‘Conflict of interest’ is a concept poorly understood by most Indians: from the dislodged BCCI chairman for obvious reasons to a school teacher offering private tuition. Conflict of interest also looms large in the Indian financial advisory business. I would bet that more than 95% of financial advisors get remuneration of some sort from mutual fund houses, insurance companies etc.
Investors who wish to get their financial planning done should first understand the difference between a fee-based planner and a fee-only planner. Fee-based planners get paid for creating financial plans for clients with periodic reviews. They also get compensated by fund houses and/or insurance companies for bringing in business. This automatically creates a conflict of interest. Indian fee-based planners get pretty emotional when this topic is broached and simply refuse to understand: potential conflict of interest IS conflict of interest. Here is a very good article on this topic: Sell financial advice or products, not both
A fee-only planner is compensated only by the client. Thus the client’s best interest also represents the planner’s best interest. It is a no-brainer to recognize that fee-only planners should be the first choice of investors who wish to get their financial life in order. Unfortunately fee-only planners are a critically endangered species!
While I was trying to compile a list of fee-only Indian Certified Financial Planners (CFP) (to be published) I realized that I can think of only one fee-only planner who is not a CFP: Raag Vamdatt. He quit a well-paying corporate job to become a full-time entrepreneur. He is one of the first to offer an online financial planning service in the country. He also offers a variety of other services. I sought him out for an interview. What he has to say will be of interest to the investor, planner and entrepreneur alike.
1. Giving up a steady job to pursue ones passion requires courage and determination. What gave you the confidence that you could make it?
There were two major factors. One, I had already set up a base before starting – I had started my website as a hobby, and it eventually grew to have a critical mass. That’s when I took a plunge into entrepreneurship. It was not a blind jump based just on faith, but a calculated move based on the response I was getting from existing readers and clients.
Two, I had the full backing of my wife. She not only supported my decision, but actually encouraged me to take the plunge. And that meant a lot to me – especially since she was going to be the one shouldering the financial responsibility of the family for a while after I quit my job!
2. How did your friends and family react to your decision? Did you have a backup plan?
People were initially shocked at the thought of me losing a steady stream of income. But they soon were comfortable with the decision since they had seen my website grow, and had seen me work hard on it.
I didn’t have a backup plan per se, but joining the workforce back as an employee always remained an option if needed.
3. How long did it take for you to get your practice streamlined? Were there any tough periods?
As I already had my website setup, I had the infrastructure & the processes ready. But the biggest hurdle I faced was setting up the payment processor for accepting credit card and net banking payments from clients. It was a lengthy and paperwork intensive process to get approved, and a technically intensive process to set up for the website. And since I was a solo entrepreneur, I did everything myself!
4. Why do you choose to remain a fee-only planner when there are only a handful of such planners in the country? Even fee-based planners struggle to stay afloat.
I think a planner can remain true to his or her clients only if there is no conflict of interest. And you can avoid conflict of interest only if you earn from only one person – your client. I firmly believe remaining true to the clients and keeping their best interest in mind is more important than anything else – even more important than staying afloat.
5. What should be the attributes of a long term investor?
I believe that the most important attribute for a long term investor is having patience. It’s not just about holding on to a stock for the long term – it’s about resisting the urge to “do something” when the market is moving and you see everyone around you buying or selling. You need to learn to base your decisions on the fundamentals of the company and not based on the “advice” from the so called experts – and that is certainly not easy!
6. Tell us something about your stock picking method. Do you offer a stock-related service?
I am a big follower of Warren Buffer, and invest for the long term. I believe in doing fundamental research about a company, and evaluate its prospects for the future. When I like a company, I buy its stock and like to think that I am a part owner of the company (which a shareholder is). I hold on to it irrespective of the stock price movement as long as the fundamentals of the company have not changed. In fact, there are many stocks that I have been holding for 9-10 years (which is really long term considering the fact that I am only 34)!
I do not offer a stock related service, because most people today are not long term investors – including some people who like to think they are! If someone is not true to the philosophy, I would not be able to provide the best returns to them.
7. Why do most people find investing confusing? What is the way out of this confusion?
There are a couple of problems.
- In the last few years, the number of financial products has multiplied many folds.
- People who we relied on for advise (bank managers, family insurance agents, etc.) are not very dependable any more due to conflict of interest.
- There is way too much information that is disseminated by the media
All these things make investing more complex than it really is.
The way out is to focus on simplicity – invest in simple products that you can actually understand: term insurance instead of ULIPs, diversified MFs instead of sector funds, and so on.
8. What aspects of financial planning are poorly understood by the average retail investor?
You would be surprised by the answer – it’s not something that a planner does, but something that the client has to do!
I have seen that most people are rather clueless about their own overall financial situation, and their financial goals. Most of the time, they haven’t thought about it in a holistic way at all. So the process where I collect their financial data from them, and prompt them to think about what they would like to achieve in their whole life is rather enlightening for them!
9. What happens after you draw up a financial plan? Do you help the clients execute it? How do you monitor their portfolios?
I do not help my clients execute the plan – again, to avoid conflict of interest. They can make the investments using any broker or agent that they like and trust. I monitor their progress once a year, and advise any course-corrections if necessary.
10. How do you think we could get young people to start investing in equities?
The best way is to start making monthly investments in diversified MFs using the Systematic Investment Plan (SIP). Even a small investment every month can reap rich reward in the long term due to the compounding effect.
11. It is practical for a young person with little or no net-worth to start an independent advisory practice?
I would advise against this. You need to have some buffer before you start your own firm – any firm. It becomes even more important for a profession like financial planning where you have competition not just from other planners, but from many others like insurance agents, MF agents, relationship managers, bank managers, etc. A working spouse who can shoulder the financial responsibility of the family while you establish yourself – like in my case – would really help reduce your financial difficulties and stress.
12. Some do's and don'ts for an entrepreneur?
I will give one each based on my experience.
Don’t plunge into something purely based on your gut feeling – do some research to see the viability, and if possible, have a test launch on a small scale to gauge the response & people’s willingness to pay for your product or service.
Do take your spouse into confidence. He or she would be the one sacrificing the most due to your decision, and their encouragement would make a world of difference – especially when you would have your moments of doubt.
13. Almost every planner I have interacted with has complained at some point of time that the investor is not willing to pay for advice. What can be done to change this?
Based on my experience, I disagree with this. The young adults these days earn a lot, and are quite willing to pay for the right advice. They are smart, and they would certainly shop around for the best person, but they certainly are willing to pay.
It’s the older generation that is reluctant, and the only solution is to educate them. They need to be explained that free advice is never really free – the advisor has some hidden agenda in most cases, and such an advice can be really costly when implemented.
14. Will the concept of fee-only practice ever become popular?
I think fee-only practice is the way ahead. I can only talk from what I hear from my clients and readers, but what I have seen is that people have started seeing through the free stuff, and they want someone who is on their side. And they know that it would be someone they pay – and not someone being paid by the MF or insurance companies.
15. Have your clients taught you anything?!
My clients have reinforced one belief that I always had – you don’t have to earn a lot to be rich! I have seen clients that earn relatively less but have built many assets over time due to prudent spending and investments. At the same time, I have seen clients earning ridiculously high amounts, but having nothing concrete to show due to their equally high spending!