Some advice on choosing money advisors

Rajeswari Venkatesh, 26, a software professional, was looking to invest Rs 50,000. And while friends and colleagues suggested a plethora of stocks or mutual fund schemes, she wasn’t feeling very confident about taking a decision on their advice.

While hunting for professional financial advisors on the Net, she came across several names. On approaching one, she was handed a big list of MF schemes and returns. “You can invest in any one of them,” the advisor said.

Once she had selected a scheme, the advisor invested the entire Rs 50,000 in it. When she sought to divide the money between two-three schemes, the advice was that the money was too little to be split.

Three months later, the advisor called her to say there was a new fund offering (NFO), which was rather promising. And since Rs 50,000 had grown to Rs 60,000, she could invest some part of it in this scheme. “You will get more units, as the net asset value (NAV) is only Rs 10,” the advisor said. Six months later, he again asked her to invest in another NFO.

At the end of the year, while Venkatesh's money was divided in three schemes, it had grown by only 25 per cent. In comparison, the stock market had risen more than 50 per cent during the year. On enquiring, she was told that she had to pay a short-term capital gains tax of 15 per cent twice, while moving money from one scheme to another.

Venkatesh’s case is not isolated. Many financial advisors hurt your finances by misleading you. Making you move money several times during the year is one way. They do it because they are paid higher commissions for promoting these schemes.

“If the advisor asks you to exit an existing infrastructure scheme for a new one, it is clear that he is taking you for a ride, because the new scheme will also invest in the same companies,” said Mukesh Dedhia, director, Ghalla Bhansali Stock Brokers.

Similarly, many sell unit-linked insurance plans when you are looking to buy a term plan or MF. The tell-tale signals are when a financial advisor offers to pay the first premium for an insurance plan or gives you money back for investing in a particular scheme.

“In such cases, be sure that he is getting an exorbitant commission, and it is from your investment only,” said Kartik Varma, co-founder, iTrust Financial Advisor. In other words, the recommendations are being made to earn the commission, and your needs are not being addressed.

Also, if the stock or entire portfolio is being churned too often (three-four times a year) under the guise of ‘rebalancing’, it means your tax outgo is becoming higher. So, how does one select a financial advisor? “There is no clear answer,” said Sandeep Shanbhag, director, Wonderland Investments.

But having basic knowledge before investing is important. At least, it helps to ask the right questions. To start, check the advisor’s qualifications. The advisors should preferably be certified by Association of Mutual Fund Industry (Amfi) or Insurance Regulatory and Development Authority (Irda). “These certifications ensure the advisor knows about products and is in a position to meet the client’s needs,” said Shanbhag.

Also, rely on well-known advisory companies, compliant with regulatory norms. Advisors who have experienced at least two market cycles are likely to have reliable perspective.

Always question the advisor’s recommendations, because it is important to know how a product will benefit you, based on your goals and risk profile. “A need-based analysis and risk profile are very important, because they are highly personalised. An advisor cannot recommend a one-size, all-fit product to each client,” added Varma.

Check the fees of the product being sold and compare with others. Importantly, visit several advisors before zeroing on one.