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How to choose the right financial planner

January 03, 2016 10:54 IST

Look for one with the right mix of qualification, experience, ethics knowledge, and communication skills

In the New Year, many individuals and couples will resolve to go in for financial planning. They will then hunt for a good financial planner to do the planning for them. While there are benefits of taking services of a planner, choosing one with character and competence requires you to go the extra mile.

Why hire a financial planner

Our financial life has turned much more complex than was the case 15-20 years ago. With the returns from fixed-income instruments falling into single digit, most people will have to venture into the equity markets for higher returns. The reliance on loans to achieve financial goals also carries risks.

"You need expert help to deal with the volatility in equity markets or to ensure that you don't take on excess leverage in today's growing EMI culture," says Ranjeet S Mudholkar, vice chairman and CEO, Financial Planning Standards Board, India. Busy professionals are better off recruiting an expert as they lack the time required to do a good job of managing their finances.

Many people adopt the do-it-yourself (DIY) approach to financial planning. However, when things go wrong, they lack the objectivity required to identify their mistakes. They may focus too much on a couple of areas at the expense of others. A debt-averse person may focus all his energies on paying off his debts even in situations where the cost of the debt is low and considerable tax benefits accrue from it. Another investor may be focused on the rate of return he earns from his investments while overlooking the leakage that happens due to his spendthrift habits.

"By looking at the holistic picture from an asset-liability and income-expenditure standpoint, a planner can add considerable value," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. A planner will also focus on succession planning, a much-ignored area that can ensure smooth transfer of wealth from one generation to the next.

Characteristics to look for

A financial planner should be able to empathise with what your family and you wish to achieve. In addition to standard goals - buying a car and house, saving for children's education and marriage and retirement planning - many people have goals that are important to them. Some may want to engage in philanthropy while others may want to contribute towards their parents' post-retirement expenses. The planner should be able to help his clients achieve both standard and specific goals.

A planner should have the strength of character to be able to say things to the client that he doesn't want to hear. If a client's rate of expenditure is high, it is the planner's job to ask him to rein it in. Sometimes, clients lose money when a stock market boom goes bust, as in 2008. Often the investor attributes his loss to circumstances. Again, it is the planner's responsibility to point out that his loss occurred not just due to the market downturn, but because he was over-allocated to equities, or was leveraged via futures and options.

Planners tend to have more skills and experience in some areas than in others. Look for one whose expertise matches your needs. It does not help if your primary goal is wealth creation while your planner is highly skilled at debt management.

A good planner should be able to analyse his client's current financial situation and devise a plan that will help the latter achieve his goals based on the resources available. He should also act in the client's interest at all times. "The financial planner should be ready to forego the revenue he earns from products if the client wishes to purchase them online," says Anil Rego, CEO and founder, Right Horizons.

Look at the financial planner's professional qualification. It is preferable to go with one who has the Certified Financial Planner (CFP) degree. Your financial planner should also be a Sebi-registered investment advisor. Such an advisor is expected to adhere to fiduciary norms, which means that he should act on behalf of his clients the same way he would with his own money.

The financial planner should also have over seven years of experience. Having experienced a stock market meltdown, like the one in 2007-08, such a planner will be able to stay calm in the next downturn and take the steps required to protect his client's portfolio from being hit hard.

What to avoid

Stay away from a financial planner who is more focused on selling products. The planner should spend a considerable amount of time on need analysis and on setting the right strategic direction. The products to be used for achieving these goals should be decided only after these two essential steps have been taken.

Avoid a planner who will not sign a non-disclosure agreement (NDA). "Beware of a planner who follows unethical practices like asking for fee in cash, pressurises you to buy a specific product, or doesn't maintain proper records," warns Rego.

You are also better off avoiding one-person outfits as you will find yourself without service whenever that individual is not available. The FP should have a team, even a small one, to back him up.

Choose the right fee model

Several remuneration models exist: flat yearly fee, percentage of assets managed, project-based fee, and hourly fee model. The fee model you choose should depend on your requirements. A DIY investor who only requires confirmation that he is on the right course may go for a project model.

If you are looking for specific advice, such as on succession planning, you may opt for the hourly model. But if you want holistic and on-going advice, you could opt for the retainership or percentage of asset model. The fee should also depend on the complexity of the task that the FP has to perform.

Checks you should run

  • Go to fpsbindia.org and check if the financial planner is certified
  • Speak to existing clients and go with a recommended planner
  • Ask clients if the planner can help in the areas where you need help
  • In the first interaction, ensure that the planner listens empathetically. See if you are comfortable communicating with him
  • Avoid planners who focus on selling products or promise a very high rate of return on portfolio

Illustration: Uttam Ghosh/Rediff.com

Sanjay Kumar Singh
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