all Investment advisors collect all the information pertaining to client’s existing investments in different asset classes, their life goals, their existing insurance policies, their expenditure pattern etc.
  • They access client’s risk profile by analyzing the answers stated on risk profiling questionnaire by their clients.
  • Financial Planners main job is to help client identify their goals, priorities them according to their investible surplus. Investment advisor arrive at the future cost of the goals after taking inflation into account.
  • They suggest their clients suitable financial products according to their risk taking capacity and time frame of these goals.
  • Investment advisor support their client for full one year of their engagement for any financial queries.

Understand these important points:

  • SEBI RIAs mostly prefer investment in equity through mutual fund route only. Most of the RIAs don’t suggest any direct equity to the clients. Investing in equity mutual funds through SIP is the best option available to create long term wealth.
  • RIAs do careful study of individuals profile pertaining to his/her age, occupation, income, family responsibility and risk taking ability while suggesting appropriate Mutual fund SIPs based on historical data.
  • But their suggestions are based by thorough study and analysis. It can not be compared with random advice by a friend or a relative.
  • He/she doesn’t tactically change asset allocation based on market situation. Their decision doesn’t depend upon short term/daily fluctuations in the market
  • He/she doesn’t frequently review the financial products suggested to the clients. RIAs don’t entertain clients’ urge to change funds in very quarter.. Frequent churning of the portfolio is not advisable.
  • Good Investment advisors always try to manage the downside risk rather than maximizing the returns for customers. So they don’t suggest very risky financial products even if client is ready to venture it out.
  • SEBI RIAs doesn’t try to generate optimum return by suggesting fancy financial instruments. Good RIAs always encourage clients to expect reasonable rate of return from their investment.
  • Last but no least Investment Advisor does not guarantee the returns earned on the investment especially equity investment made by the customers on their advice. Nobody can predict the market. Nobody can time the market. Not even RIAs or any market expert.

So if your Investment Advisor don’t do the listed things, you are in the safe hands or else you need to change your advisor. As above mentioned things do not necessarily needed in Financial Planning.

Trust them. Have faith. Ask them questions if you have any doubts. But be stick to your investments. Do not stop in between. Keep invested till your goals are achieved.

Trust them. Have faith. Ask them questions if you have any doubts. But be stick to your investments. Do not stop in between. Keep invested till your goals are achieved.