Invest talk: Expert advice key for de-risking

In my last column, I talked about why we all need a wealth doctor as much as we need a health doctor.

In order to gainfully engage a wealth doctor or a personal advisor, we first need to make a mindset change. We all like to think that advise is free. We also think that we can find everything on the internet and we will get what we want for free.
This reminds me of folks who will borrow a book, make a xerox copy at office expense rather than spending money on buying a book. We have to realise that financial advise is a serious business. And the financial advisor has to be trusted with your wealth as much as you trust your doctor with your health.

Why is it that you don’t use google for medicine? And you don’t mind paying the doctor what he demands, after he has finished his consultation? Do you say that you already knew this or negotiate on the fees? You are willing to pay the doctor as it deals with ‘health’.

When you refuse to pay for financial advise or refuse to share details with your advisor, it gives me an impression that you really do not care much about your wealth or that you know everything there is to know.

To me, the biggest task a financial adviser undertakes is to explain ‘risk’ to you. Every financial instrument carries varying degrees of risk and return. Risk can extend from keeping your principal intact to losing hundred per cent of your money. Similarly, returns can extend from a savings bank return to the ‘ten bagger’ returns. What is important for you to understand is the extent of risk that you undertake in order to jump up the return curve.

Thus, we need adivsers who are wise. Who have seen business and market cycles. Who can explain complex fi-nancial instruments in simple terms. And most importantly, the honesty to sometimes tell you that he does not understand some instrument. In short, we need a ‘doctor’ for our wealth.  

Often, both the kind of doctors (health and wealth) have some conflict of interests. They may get paid to ‘prescribe’ one product over another.  In financial advise, we can generally overcome this. Let the ‘wealth’ advisor be restricted to prescribing the things we need. We can choose our chemist shop and buy. 

Today, due to our reluctance to pay financial advisors, they also have to become sellers of products and they make their living from what the producer pays them. This is not an ideal situation. Your search for free advise will generally result in your getting prescribed an inferior product. After all, the advisor also needs to make money and make a living.

The most important element is in deciding what is a fair fee for advise. Looking at the salaries that fund managers get for even a mediocre performance, we should be able to reward good advice in a fair manner. What is ‘fair’ becomes a subjective issue. However, let me try and lay down the ‘engagement’ terms for a financial advisor:

• The client will disclose his full financial status, his expectations, his resources, his commitments etc;
• The client will respond truthfully to questions asked by the advisor;
• The advisor will lay out the various options available, explain the risks in each path and the ‘possible’ outcomes in a fair manner;
• Advisor should be having 10 to 20 years of experience in financial markets. He will disclose fully all products for which he is a seller and gets paid a selling commission;
• The engagement can be a one time or continuing one;
• Advisor will commit and agree to a periodic (quarterly, annual or some such period) review of the investment and savings plans;
• The client does not bother the advisor unless absolutely essential;
• The advisor should be able to provide an online platform where a monthly snapshot is available;
• The client is faithful in not doing ‘deals’ directly with someone else, then the main advisor is fully informed;
• A scale of fees is agreed upon. There should be something for a first review and a monthly or a quarterly fee to the advisor. It could be a per-ecentage of the total assets with a floor and a ceiling;
• The advisor expressly lists out the various services he will provide in terms of actual actions to invest/redeem etc;
• If you buy a health insurance or term policy, then the agent must give in writing to collect premiums, help out with claims etc. This should be a contract with penal clauses.

We can keep adding and subtracting. The key things in forming an association with an advisor is integrity on both sides, a fair payment and an agreed level of services that the agent will provide. It could be an individual or a corporate.

In fact I prefer individuals over a bank or a corporate entity, since the advisor has a revenue target and a sales target. And yes, surely I need some references. And if possible, a local resident, who is known over a couple of generations.
(The writer is an independent financial analyst. He can be contacted at
balakrishnanr@gmail.com)