Sunday, October 23, 2016

Is Paying for Financial Planning or Investment Advice Worth it?

As the second most populous nation in the world, India is arguably one of the fastest growing markets when it comes to the financial services industry. Almost every bank offers financial planning and investment advice these days. You get random calls from agents selling the best investment product ever almost on a daily or weekly basis. And, we also have friends or neighbours or relatives who are insurance advisors who want to sell you some insurance product.  Of course, all these avenues of advice don’t charge you any fee. On the other end of the spectrum, we have people who offer professional financial planning or investment advice for a fee. 

That brings us to the question or the topic at hand – Is paying for Financial Planning or Investment Advise worth it? That’s exactly what you will find out by the end of this article. 

Why Most Financial Planners or Investment Advisors Don’t charge any Fee? 

Let me ask you a simple question – most of us are salaried employees who work for a monthly salary. If for some reason the employer says that he will not pay us from now on for our work, would we continue to work there? Of course not. That is our job. The job is how we make a living and support our families. Without a salary it wouldn’t make sense for us to continue on the job. 

Likewise, offering you investment advice or doing financial planning is their job. However, they offer it for free and don’t ask any money from us (the customer) which means they must be making money from somewhere else isn’t it? 

You are absolutely right. Most Financial Planners or Investment Advisors have tie-ups with companies that are selling financial products. By selling products from a certain company to their customers, they get a fee from the company for the extra business. This way the planner or advisor doesn’t have to charge the customer because they are getting paid by someone else anyways. 
Simple Right… 

Is Taking Free Financial Advice a Good Idea? 

Now, think about this: If you are being paid by a company to sell their product, would you be interested in the benefits the customer is going to get by buying the product or would you be interested in selling more of the product to make more money for yourselves? 

The Answer is very straightforward isn’t it? You would obviously try to sell more to make more money. What the customer does after he buys the product is not your primary concern while finishing a sale. This is exactly why taking “Free Financial Advice” is a REALLY BAD idea. 

I have seen numerous people being sold horrible financial products that absolutely don’t suit the person who bought it. But still they were sold the product for one simple reason – MONEY. These Advisors and Planners who offer their services for free have tie-ups with companies that come up with these fancy investment & insurance products that offer hefty fees to the person selling it and they go around hunting for prospective customers without much thought about whether the product suits the person or not. 

I got an email from a blog reader a few months back who is a retired school teacher who was asked to invest his retirement corpus in a Single Premium ULIP scheme that invested in Equity markets and charged a first fee of almost 15% of the invested corpus. The agent made away with a hefty sum and the poor customer ended up making tons of losses because the ULIP badly underperformed the market and the gentleman was unsure what to do with the product. If he had received financial advice from someone who was qualified and had the customers interest in mind, firstly they wouldn’t have suggested such a product with a hefty fee structure. Secondly they wouldn’t have recommended such high equity exposure to someone in his 60’s. 

What to Look for in a Financial Planner or Advisor? 

There are a few things you can take a look to identify whether the Financial Planner or Investment Advisor is good enough: 
1. Their Experience & Qualifications – Just like any job, experience and qualifications play a vital role in choosing people for the role of a financial planner or investment advisor. Especially because we are dealing with hard earned money and I personally wouldn’t want to lose money on my investments. 
2. Areas of Expertise – Some people specialize on stock market instruments while some specialize in insurance and so on. You would need to choose the right person depending on your needs. 
3. Are they Independent? – Many financial advisors are affiliated to a few companies and only offer their products as part of their services. This may firstly limit the range of products you could choose from but more importantly this could result in a conflict of interest – Your Interest because the Advisor is not independent and going to sell you stuff that you probably won’t need. 
4. Cost – Independent Financial Advisors usually charge you a fee for their services so, try to look for one that offers a fixed fee model rather than someone who asks for a fee based on the amount you are willing to invest. The good ones are unlikely to be available at cheap rates because just like any other profession, they charge a fee based on their expertise. 

Choosing a Financial Planner or Advisor is a crucial decision because that is going to have a long term impact on your financial well-being and future. Take your time, get quotations and feedback from more than one professional and choose one that you are confident in and are comfortable with. 

Signs your Financial Planner or Investment Advisor is Not Worth the Fee

Analysing the profile of a financial planner and choosing the one that would most suit you is a long and cumbersome process. To make things simpler, let me try to help you with the tell-tale signs that can help you find out whether that the person is more concerned about their share of the fee than your well-being. 

Sign 1: They are trying to Rush you into making an investment or buying a product 

A good financial planner or advisor will NEVER and I repeat NEVER rush you into doing any money related decision. If they are giving you slogans like this is a once in a lifetime opportunity or the market is poised for a 20% jump in 2 weeks and if you miss it now you may repent in future or something along the lines, they are probably trying to meet their monthly or quarterly sales targets. 

Sign 2: They don’t offer Products from Multiple Companies 

A good financial planner or advisor should be able to recommend you products from any and all companies that would suit your needs. If your planner is only suggesting products from one or two specific companies, there is a high chance that he is receiving commission on the side for his sales and that means your interests are compromised already. 

Sign 3: They offer you Perks 

Most financial planners would probably be meeting you face to face in a coffee shop and wouldn’t mind paying for your coffee while you both talk. Of course this isn’t considered a perk because they are probably going to charge you a fee that would cover these kind of costs they incur on prospective customers. By Perks I am talking about offering you a % of the fee they are getting out of a sale or offering you something in return for signing up for a product and so on. When they need to offer you extra motivation to get something it’s a clear indication that something is wrong. 

Is Paying for Financial Planning or Advice really worth it?

If you ask me, I would say – Yes Definitely. You may be mumbling – this guy is a blogger and is probably doing financial planning on the side so of course, that is what he would say. 
I am not saying this because I want to sell you my service as a financial planner. I am saying this because nobody else would care more about your money that you do. If you want someone else to care about your money, you need to give them a reason to do so. The best way to do that is by paying a fee that makes them accountable for the work they do. Otherwise they will show their loyalty to the person paying them. 

What is a Nominal Fee for a Financial Planner? 

Ok – this is a tough Question and there are many different independent financial advisors or planners in India the charges range from just a few thousand rupees to even a few lakh rupees depending on the extent of services provided and of course their credibility.  Most reputable independent financial advisors in India charge around the 20-25k rupees mark for one thorough/detailed planning session with discounts for future follow-up sessions.  

Like I said before, choose people who offer fixed fee services irrespective of the amount you are investing rather than guys who ask you for 2 or 3% of the amount you are investing. 

Some Last Words 

If you want GOOD Advice, it WILL NOT be FREE
If you want FREE Advice, it WILL NOT be GOOD 

Happy Investing!!! 

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