Who is a financial advisor? What should you look for in one?

Think about any of your recent vacations across India, or abroad. If you visited any of the famous historical monuments or museums, there is a high probability that you would have felt lost and unsure where to begin and how to go about viewing all that there is to see. Lack of familiarity and information is often the cause for this feeling. This is where ‘guides’ come handy as they know the place inside out and have in-depth knowledge of what is there to take in and enjoy.

The financial landscape too is a similar maze for the common man. It helps to have a ‘guide’ to take you through the choices and their implications. These financial guides are known as financial advisors. They come in many different shapes, sizes and shades. They act as guides and will not only spend time with you to understand your requirements and your goals, but also take you through the many investment products available to help you make the right choices. The different titles that they sport often causes confusion on their nature and scope of service.

Here is an attempt to understand them better.

Different types of Financial Advisors

Financial advisors, as we commonly refer to them, provide guidance and service to the consumer on issues concerning their money matters. Their common nomenclatures and functions are as below:

1. Banks Relationship Manager: Banks act as financial supermarkets and your relationship manager or your RM at the bank will talk to you about variety of products like mutual funds, fixed deposits, life and general insurance, loans, etc. Since they are privy to all your financial transactions, they attempt to provide you with financial products that suit your needs and situation. The bank will usually not charge customers directly for its investment advisory services and will earn commissions from product manufacturers such as asset management firms or insurance companies. Your relationship manager in turn will be suitably compensated by the bank.
2. Financial Distribution Company: Relationship managers at large financial distribution companies also sell financial products. They are equipped with knowledge on various investment products and can help you not only identify the right products but also complete the paper work and formalities to execute your investments. Similar to how a bank earns, the financial distribution company will also usually not charge customers directly and will earn commissions from product manufacturers. Your RM in turn will be suitably compensated by the financial distribution company.
3. Independent Financial Advisors (IFAs): They are experts who are not affiliated to any bank or a large financial distribution company. They work independently and are experts on most financial products. They generally earn commissions from product manufacturers and can also earn directly from customers by charging a fee for their expert advice.
4. Certified Financial Planner: Some IFAs become certified financial planners by doing a specialized course. They take a big-picture view of your finances and guide you on a comprehensive range of issues like investments, insurance, loans, financial goals, tax planning, etc. They help you make a blueprint of your financial future to achieve your financial goals and they can charge their clients directly for this.
5. Registered Investment Advisor: A few IFAs also become registered investment advisors post getting certified and completing certain registration formalities according to SEBI guidelines. They restrict their area of operation to investment products and strategies. They provide advice, make recommendations, issue reports or furnish analyses on securities, either directly or through publications, help you select the right investments that match your expectations and help you build a financial blueprint to plan and achieve your goals in your defined time frame. They generally earn directly from customers by charging a fee for their expert advice.
6. Tax planners: Tax planners help you understand the impact of taxes and how you can manage them correctly. They help you avail the various tax benefits and provisions to legally minimize your tax liability.
7. Mutual Fund Distributors: These are individuals and organizations that restrict their scope of services to selling mutual fund schemes to you. They equip themselves with knowledge on various aspects of mutual fund investing and assist you in picking the right schemes apart from also helping you complete the paper work and formalities involved to execute your investments.

7 things to look for while selecting a suitable financial advisor

As financial products are intangible and the consequences of the advisor’s recommendations and actions show up years later, you need to be very diligent in picking the right one. Here are some key factors that you need to consider in making an objective evaluation of the advisor:

1. Qualifications: Is he qualified to offer you the guidance you are looking for? Find out if his qualification is recognized by the regulator and whether he is registered or licensed. He should hold a certified financial planner degree, should have been practicing for a long time and should have a roster of happy long term clients. Similarly, for someone to advise you on mutual funds, he or she must have taken and passed the NISM Mutual Fund Distributors Certification Examination.

2. Credibility: Knowledge is of little use unless accompanied by integrity, ethics and transparency. Check with your family / friends or read up on the experience of other users on social media sites about the conduct of the advisor.

3. Scope of services: You need to ensure that the advisor offers the entire spectrum of services that you are looking for. If not, he should at least have the necessary tie-ups with other professionals.

4. Number of clients: You need to check out how many clients he is presently managing. There is a limit to this as the service involved needs to be personalized.

5. Team size: This also determines the number of clients that and advisor can service. If he has a large number of clients, his team size should be commensurate.

6. Accessibility: Ensure that the advisor is easily accessible and has the time to serve you. If he is too busy, no amount of qualification or character is going to help you later.

7. Knowledgeable and aware: The finance field is very dynamic and any advisor needs to keep himself updated on a continual basis. Check if your advisor gives you contemporary information and advice, on a regular basis, relevant to current market situations. He should be technologically savvy and ideally should have the set up to allow his investors to transact and be serviced electronically. He should also be able to provide you with regular consolidated statements in an easy to understand format.

So now you know how to find yourself a trustworthy and competent financial advisor.

Disclaimer: The information presented is as per current SEBI Regulations governing distributors, which may change from time to time. We recommend that investors speak to their advisors and understand their compensation model, before investing.