Why you need a professional fee-based adviser!
Unbiased guidance
that is purely in our best interest cannot be had in the ‘free’ advice model.
Despite all the free ‘advice’ flowing our way from bank
relationship managers, stock brokers, insurance agents and mutual fund
distributors,
as investors, we’re never sure of the choices we’re asked to
make. “Am I just buying a product or getting holistic advice on my financial
well-being?” We have no clarity on what we should expect when dealing with
‘advisers’ and no standards to judge them against.
Indian regulators, fortunately, have woken up to the retail investor’s distress. The SEBI Registered Investment Adviser (RIA) Regulation, 2013, while still seen as an evolving model, is actually leading the way amongst all Asian markets to drive transparency and standardisation in financial advice. The regulation holds the key to finally dispelling the ambiguity and lack of trust surrounding advice.
But accepting and adopting this change will also depend on how well we, as investors, understand our need for financial advice. And on whether we are able to differentiate between the opportunistic or generic advice that we perceive to be free, and qualified, professional, personalised advice that can truly move the needle on our financial well-being.
Making one single investment is not really complex. But building a portfolio of investments is. Asset allocation and disciplined rebalancing have proven to deliver long term returns. This requires the adviser to understand the market conditions well without succumbing to market sentiments, take corrective actions promptly and be an expert in multiple asset classes.
You will invest over a few decades in your life, and all of the products you invest in, be it insurance policies, equities, regular mutual funds or bonds, come with hidden costs that eat into your returns. The late John Bogle, legend of low-cost investing, estimated that hidden costs ate away as much as 2/3rds of an investor’s return over the long term. The right adviser will focus on getting you low-cost products that do not compromise your returns and risk exposure. He will disclose fully all the hidden costs to you and advise you on how to reduce it.
Neither is he driven by the need for frequent incremental investments, nor will he shy away from recommending a withdrawal or exit if your portfolio strategy demands it. A fee-based adviser is equally happy servicing low-cost products as it benefits you, while having no impact on their own income. With SEBI’s RIA regulation, investors are further assured of a certain standard of services provided.
All Registered Investment Advisers (RIAs) are expected to have professional qualifications in financial planning, capital markets, economics or other related areas, apart from basic graduation. This is to ensure that they can do more than basic risk profiling for investors, take a 360-degree assessment of your financial health, and build portfolios with the right asset allocation.
RIAs operate under a strict code of conduct as defined by SEBI: they can only offer advice that is in the investors’ best interests and have to disclose any conflict of interest while doing so. They have to maintain detailed records of clients’ risk profiles, goals, portfolio performances and all advice given, and are subject to audits by SEBI.
Once we understand the commitment, expertise and integrity
required from a financial adviser in giving unbiased advice that is purely in
our best interest, it is a fairly logical conclusion that this cannot be had in
the ‘free’ advice model. Only when an adviser’s source of income is transparent
and comes only from you, will he/she be free of any bias in recommending
investment products or investment actions. It is critical that there is an
alignment of interests where the adviser is not incentivised by product
providers to sell you any product.
Erik Hon
Managing Director,
iFAST Financial India Private Limited
