Test your financial adviser before taking his counsel
Uma Shashikant, Economic Times 14/5/2012
The frustration with the advisory tribe-variously called relationship managers, financial advisers, wealth managers, financial planners or private bankers-is high. There is a serious lack of trust, which makes it difficult for investors to implement their personal finance decisions.
Creating a trust-inducing environment for financial transactions requires a new, bold, and fair policy framework. This is likely to be a long time away since regulators are only tinkering on the margin and refuse to see the need to come together in the interest of the investor. What can investors do in the meanwhile? You can put your advisers to test before you pay heed to their counsel.
Does the planner know enough about what he is offering you? How does he deal with questions whose answers are not found in the product literature he is carrying? Is he telling you that he will ‘get back’? Does he know why and how the returns he is promising will be generated? Is he able to explain the risks? Do not be reticent to ask, worrying about your limited knowledge of products and markets.
The adviser is expected to know. If your adviser brushes aside questions with generalisations-‘our manager will take care of the risks’, ‘we have the expertise to do this’, ‘this guy is a star and he will do what it takes’-keep away. The quality of conversation about what is being offered to you is a clear indicator of how much the planner actually knows. A careless one does no homework and is not worth dealing with.
Is your planner throwing jargon at you to intimidate or impress you? Do not be led astray by his sound bites; seek simplification. If he knows what he is talking about, he will be able to explain in simple, clear terms what the product is about.
There are three basic things to know irrespective of the product you choose: how is the return going to be generated? What can go wrong? What would it cost? Even if you are told that ‘in the long run, things will be fine’, you need to be told why that will be the case. Desist overt simplifications-‘this is a PSU company’, ‘this the largest offering’, ‘IPOs always list at premium’. Seek the ability to distill the core features of a financial product or service in a language that you can understand.
What are the alternatives? If an adviser is suggesting a single product or plan of action and returning to it too frequently, stop him to ask for another choice. Just one more option. Is he able to tell you why you should invest in the gold product he is selling? Is there another way to invest in gold? What is the difference?
If the conversation debunks every other option and holds up what he has come to sell as the best, end it there. Look for the ability to compare options and the choice to go with what you like better. Do not abdicate all decision-making to the adviser. Getting involved with the choices helps you learn over time. However, do not allow him to overwhelm you with too many options either.
You should also know about the work flow. What happens from the time you give the money to the point it is returned to you? Ask the adviser to explain to you the operational flow of the transaction. Many people only know that they have invested in a name. They do not even know if it is a mutual fund or a bank, or an insurance company. You have to know about the entities that will handle your money. Who will keep it? Who will allocate it? How will you access it? How does it come back?
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