Between Two who you prefer to choose as your Financial Advisor | Way to evaluate a good Financial Advisor

Finance -Md Imran

First, let’s understand some of the qualities of a good financial advisor:

• Sound knowledge of the subject: This is a key quality. Before you shortlist any advisor, check the knowledge. The person would have a blog, Quora answers, youtube video, client testimonial, etc. Take your time and do your research and build trust.
• Honest opinion: What is the intention of the person? Is he looking to make quick money by pushing some financial products or genuinely want to help? You can gauge this parameter to an extent by speaking with the person.
• Ability to explain personal finance in a simple layman language: It doesn’t matter how good the knowledge is unless the person knows how to explain it in simple layman language. A lot of finance geek make finance sounds so complex that people do not even want to discuss it. Hence, a person should be able to keep it simple.
• Comprehensive financial planning: Financial planning is not just about selecting the right mutual fund or right insurance plan. A mutual fund agent is not a financial advisor. An insurance agent is not a financial advisor. A financial advisor is someone who can do comprehensive financial planning from insurance to investment, tax planning to expense tracking. A good financial planner would first diagnose the financial health and then suggest the right plan accordingly.

Any person who can qualify on the above parameter should be a good financial planner.

Now, the next question is- What should be the right fee for a good financial planner?

There are 2 business models –

1) Fee-Based

2) Commission Based

Fee-Based– The person would charge an upfront fee on financial consulting. The fee could range in between 10k-20k for one time comprehensive planning. There should not be any further fee unless there is a major change in the portfolio.

Commission Based: The financial planner would invest on your behalf and would charge a commission on the return.

Which is better?

While the fee-based option sounds a bit harsh with the upfront fee, it is a thousand times better than the commission-based model.

Let me explain it with a small example:

Let’s say you want to invest in a mutual fund. You are 25 years old and you have a target to build an investment corpus of Rs 5 crores by the age of 50.

You start investing Rs 30k per month and expect an annual compound return of 12%.

With a 12% annual return on 30k/month investment, you will have a corpus of Rs 5.7 Crore. Now if you choose a commission based advisor who charges 1% annual commission, you will end up with 4.8 Crore. This is 90 lakh less than direct investment.

This small advice from fee-based financial advisor instead of commission-based advisor would save 90 lakhs!!

This is just one of the example of many other benefits from a fee-based advisor.

But, unfortunately, most of the Indian audience is not prepared to pay an upfront fee. I have done research where I asked people to pay whatever they think is the right value for the fee-based advice. A lot of them offered Rs 500- Rs 1,000. This is an insult to the hard work of the financial advisor.

Hence, most of the financial planners get into the commission-based model. I spoke with some of the financial planners who work on commission model and they agreed that the Indian audience is not ready to pay the upfront fee and hence they have opted for the commission-based model.

Now, I would let you decide who is the best financial advisor and whether you should opt for a fee-based model or commission-based model.

Warm Welcome and Regards

MD Imran