Be careful while choosing your investment advisor

Many of you may have received emails or phone calls promising high returns by investing in a particular scheme or a stock. But before you hand over money to such 'advisors' do check if they are registered with Securities and Exchange Board of India.

Last week, the markets regulator put out a list of dos and don'ts for investors while dealing with investment advisors. The first in the list of dos is to deal with only Sebi-registerd advisors. DNA Money spoke to some Sebi-registered investment advisors (RIAs) to find out what should one look for in a financial advisor.

Where to find RIAs?

The best place is Sebi's website, which has a list of RIAs with their address and contact details. A RIA can be an individual or a financial services firm.(https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognisedFpi=yes&intmId=13). Another place you can get information about RIAs is the Financial Planners' Guild India (www.fpgindia.org), which has only Sebi RIAs as its members. Sebi has also specified in an earlier circular, educational and professional qualifications and work experience for an RIA.

How to select an RIA

It is important to build a rapport with the advisor before entrusting your money. According to Gaurav Mashruwala, a Mumbai-based Sebi-RIA, the process of selecting an advisor is similar to how you would select your physician, lawyer or beautician.

"Meet a couple of them and talk to them about their clients, how they charge fees, their experience and so on. Do a background check on their Sebi-registration. Somebody could have given you a referral or you could have heard about them through media,'' he explains.

According to Manikaran Singal, a Chandigarh-based Sebi-RIA and founder goodmoneying.com, an advisor who has seen different market cycles, has been dealing with varied investor profiles and has exposure to different products is in a better position to advise.

"However, this does not mean higher the experience the better it is. The trust builds with transparency and communication. There should be a process behind an advice which the advisor should be able to explain. These are subjective things which investors have to judge themselves. Is the advisor also earning commissions besides the fees he is charging from you, are there some products with higher commission, etc, are some things which an investor should watch for,'' he says.

You can speak to the advisor (most offer the first short meeting complimentary) and explain your requirements. "You can also understand how the advisor works and whether he offers the service you are looking for. If he suggests something else, you need to understand why an alternate suggestion is being made and whether that is amenable to your overall financial well-being,'' says Kiran Telang, a Sebi-RIA and co-founder & director, Dhanayush Capital Advisors.

How to know if the advice is apt for you

This is difficult and there are no set rules. One should ask for terms and conditions in writing, verify the Sebi-RIA's registration number on the Sebi website, insist on the risk profiling and be clear on the fee structure. In fact, all advisors have to maintain the rationale of advice from the Sebi annual audit perspective.

Keep in mind that financial planning is a broad subject and not limited to product advice, points out Singal. "One may look at what is the basis of his advice. How can he say that a certain product is most suitable to the risk profile? If he is doing goal-based advisory then one should know the reasons behind his advice. The advisor should be doing the cash flow analysis, insurance planning, debt management, etc, as all things are interrelated in a financial profile,'' he explains.

According to Telang, if an advisor starts suggesting products without understanding the need or says that any product is a zero-risk product, or returns seem too good to be true- that should be a warning to be careful.

All experts agree that any advice which is based on the promise of a certain level of returns is incorrect, since financial planning offers holistic advice.

"When comprehensive advice is offered, it can create lot many improvements which are not measurable. Like making you more disciplined in your investments, making you more conversant with your money management, helping you make better decisions regarding money, protecting you from making mistakes that an jeopardise your finances, and opening up of possibilities of living life the way you had never imagined,'' Telang adds.

Mashruwala says that ideally a financial planner talks about income and expense, asset and liabilities. "Basically, your profit & loss and balance-sheet. So the moment he starts talking only assets, then it means there is something is drastically wrong. You must change your advisor when there are issues of commitment, violations. If you lose trust just leave that person,'' he says.

Fee structure

There is no guideline on what the fee should be, nor is there a platform for comparing the fees. You will know only after speaking to a few advisors. But the key is that an advisor should be transparent about the fee structure from the beginning.

"Every advisor has his/her own charge structure and this is where investors tend to make mistakes by comparing advisors on the basis of only costs. They always prefer to go with the one having "Low" charge or "No" charge. And then fall prey to product sellers who sell them the products with high commission,'' says Singal.

Some advisors charge only advisory fee for providing advice. Some may charge advisory fee for the advice, but give you an option of investing through them. If you do, they may charge a commission for the same.

Grievance redressal

If you have a complaint against your advisor, you can lodge a complaint at http://scores.gov.in. But before that, the investor has to approach the advisor with the grievance. All registered advisors are mandated to put up grievance a redressal mechanism on their website which should also have Sebi details in it.

MONEY MANAGERS

• Talk to a few financial advisors, understand their background, qualifications,  clients, and fee structure before you sign up 
   
• Confirm whether they charging you fee for advice, or commission for products or both  
   
• If they talk only assets and returns, it is not a sound approach