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When it is a question about your health, would you not ensure that the doctor you are consulting is qualified? When you want to build a nice house, would you not ensure that the architect you are consulting is qualified? When you want to get your car fixed, would you not ensure that the mechanic you are consulting is qualified? Is this the same for your financial advice?
Too many times I hear from people around me about getting their advice from newspapers, TV channels and in general tips from friends and family. While those may be good for some short-term gains, this kind of advice does not create long-term, sustainable growth in wealth. Financial planning, regular investments, long-term investment outlook, risk management, tax planning are focus areas for you to attain financial well-being. While in a full-time, responsible position and with a family, it is difficult for an individual to plan finances, research financial products, execute on investments, monitor regularly, exit investments etc. The best course is to hire a professional financial adviser.
Unfortunately, the financial industry is beset with products mis-selling, conflict of interest, misleading information and irresponsible advice. Clients have been bitten not once but many times and now they are more than twice shy! In such an environment, how do you find an adviser that understands and believes in its fiduciary duty to its clients? I have put together a list of standards that you should rate your prospective adviser against before signing him/her up for your financial needs.
Adviser Business Model
If an adviser business model is to sell products and earn commissions then the adviser will most likely not have a holistic approach. In an advisory company, there may be relationship managers who may not exactly subscribe to the products push culture but despite the best of intentions, the conflict of interest will always come in the way of providing the right advice. Preferably, look for an adviser with fee-based compensation model. If a doctor gets compensated from drug manufacturers instead of patients then would the patient trust that doctor's advice? The independence of advice cannot be stressed enough.
Whether an individual or a company, ask about your adviser's qualifications. Besides being a graduate/post-graduate in a finance related course, it is preferable that the adviser has certifications like CFP, CFA etc. Past related experience in the advisory industry is an added advantage.
Adviser Infrastructure and Support
An individual adviser (with some operational support) who acquires clients, manages the relationship, researches the products, executes on investments is exactly the situation that should be avoided. Remember, you are not the only client that the adviser has. It is physically, mentally and emotionally impossible for an adviser to provide quality services alone. The adviser should have proper sales, research, operations and execution support at the backend. Technology is all pervasive these days hence it is imperative that the adviser has proper software and analytical tools including regular portfolio reporting. Ask your adviser about the Research methodology, the tools being used and the team behind the scene. It is also important to know the physical space, the hardware and the Internet connection of the adviser for good service standard.
Optimum processes take care of the outcome. Does the Adviser have processes for financial planning, risk profiling, asset allocation, investments entry and exit, investments monitoring, portfolio reporting and regular communication? Make sure that the Adviser has established clear approval mechanisms, regular reviews, status checks and documentation maintenance.
In 2013, Securities and Exchange Board of India (SEBI) published a new regulation, Investment Advisers Regulation 2013, applicable to the Investment Advisory profession. From the SEBI website, "In terms of the IA Regulations, no person shall act as an investment adviser or hold itself out as an investment adviser unless he has obtained a certificate of registration from the Board or he is specifically exempt." The regulation specifically stipulates qualifications, infrastructure requirements, investments suitability criterion, processes for risk profiling, asset allocation and separation of advisory from execution activities of the company. The regulation is designed to protect clients' interests and clearly mentions "An investment adviser shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise". Documentation maintenance and compliance are an integral part of the regulation. Mitraz Financial was one of the first organizations to apply for a "Registered Investment Adviser (RIA)" license and was awarded the same in February this year.
If you are planning to work with a Financial Adviser then do check the various aspects outlined above. This will ensure that the Adviser provides you with quality services. You should also ask the question from your prospective adviser, "Do you have an RIA license from SEBI?" The registration provides assurance that there is regulatory oversight and you can depend upon your adviser to act in a fiduciary capacity.
The writer is the Managing Director of Mitraz Financial Services Pvt. Ltd and can be contacted at firstname.lastname@example.org