Who on Earth is a Financial Adviser?!

"who is a financial adviser? What do they do?", are, for me, surprisingly difficult questions to answer.

Perhaps if I did not know anything about advisory regulations, I might have said something naive like,

'a financial advisor is a money-management doctor'

Unfortunately, since I know a bit about these regulations, I take it upon myself to irritate  readers from time to time with it. Like right now for instance!

Knowledge can have several effects on you. Nausea is one of them.

That is how I feel when I see the utter disregard for the regulator by members of the financial services.

Suppose you gather different sections of said community and ask financial advisors  to identify themselves by a  show of hands  and then ask each of them, 'what they do for a living', you are likely to get answers like

  • insurance selling
  • stock brokering (or sub brokering)
  • realty brokering
  • commodity brokering
  • currency brokering
  • mutual fund distribution
  • bonds, corporate investment sercvice
  • CA + all, or some of the above
  • financial planning + all, or some of the above (fee-based planner)
  • financial planning (fee-only planner)

Everybody answers to financial adviser! They may also do other businesses to survive.

The community is in such a cluttered and tangled mess because,  SEBI has clearly laid out regulations that

1) People who offer investment advice will have to registered as investment advisers.

2) Distributors cannot offer investment advice. They can only offer 'incidental advice'. Goal-based investing and risk profiling is not incidental advice. They better not be!!

3) People who are involved in multiple activities (such in mutual fund distributor and insurance agent) must get registered as investment advisers. They would also be known as registered investment advisers.

Well, that is how it reads on paper. As mentioned several times before,  these stipulations have been largely ignored based on the confidence that SEBI will not act unless someone complains.  Like most situations, it boils down to simple economics: commission based selling is too deep rooted and is by the most reliable breadwinner.

Like most situations, it boils down to simple economics: commission based selling is too deep-rooted and is by far the most reliable breadwinner.

The point I wish to make in this post is that even if everyone who ought to register, did register, the question,

'Who is an investment adviser?', would remain.

The reason for that is, SEBI (although it is trying) has not managed to differentiate (even on paper, let us worry about reality later) between an

investment adviser - a person who recommends specific products based on the requirements of a client, for a fee (only from the client)

and an

investment enabler - a person who helps a client conveniently purchase products (recommended by the investment adviser) for a commission from the product manufacturer.

To use industry motivational parlance,

the investment adviser is the doctor and the investment enabler is the pharmacist.

Or to put it simply, the doctor cannot run a pharmacy and the pharmacist cannot prescribe.

Well, not a great analogy since doctors are enticed by product  manufacturers on a daily basis, but let us not get too picky.

The point is pharmacists cannot be 'dispensed' with! They are crucial for the existence of product manufacturers and they do provide a useful service.

See I am not at all anti-distributor! Just that I advocate the option of buyings drugs wholesale combined with either DIY or professional advice

Hey, I wrote a whole post without saying 'conflict of interest'!

It can be argued that, with the exception of a few nauseous idiots like me, most investors do worry about such issues and therefore nothing need be done.

I disagree. Trust is the biggest stumbling block for the industry today.

Unless this difference between advice and enabling is enforced, investors will have trust issues while seeking professional help.

Yes, there are many who love a free lunch, but there are also a good many investors who are willing to pay for professional advice. They are not taking the plunge because choosing a 'financial adviser' (even if they are unaware of the above-mentioned mess) is harder than choosing a mutual fund (if not a stock).

They may not be asking the titular question. They are certainly asking, "Who on Earth should I trust?". Trust me on this!

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12 thoughts on “Who on Earth is a Financial Adviser?!

  1. Bala

    Money will draw all kinds of advisors much faster than blood drawing sharks. So for the health of investors it is better to treat everyone as an agent for the products they advise and just become DIY as far as decision making is concerned. I can't believe any advisor can be truly unbiased when pitted with the small fee vs the fat product commissions.

    Reply
  2. Bala

    Money will draw all kinds of advisors much faster than blood drawing sharks. So for the health of investors it is better to treat everyone as an agent for the products they advise and just become DIY as far as decision making is concerned. I can't believe any advisor can be truly unbiased when pitted with the small fee vs the fat product commissions.

    Reply
  3. Bharani

    I always keep wondering why fee-only structure is not the norm (you had 8-odd in your fee-only planner list), despite knowing it may be the best model. But then there are multiple forces at work:
    1. I've talked to many people in the past (relatives, friends); they want convenience along with advice (someone who can do postman job eg: sending app form to AMC); in terms of value, former is valued more! As long as this exists, fee-only model will remain a dream to take off for middle-class.
    2. Relationship: For some people, bank RM, de-facto adviser, is the best invesment manager, and whatever products they offer, people will take it! Relationship is apparently more important than right products and long term goals. Fee-only planner is simply a new person who doesn't offer FD!
    3. Difference between the fee/cost involved from investor perspective is huge - 10k-15k for fee-only, while 0 for distribution model (again, this is the perception). If the bottomline states this, then how will fee-only model take off, even if they are ready to break it down and explain the value difference to customer?

    Reply
  4. Bharani

    I always keep wondering why fee-only structure is not the norm (you had 8-odd in your fee-only planner list), despite knowing it may be the best model. But then there are multiple forces at work:
    1. I've talked to many people in the past (relatives, friends); they want convenience along with advice (someone who can do postman job eg: sending app form to AMC); in terms of value, former is valued more! As long as this exists, fee-only model will remain a dream to take off for middle-class.
    2. Relationship: For some people, bank RM, de-facto adviser, is the best invesment manager, and whatever products they offer, people will take it! Relationship is apparently more important than right products and long term goals. Fee-only planner is simply a new person who doesn't offer FD!
    3. Difference between the fee/cost involved from investor perspective is huge - 10k-15k for fee-only, while 0 for distribution model (again, this is the perception). If the bottomline states this, then how will fee-only model take off, even if they are ready to break it down and explain the value difference to customer?

    Reply
  5. moronbuffett

    Al pacino : How do I know who is the traitor among us?
    Marlon Brando : Anybody approaching you with a peace treaty with Barzinis

    Reply
  6. moronbuffett

    Al pacino : How do I know who is the traitor among us?
    Marlon Brando : Anybody approaching you with a peace treaty with Barzinis

    Reply

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