Few Do’s for Investors

Source: Email

Do you find yourself wondering how good your financial advisor is? How trustworthy? Do you ever feel uncomfortable sharing your information with him? Maybe it is time to ask some hard questions and get some peace of mind.

You can’t be blamed for a bit of suspicion. The reputation of financial planning and wealth management has been dealt some blows recently for multiple reasons:

1. Many scandals have erupted lately concerning wrongdoing in financial management, in India and abroad. People wonder, how can I protect myself? Can it happen to me?

2. The sudden financial meltdown means many people have lost money, some more than others. Everyone is struggling but some portfolios have held fast better than others. People wonder, if my portfolio was better constructed, would I have lost less?

3. There are plenty of people doing advisory and wealth management work even though they are not qualified to do so. They may not have gone through proper training and been certified. Therefore, they are not bound by any strict code of conduct or professional standards. They may lack experience.

4. Some thrive on sales commissions more than advisory fees and it’s in their interest to sell you more products, whether or not you those products are suitable for your situation. For them, financial planning might mean selling you high-commission insurance policies and ULIPs instead of looking at your total portfolio and trying to give you a comprehensive solution.

Here are some of the questions you can ask your advisor to make you feel more comfortable:

Where did you go to school? What certifications do you hold?

Are you registered with Financial Planning Standards Board (FPSB) or any other professional body?

What products and services you do you offer?

Can you only recommend a limited number of products or services to me? If so, why?

How are you paid for your services? What are your motivations and incentives in monetary terms?

Can you provide me references from other clients?

For registered advisors, will you show me a copy of your credentials?

While these are good questions to ask, a veteran can pass this test with flying colors. Thus these questions alone aren’t adequate to protect you from someone conniving to steal your money. The investment environment has struggled and the whole world is feeling the consequences. So in addition to asking about the investment advisor’s credentials, you must also understand where your money is and who can access it.

To best protect yourself and your assets:

Use investments that are priced daily in a public market

Use investments that you understand

Avoid anything that sounds too good to be true

Avoid anything that is proprietary, secret, or touted as exclusive

Know how much the fee is and how it is paid

Search for your advisor’s recommended investments. Chances are someone
might have blogged or talked about a similar experience or situation

Lastly, trust with verification

Use investments priced daily in a public market

If you can independently evaluate your portfolio any day you wish, then you have eliminated a major source of fraud. Some fraudsters create fake statements with any values needed to keep you convinced the portfolio is doing well. Publicly traded securities are easily valued so fraudster prefers to avoid them.

Use investments you understand

It’s much harder to fake returns and statements for securities that are easily understood and verified independently. Stocks, bonds, and mutual funds are all easy to monitor. There are many exotic products out there which are difficult to understand and monitor.

In any case, many of the exotic financial instruments took a major hit in the downturn, so chances are you are better off with the tried and true.

Avoid anything that sounds too good to be true

Promises of future returns are the ultimate warning sign. No one knows the future, and if they did, they sure wouldn’t be telling us. Promises of positive returns under all conditions are just lies for anything other than risk-free securities: Savings accounts, FDs, and RBI Bonds are about it.

Just by following the news you can get a good idea of how the investment markets are doing. Your investments should be performing in a similar range, otherwise, beware.

Don’t let greed get in the way of common sense. Anytime someone offers you profits that sound exceptionally good, you should:

Wonder why me instead of his best friends and family?

Wonder why not keep the process a secret so it won’t get copied and possibly ruined?

Avoid anything proprietary or touted as exclusive

This goes along with using investments that are priced daily in the open market and easily verified. Propriety and exclusive implies investments or a strategy that are hidden in a black box and unverifiable.

Know how much the fee is and how it is paid

It should be very clear how much your investment manager is paid and how she/he is paid. If you don’t know for sure, ask.


This is true for all kind of decisions you make. Just try various search engines and see what people are saying via blogging, forums, Q&A sites etc. This can be your best resource.

Lastly, trust with verification

After you have found an investment manager that passes all the above tests, you need to trust them so the relationship works for all. However, you must verify that the relationship stays honest.

Review your monthly statements for anything unusual like mysterious investments. Ask for clarifications
right away in case of doubts

Monitor your performance and make sure it is about what you should expect from the types of investments you
are using. If you are making money in a year when most others are losing, you should be suspicious not gleeful.

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