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How to select a good financial advisor

Last updated on: October 26, 2012 07:56 IST

How to select a good financial advisor

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Vetapalem Sridhar

In India the term financial advisor is used to describe a person who is either selling or advising on one or many financial products. The lines are blurred when it comes to a clear understanding of how a financial advisor operates or how competent he/she is in providing financial advice. This article aims to make a person aware about what to look for in a financial advisor.

What is it that you want from a financial advisor? You would look for an advisor who can guide and help you in taking the best financial decisions. You want an advisor whom you can trust and depend on. There are three broad areas that you need to evaluate to find a good advisor.

  • Competence or ability to deliver the best advice
  • Intent in terms of working in your interest
  • Business practices adopted by the advisor

Let us understand in detail how to go about evaluating a financial advisor:

Competence

A very important attribute that you would want in your advisor is competence. If and only if your advisor is competent would he or she be able to guide you in taking the best financial decisions. A lot of us deal with a single financial advisor for all our needs. If this is true, then it is important that the advisor is competent to advice on most product categories. Please make sure that the competence is not limited to just one product category (be it insurance, shares, mutual funds or postal savings). Competence means a deep understanding of all investment choices. Without it, an advisor would not be able to provide the best advice.

Superficial knowledge is not enough. You can probably judge competence after a detailed discussion with the advisor. But you will certainly come to know about the competence of your advisor as you deal with him/her over a period of time.


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Experience

How does one build competence? Just by reading books or clearing an exam a person cannot become a competent financial advisor. Competence is usually built over a long period of time through reading and experience. Experience probably plays a more important role when it comes to building competence.

A person with varied experience would come across a lot of challenging and unknown things over time. This helps in building skills. If this person is focused in building competence he or she will put effort in knowing the unknown things.

In the financial services space, the advisor should have exposure in dealing with the various areas like insurance, equities, mutual funds, various debt products and tax laws.

Education qualification

Formal education by itself does not make a person a competent financial advisor. It does play a very important role in introducing a person to concepts an advisor needs to know. A degree or a certification does give a person an edge to arrive at decisions based on theoretical concepts. However, financial advice is not limited to theoretical decision-making. When taking financial decisions a number of other aspects like emotions, personal values and outlook towards life of the client need to be understood and taken into consideration. Any textbook does not teach tackling of such issues or no exam can test these skills of an advisor.

There is too much marketing being done by various institutes promoting advisors holding specific degrees or certifications. Such qualifications should not be the sole reason to select an advisor. The other factors enlisted are equally important to ensure you find an advisor who can help you reach your goals. An easy way to distinguish better advisors is to find out the ratio of income earned through fees vis-a-vis commissions through selling financial products.

To understand this concept better, let me take a few examples. To become a competent mutual fund advisor, is clearing an AMFI exam enough? A lot of students studying for their degrees clear the AMFI exam. Is an insurance advisor who has cleared an insurance exam, competent to do a complete financial evaluation for you? Does holding a certified financial planner certification make the best equity portfolio advisor? Probably it does not. But relevant experience and learning in a field can make the above advisors competent in them. So do not look at educational qualification as the sole basis.


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Provides individualised solutions

It is important that you advisor understands the concept of individuality. The advisor must know that no two people are alike. Two different persons may need different solutions as their goals and needs in life maybe different. It is very important to understand that the role of the advisor is to help a person in the best way possible to achieve what they are working towards in their life. In a lot of cases this does not happen. There is a tendency to give same solutions to all problems. This primarily comes from being associated with selling a specific product category. A good advisor understands that the solutions for each case maybe different.

Personal values of the advisor

The personal values of the advisor would go a long way in determining the business practices that would be adopted by him/her when dealing with you. Is the advisor going to put your interest before his/her own? Is he or she focused towards providing you the right advice or is the focus more on selling you a product where the income is greater.

Transparency

It is extremely important to find a financial advisory who is completely transparent in his/her dealing with you. Complete disclosure before they engage with you is a must. Neither trust or mistrust them. When you go to a shop or to a doctor for the first time do you trust him/her? Not completely. With experience and over time you evaluate them and only then comfort gets built. This then transforms into trust naturally, based on your gut feel.


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Learning

Learning is an important contributor towards creating competence in an advisor. It is extremely important that your advisor is putting in adequate time and effort into learning and reading activities. This ensures that the advisor is upgrading his or her skills to keep up with changing times. This is relevant as lot of financial decision-making is based on factors which are related to happenings in the economy.

Advice based on evidence and research

A good and genuine advisor will always be able to back up advice provided, by sound evidence and research. Anyone can give an advice. But to evaluate if it makes sense, evidence would help. The research ability would make sure that your advisor is not just selling you products, but is someone who is putting effort to help you take better financial decisions.

Transfer of knowledge

Managing money and taking smart investing decisions require some skills. A lot of people depend on their advisors for these skills. For long-term success, it is important that clients too are able to improve on their knowledge and awareness regarding money management. There are primarily two reasons for this.

Firstly, over time the financial resources that you have to deal with at your end increases. The decisions may tend to become more complex. If you do not improve your skills there is a higher chance that you will not understand what you are being advised.

Secondly, take a case where for some reason you lose your advisor who has helped you over a number of years. If this advisor had been educating you and helping you understand how your money was being managed, you can start of from the same place. Otherwise you come back to square one and are at the mercy of the new advisor who may undo all the good done by your previous advisor.

Hence it does make sense to find an advisor who is committed to your education. Over time the advisor should put effort in helping you build the right skills for you to be able to manage your money better.


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