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Change your investment advisor if. . .

July 01, 2005 10:01 IST

Investors often fail to appreciate the role played by an investment advisor in the process of financial planning. The advisor is responsible for bridging the gap between investors and their financial goals.

The advisor's role assumes significant importance in an exuberant scenario like the present one, when it is easy for investors to lose track of their objectives and make wrong investment decisions.

Conversely, an association with the wrong investment advisor can spell disaster for investors. We present a few pointers which will help investors gauge if they are with the wrong investment advisor.

1. The advisor only recommends the 'season's flavour'

The mutual fund industry has witnessed a number of trends in the recent past. Monthly Income Plans (MIPs), mid cap funds, flexi cap funds among others have all enjoyed their moments of glory (some still continue to do so, but then it is anybody's guess how long this will last!).

Fund houses have fallen prey to herd mentality and launched similar offerings in quick succession; investment advisors have played their part by indiscreetly pushing these products.

If your investment advisor only recommends the season's flavour, disregarding your investment objectives and risk appetite, there's a fair chance he is more interested in his commission earnings vis--vis your financial goals. Steer clear of such advisors.

2. The advisor convinces you that a Rs 10 NAV is cheaper

Investment advisors have ridden the mutual fund IPO (now referred to as New Fund Offer) wave by convincing investors that its cheaper to invest during the IPO stage.

Nothing could be farther from the truth. By likening mutual fund IPOs with stock IPOs, distributors have only done a huge disservice to their investors.

A good advisor will only recommend a new fund if it adds value to the investor's portfolio or is a unique investment proposition.

Any advisor worth his salt will vouch for an existing scheme which is time tested and proven vis--vis a similar scheme in its IPO stage.

3. The advisor's USP is 'commission offered'

A widely prevalent practice (despite being explicitly prohibited) among investment advisors is to rebate a part of commission earned, back to investors i.e. the investor is 'rewarded' for getting invested. Investors on their part should also shoulder the blame for demanding and accepting such commission.

What investors fail to realise is that the commission offered by the advisor could be a ploy to disguise his inefficiencies. Wealth creation for investors should come from the investments made and not commissions. Select an advisor for his ability to recommend the right investment avenues and manage your investments rather than his willingness to refund commission.

4. Lump sum investing is the consistent advice offered

If your investment advisor has not initiated you to the practice of making investments using the systematic investment plan (SIP) route and continues to endorse lump sum investing, its time to start looking at other options.

An investment advisor who fails to promote the SIP form of investing when markets have touched record highs is either driven by his earnings or fails to understand the nuances of market-related investments. In either case, the same could be detrimental to the investor's cause.

5. Advisor's role is restricted to delivery and pick up of forms

Oddly for a bulk of the investment advisors, the service offered is restricted to delivery and pick up of application forms; the 'advice' component is sorely missing. An investment advisor's primary role includes creating a portfolio for the investor based on his needs, risk profile and successfully managing the same.

While maintaining high service standards is pertinent, it shouldn't gain precedence over the advice part.

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