How to choose a financial planner?

Published: February 23, 2015 at 8:58 am

Last Updated on April 18, 2016 at 10:24 am

Do you even need a financial planner? Money management, especially  inflation proofing long-term goals, is not rocket science.  Then again, even rocket science is not rocket science! The inclination to act, coupled with commonsense is all that is required.

So the answer is, a financial planner is not necessary. Of course, financial planners and ‘independent’ financial advisors won’t agree, but then again why would they?

Few in the financial services industry concede that DIY investing will work. Such opinions are the saving grace among the dumb comparisons to doctors floating about.

Seeking professional help from a financial planner would certainly help people who have messed up their fiscal health or those who choose to outsource money management.

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The financial services industry will readily point out that choosing the right product for a specific requirement is ‘tough’.

What the industry as a whole is not willing to concede is, choosing the right financial planner is equally tough.

There are plenty of articles based on the theme of this post, but almost all of them written by financial planners!

Most of them would say something like, ‘is your planner a CFP?’, ‘Does he have experience?’ ….

Such questions mean nothing. Just to play along with the planning community. Hundreds of doctors graduate each year. All of them cannot be equally competent. It is against the laws of nature.

Having a CFP degree means nothing. Many instructors offer shortcuts to get this degree.  There is too much of hype created about this degree (to hike up fees) which is unwarranted. I have interacted with several CFPs. Only a handful of them have impressed me.

I have had occasion to study how members of the financial planning fraternity operate since around 2007.

All that I have learnt (factoring regulatory developments) so far(!) has been posted earlier:

What You Need To Know Before Hiring a Financial Advisor 

List of Fee-only Financial Planners in India

In this post, I would like to point out (well, reiterate) certain simple thumb rules while selecting a planner, if and only if you think you need one. If you don’t need one,  forward this information to others (if  you think they might find it useful).

Any selection process requires a short-list.  Be it a stock, mutual fund, insurance product or a planner, the clarity with which a short-list is made determines the quality of the final choice.

When it comes to financial planners, the short-list can be arrived at in a few steps.

  1. Never ever buy mutual funds from banks or discuss your financial goals with the relationship manager. Better still, don’t visit your bank unless necessary.
  2. Avoid all planners who charge a fee from you, offer to do the paperwork for investments and suggest regular mutual fund plans. This is double-taxation.  The fee for the financial plan should (and usually does) include the charge for suggesting products. You do not owe the planner anything more. Do not pay trail commission to them in addition. Such planners are called fee-based planners.
    • SEBI has outlawed this in a feeble manner, stating that advisory and distributions should kept at ‘arms length’. This has been defined as per convenience. We have planners whose spouses, children and parents distribute, while they show off their compliance with SEBI norms with a registration. Why do you want to pay advisory fee to one family member and trail fee to another? This is as bad as the same person getting both. Of course SEBI seems to think otherwise! Some of these family-based planners could call themselves as fee-only planners. Beware!
  3. Compared to such a family-based planner or fee-based planner who has ignored  SEBI mandates, a distributor without a fancy CFP degree, but who understands markets (equity +/- debt) and gets only a trail fee for suggesting products and executing transactions is way, way, way better. Such distributors also have access to standard financial planning products and they too can tell you how much you to invest, suggest decent asset allocation etc.  There is at least no double taxation here. The problem is, some (if not most) distributors may push products for which they get upfront fees or higher trails. They might ask you to invest in NFOs. Established distributors don’t do this. Not recommending that you do this. Just pointing out that this is a better option than the planners mentioned in (2).
  4. Finally, the option that I do recommend is consulting a fee-only planner.  They would draw up a financial plans and suggest products for a fee. The investor is free to invest in direct mutual funds (or regular plans with an independent distorbutor on online portal offering ‘free’ accounts!), There is no conflict of interest involved here. You, the client is the boss. They work only for you.
  5. Warning. Many in the services industry do not understand the difference between fee-only and fee-based! So  ask them if they or their family members  distribute products. Don’t ask them if they offer fee-only planning services!

I stuck my neck out and listed fee-only planners that I could locate after searching for a couple of  years. Most of them in the list never distributed any products ever. A couple of them gave up distribution to fall in line with SEBI mandate. The list is not exhaustive. Since the blog has grown popular with time, I am scared of adding new names without external confirmation (which is not easy to obtain).

It was a risk to my reputation, because nothing stops them from taking up distribution in future or becoming a family-based planner. My aim was to project fee-only planning. So far I am glad to note that awareness about conflict of interest and for this kind of service is steadily increasing. A disgruntled advisor  in facebook group, Asan Ideas for Wealth accused me of getting money from these planners and I had to respond to some dumb comments in the post where fee-only planners were listed!

Well, I can assure you that there is no such monetary arrangement (or any kind of arrangement) between myself and the fee-only planners.

Now the question is, ‘How will I choose a fee-only planner?’ After all, the ‘not everyone is the same’ argument applies here too.

Based on the feedback from readers who have interacted with some of the fee-only planners in the list, I would like to suggest few thumb rules to finalize a fee-only planner.

  1. Join facebook group Asan Ideas of Wealth, run by Ashal Jauhari and seek out members who have engaged the services of fee-only planners. Contact them personally and find out their experience. Do not do this publically in the group. Note that all fee-only planners listed here are in that group (along with fee-based, family-based planners and distributors).
  2. The above strategy is, in my opinion, better than asking for references from the planners themselves.  In case no member has engaged the fee-only planner that you have in mind, ask them for a reference. If someone does not give me a reference for their services, I will not engage them.  I, as a client, would like to talk to other clients to make up my mind.

3. If you wish to discuss your interaction with the planner or their clients with me, Ashal Jauhari or post it at Asan Ideas of Wealth, feel free to do so. This is about your financial well-being. There is no hurry to engage a planner. You can spend a few days researching your options.

  1. The fee is an important criterion. There is no regulation with regard to financial planning fees. They can range from 5000 to 50,000! This is applicable for all categories. Planners (in general) talk about the value they offer to justify the fee. Don’t fall for it. Since the fee-only list is small, you can easily tabulate the services fee listed. Remember, higher fee does not mean more value (or competence).
  • The fee-only planner is going to be your confidante. Are you comfortable about sharing personal details with this person? Financial planners -all varieties- can ‘generally’ be trusted in this regard. I am not referring to trust. I am referring to comfort levels.

    • No Conflict of interest? Check (automatic elimination in the case of fee-only planner)
    • Satisfied with references? Check.
    • Can afford fees? Check. (Since you are looking for a financial planner, I am assuming you understand and appreciate that plan creation and review require fees)
    • Comfort level? Check.

    That is it. You can a pick any fee-only planner who makes the cut,

    What about competence? To quote Subra, if you are competent enough to judge the competence of a financial planner, you will not be needing one!

    Financial planning will work only if you trust the planner. I see many people who get a second opinion either privately on in Asan Ideas for Wealth. This is a double-edged sword and could confuse you further.

    What if after a couple of years of working with the fee-only planner, I feel confident to DIY?

    Fantastic. Go for it.

    Seem like too much trouble? Whose money is it anyway?

    Finally, readers ask me to draw up a financial plan for a fee. I would like to point out I do not offer any kind of financial advisory.  It is not my cup of tea.  I do not enjoy it.

    All I want to do is to promote DIY investing and fee-only financial planning. In that order.

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