What is that I hear? Do you wish to engage a financial advisor/planner? Congratulations! A wonderfully positive step that has the potential to change your financial life.
Do look before you leap though! Are you aware of what you are getting into? Whether you are planning to engage a planner or are already using their services, here is a (reasonably exhaustive!) list of must-know information about financial planners.
- Most financial planners (certified or otherwise) engage in mutual fund distribution and/or insurance sales. That is they are also agents. When I say most, a good 85-90% of them at least?!
- Such planners are known as fee-based financial planners. A fee-only financial planner is one who gets paid only for the financial plan he/she creates for you. As you can imagine fee-only planners are an endangered if not extinct species!
- Mutual fund distribution is commission-based selling. There are different kinds of incentives (variable from AMC to AMC) that a distributor is offered to ‘push mutual funds.
- So when a financial planner recommends mutual funds to you, can you be sure that commissions are not behind the recommendations? Everything from the number of funds, to the choice of AMC and choice of fund can be linked to commissions or relationship of the planner with the AMC. This leads to a clear and obvious conflict of interest. Is it good enough for you if the planners says there is no conflict of interest involved in such an arrangement?
- Something known as SEBI Advisor regulations hopes to (in spirit at least) change the way fee-based planners operate and eliminate this conflict of interest.
- Before the regulations came into place, when fee-based planners create a financial plan they will suggest that you invest ‘through them’ as it will be convenient for them to monitor and advice on your portfolio. This means that they want to earn commissions from your investments.
- Since January 2013, direct mutual fund plans are in force. This allows investors to directly invest via the AMC. Since no trail commissions are paid to advisors/agents in this mode, it allows the direct investor to earn up to 0.5% more returns for each year of investment.
- If you are already investing in regular mutual funds via an agent or financial planner and wish to go ‘direct’, you are likely to be met with a response like, “If you go direct I will not receive information about your transactions with the AMC. This will make it difficult for me to monitor your portfolio and advice you"!
- The information from AMCs or ‘feeds’ as they call them is just your account statement! It is complete bullshit if a financial planner claims that it will be ‘difficult’ to monitor the folio and advice without the feeds. That is, if you do not invest via them in regular plans. I will be happy to demonstrate, how from pdf account statements a portfolio can be effectively monitored. The ‘extra’ time spent is hardly significant.
- The customer is king! Yes you and me. We have the mandate from SEBI to go direct. That is we can invest via the AMC and earn about 0.5% more returns by saving trail commission. Do not expect fee-based financial planners to spread this bit financial literacy!
- As per SEBI advisors regulations, An investment adviser shall not receive any consideration by way of remuneration or compensation or in any other form from any person other than the client being advised, in respect of the underlying products or securities for which advice is provided.
- In English, this means, financial planners should not receive commissions by distributing mutual funds and any investment or insurance products they recommend to clients.
- It is important for investors to recognise that a majority of financial planners have been affected by this. Commissions from mutual fund sales are a major source of income.
- Amusingly, SEBI followed this rather strict ruling with “An investment adviser shall maintain an arms-length relationship between its activities as an investment adviser and other activities"
- Financial planners have freely interpreted what ‘arms length’ stands for. There are tales on the internet about how one financial planners have shifted their businesses to fathers and daughters. One even tried to shift it to his wife! Check out my Weekend Round Up posts for more information in this regard.
- It is our duty as investors to question financial planners who have shifted (or attempting to shift) distribution businesses in the name of family members. Clearly, SEBIs goal of removing the conflict of interest mentioned above has been diluted by this fuzzy arms-length ‘ruling’.
- It is important for you as an investor and potential client to recognise that a majority of financial planners have not complied with the SEBI regulations. Those who do not distribute mutual funds have happily registered. Those that can shift the business in the name of a family member or friend have managed to do so. What about the others? Non-conformation with SEBI regulations has made their businesses illegal.
- If you have already engaged a financial planner, ask them if they are SEBI registered. If they have not, find out why. Would you like to engage an illegal business operation?
- Financial planners continue to ‘encourage’ clients to invest via them ignoring the SEBI regulations! Planners who are SEBI registered ‘encourage’ clients (they cannot insist!) to invest via an agency allegedly independent of their business. Do not be surprised if your favourite personal finance blogger is on either list!
- What should you do? Here are (some!) choices
a) Seek out an SEBI registered planner/advisor who does not distribute mutual funds or sells insurance. They provide a financial plan, you pay them and implement the recommendations on your own. Simple, clean and free from conflict of interest. This is the best and most suitable option for investors. Investors who claim they have ‘no time’ to implement can go jump as far as I am concerned.
b) Difficult to find fee-only planners? Not at all! I maintain a (short!) list of fee-only planners. Happy to share it with those in need.
c) DIY. Manage your finances on your own. It is not rocket science.
d) Choose a SEBI registered planner/advisor who ‘encourages’ clients to invest via an ‘independent’ body! Ask them how independent it really is! But first ask yourself how independent that would really be!
e) Choose a fee-based planner/advisor who has not (yet!) bothered to register with SEBI. That is they earn from the financial plan and from commissions from mutual funds.
Addendum to options (d) and (e)
- Pay for the plan and tell the planner that you would implement on your own.
- Agree to provide access to all necessary investment records at the time of review (after 6 months or 1 year).
- If they say it will be ‘difficult’ for them to review the plan if you implement on your own (that is buy direct mutual funds), walk away
- If they don’t agree, walk away
This post originates in part from a discussion thread in FB group Asan Ideas for Wealth.
Confused?! Here is the key takeaway:
Pay for financial advice and implement on your own.
Do it yourself all the way.
Both options come at a price. Money in case of the former and time/effort in case of the latter.
Both options are better than encouraging financial planners directly or ‘indirectly’ associated with commission based selling!
There is a need to create an awarness about SEBI advisor regulations. Please share this post to your friends and social contacts.