Why it makes sense to pay for a financial advisor?

Today there are lots of distributors of products masquerading as advisors. Many call themselves by fancy names like wealth managers, financial counsellors, financial coaches. It is difficult to make out as to who is a real advisor & who is merely a distributor of products, whose agenda is to just sell products that they have on offer. It is hence very important that investors first understand who is an advisor & what are the qualities they need to look for in them before deciding to go with them.

What do you need to look for in an advisor

1) Find out whether the advisor is SEBI registered investment advisor (RIA), who will charge a fee and offer advice. Such a person should not distribute products. If they also distribute products, there is no point in dealing with them as they are not supposed to advise. Even if they do have a distribution arm or relationship with another entity, they should offer a choice to the investor to choose to implement where ever they want and not coerce them into doing the investments with their entity.

2) Ask them about their qualifications. Ask them about who are there in the team and their qualifications too. Lots of times those who offer advice are just not qualified at all.

3) Find out about their process, who will be the interface, how will the service delivery happen, what are the key deliverables etc. Find out if it is a one person outfit or there is a proper & professional team to support the operation. This is important as a team ensures better & specialised delivery of services and there is no over-dependancy on one person to do everything.

4) Ask them if they have any relationships that will pay them directly/ indirectly. Ask them specifically if there are indirect remuneration/ benefits accruing to them, apart from any direct commissions/ brokerages.

5) A simple rule of thumb - If the “advisor” starts talking about products & starts putting brochures and forms on the table within the first 15 minutes - beware! This person may mostly be a product seller & is there to sell his products.

6) Ask the “advisor” if they are fee-only. To clarify ask them if you could implement their investment recommendations wherever you want. If the advisor says yes to both, then they would be a proper advisor.

7) Find out about their experience in the field. The experienced ones will be better from the investor point of view, though such advisors may come at a premium.

8) Ask for references and talk to a few. Find out from them about how long they have been with them & their experience. There may be “references” who are planted to offer good reviews. Ask searching questions. More often than not, you would be able to find out if the “advisor” is worth considering or not.

9) Find out the standing of the advisor in their field. Search for their articles, references, quotes, peer reviews etc., which will offer you a peek into the kind of person you are going to deal with.

Why should you pay a fee?

1) A true advisor does not earn through commissions. They act in the investors’ best interests & advice what is good for the investor. To get such unbiased advice one needs to pay a fee.

2) A true advisor ensures that the costs to the clients are minimised by choosing the right products that are efficient in every way, including costs.

3) Products put together are truly aligned to the investor needs and are not subservient to the need of the “Advisor” to meet their targets

4) You should pay a fee to a true advisor who acts in a fiduciary capacity. This means they put your interests ahead of everything else, including their own. This of course is priceless & is a dream come true for an investor who otherwise only find people who want to sell them something or other.

5) All costs considered, including the fee which is paid to the advisor, it would be cheaper to the investor, as a good advisor suggests products that are fully aligned with their needs, are low cost & tax efficient, with better fund management strategies.

6) Good advisors save their clients from various investment blunders that they would commit otherwise. Just this alone would save so much money for the investor that would otherwise have gone down the drain.

7) The investor would have a trusted source & a confidante to turn to whenever they need proper advice regarding any financial matter.

Most people are not used to the concept of paying a fee. They wrongly think that by paying a fee they are in fact losing money.

In personal finance area, free advice has been the mainstay. But free advice can hardly ever be unbiased & truly in the client’s interest. It is foolish to believe that product sellers (irrespective of whatever fancy names they give themselves like wealth manager, financial coach etc.) would offer unbiased advice. Conflict of interest is inherent in a distribution model. That gets eliminated when an advisor is just fee-only & does not receive any remuneration from any source.

Look at the gift horse in it’s mouth… It may not be pretty - just like how free advice is actually a money losing proposition.

Article first appeared on:
Moneycontrol - Why it makes sense to pay for a financial advisor?

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

Sebi gives a stronger push to advisory practice

Separating distribution and advisory in financial services works in favour of the investors


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The Securities and Exchange Board of India (Sebi) has made a move towards ensuring that investors receive appropriate advice and their long-term goals are met. This deliberate move has been happening for a decade now, precipitated in 2008 by the global financial crisis. Financial product manufacturers made arcane products whose structures were difficult to understand even by finance professionals, and distributors sold them widely.

In the aftermath of the meltdown, there was a sudden realisation for regulators across the globe, that they need to regulate more aggressively and ensure that intermediaries don’t run roughshod over investors. 

India has been among the countries in the forefront of investor protection initiatives. Towards this end, regulators started modifying the framework for financial intermediaries to bring in responsibility and accountability, following appropriate processes to ensure the right outcomes, cost control and documentation or trail. 

But an important piece was missing—conflict-free advice. The only option available earlier was advice from distributors. The advice was shallow as it was free and incidental to product sale. Also, most times, the distributor was not equipped to offer advice as she did not have the necessary qualifications, knowledge and experience. But there was no one else investors could turn to.

Realising the importance of providing access to quality advice, Sebi had brought in its Investment Adviser Regulations in 2013. The endeavour was to create a new class of Registered Investment Advisers (RIAs) who would offer advice for a fee and not distribute products. The regulation specified a number of requirements—education, experience, certification, conduct of advisers, net worth and other eligibility requirements; various responsibilities including advising in a fiduciary capacity; proper processes for offering advice; and documentation requirements. These advisers also had to get audited annually for processes and compliance. 

This was a watershed regulation in terms of bringing in fee-based advisory in India. But it also allowed many exemptions, which obliquely indicated that exempted parties may give incidental advice (which was being interpreted loosely). This was a grey area due to which many chose not to register. The RIA regulations also allowed both advisory and execution functions to be within the same entity, though with segregation; but that’s not the optimal way to engender conflict-free fiduciary advice.

There were a couple of consultation papers to amend the regulations; one in October 2016 and another in June 2017.

In the June 2017 paper, Sebi is proposing clear segregation of advisory and distribution services. It suggests creation of a separate subsidiary or entity for investment advisory services. This would enable watertight containers carrying out the two functions, instead of segregated divisions with Chinese walls.  

It also suggests that RIAs who provide advice across multiple categories should take necessary permissions and ensure compliance with respective regulators. However, regulators register those who distribute products under their jurisdiction, and not those who offer advice. RIAs are not product sellers and hence may not be eligible to register with various regulators. This is going to present a problem.

Since RIAs have appropriate certification for advisory functions, they should be allowed to offer fee-only advisory without being registered with various regulators.

As per the proposal, the exemption for mutual fund distributors (and others) to offer incidental advice without registering would no longer be an option. From now on, mutual fund distributors can explain the features or material facts of the product and ensure suitability, but not offer investment advice or financial planning services. If they want to offer advice, they will need to register as fee-only advisers.

There is, however, some relief to RIAs. Representatives of investment advisers can now be graduates in any stream. It was difficult to find employees with 5 years of experience after graduation, which was the condition before. Also, the net worth requirement for body corporates has come down from Rs25 lakh to Rs10 lakh. Application and registration fees for body corporates has come down to Rs10,000 and Rs1 lakh, respectively. But the re-registration fee after 5 years is Rs5 lakh, which is inexplicable.

Agencies and entities that provide ranking of mutual fund schemes are sought to be brought under the regulatory ambit under Research Analysts Regulations, 2014. However, if they provide the same on public media like a newspaper or a website, they are excluded from registering under this regulation. Again, there was no need for this exemption because widely circulated information through a newspaper or website has more impact on the public and should, therefore, be under regulatory ambit.

Overall, the consultation paper sharpens the distinction between distribution and advisory and is clearly pushing people to choose either advisory or distribution as their vocation.  

This consultation paper also puts all the choices before the investor. Sebi has made its intention clear—to have a true-blue advisory community to assist investors. It is now strengthening that framework further.  

It also gives investors an option to engage with distributors, who are very much a part of the ecosystem. For those investors who want to do it on their own, there are platforms of regular or  direct plans.  

Frequent changes can be unsettling. It would be good to have a stable regime for some time, to allow the participants to settle. Apart from that, the changes suggested are mostly positive and welcome. Investors’ hands are strengthened and they will have more choices.

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

How to fund children's education abroad without parents going bankrupt

Giving a lift up is fine but it should not be at the cost of their own future

Children occupy center stage for parents - that is well known and understandable. As a parent you would want to do everything to give them the benefits of good education and help them start life with an advantage. That is reasonable of course.

The only thing that the parent has to guard against is overreach. Today, many parents are guilty of this overreach, in their enthusiasm to confer the advantage of a high quality education. Most students today have the aspiration of going abroad for education. Parents do not want to stand in the way of this ambition - for the parents themselves see this as a passport to a good life ahead.

One of the major problems with education abroad is the cost. The median cost for education in the US could be about Rs 35 lakh per annum. If the student were to pursue graduation, which would be a four-year course, the cost would be Rs 1.4 crore, in today’s terms. The inflation on education is galloping away and it can be considerably costlier in future. After that, post-graduation would cost Rs 70-80 lakh. That is about Rs 2.2 crore per child! We are able to see that the amounts involved are astronomical & funding even one child’s education fully is going to be a huge challenge for all, but the really rich.

Supporting the child in its aspiration is fine. But the parent has to be realistic and can be pragmatic when it comes to the child’s education funding.

Firstly, sending the child at graduation itself is not just costly; they also run the risk of the child going astray in a foreign land as they may not have the maturity at the tender age of 17-18 years. It may be far more desirable and financially prudent to send the child abroad, at the PG level. At the PG level the child would be between 21-23 years and potentially more mature to handle the rough & tumble in an alien land.

The parent needs to consider other ways of funding, apart from self-funding, as a prudent practice. Parents should start talking about all methods of funding to their children, well in advance and prepare them to be more aware & responsible when it comes to their education funding. Parents should not be seen as ATMs & it is important that parents talk about how much they are willing to spend and about how the child can fund the rest.

The first mechanism of bringing down the costs of education abroad is to seek scholarships for the courses being pursued. There are some colleges which are more liberal in offering scholarships as compared to others. The top-of-the-line colleges may not offer scholarships. The child should be prepared to look at second rung colleges which offer scholarships & not be fixated with Ivy league schools alone. This sanity has to be driven into their heads by the parents.

The other way to bring down the cost of education funding for parents is to ask the student to take a certain level of education loan. Apart from bringing down the funding from the parents side, the loan also brings in a certain level of responsibility on part of the student. The parent can pay the interest till the student goes for a job, after which the student has to take care of the loan servicing. This has to be clearly communicated to their child.

The last way of defraying the costs is for the student to actively look for a part-time job when they are studying abroad. They could work as research assistants, as assistants in the library or in other capacities in the university and earn some money. Often this money would be enough to take care of their personal needs.

All these are ways to ensure that the child’s ambition is not squelched and at the same time the parent is not stretched to the breaking point, in their quest to fund their child’s education. Often parents dip into their retirement kitty in their overarching ambition to launch their child into the hallowed orbit. Giving a lift-up is fine but it should not be at the cost of their own future. If one follows these simple rules, the child education funding can happen without much problems. A good compromise would then be achieved, where the parent is happy & the child’s ambition is taken care of too.

Article first appeared on :
Moneycontrol - How to fund children's education abroad without parents going bankrupt

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

Stubbing the toe on Wealth Creation

picture courtesy : www.pixabay.com

When we talk of wealth creation, many people tend to switch off as they think it is not for them - it’s for the money bags! There are others who would feel that this tiresome topic detracts one from enjoying life and financial advisors keep reiterating on savings all the time that there is no fun left in life! These are from the two extremes.

There are many others in the middle who want to create wealth but are unsure as to how to go about it. Also, there are lots of misconceptions dogging them at every step due to which they tend to go wrong in many of what they do.

Let me try to dispel some of these wrong notions here.

A)  Money should constantly be churned to the best performing asset class -  This is a major fallacy among the public. People want to move their money to whichever asset class is doing well at that point in time. This has become a fad with people. When Gold is doing well, they want to move their money to Gold; from there it will go into equities, real estate, FDs etc. Depending on what catches the mass frenzy at every point.

This moving from one asset class to another presupposes that one will get the timing right. Also, moving from one asset class to a completely different asset class changes Mostly, the public at large gets the timing horribly wrong and get in after the asset has run up and get out after the rally has waned. Both ways, they get it wrong and hence end up with a poor yielding mish-mash portfolio.

B) Yields are very important -  A portfolio is to be constructed after due consideration of liquidity, risk, tenure, return considerations, credit quality of the investments under advisement etc. Yield is a byproduct of a proper portfolio construction. A well constructed portfolio offers an optimal return which would suit the person concerned.

The yield from such a portfolio should be enough to meet all the goals - that is how it should be planned. We have seen that even portfolios yielding 9% overall are good enough to meet all the goals in life. It is a huge fallacy that the returns have to be sky-high to ensure that one’s goals are achieved.

Sticking with the budgets and discipline while investing are important. In fact these are the only things that are important.

C)  Portfolios should be constantly monitored - Many of our clients keep looking at the portfolios as frequently as they refer to daily newspapers! Portfolio once constructed will have to sit there and has to be given time to perform. By constantly looking at the portfolios they are not going to somehow perform miraculously. One will only get palpitations by looking at the gyrations of the portfolio values in line with the fluctuations of the markets.

It makes sense to look at portfolios once every half year. That’s what we do professionally! And that is more than enough!

D)  Every single component of the portfolio should do well -  Another fallacy… Portfolio components are put in place to offer diversification in the portfolio & make it a well rounded portfolio. Obviously, different segments of the portfolio would do well at different times. That does not mean that one should get out of some portions which are currently not doing well. Having different components in the portfolio is part of the strategy. That cannot be undone on the spurious premise of lower returns.

E) I will invest when I have decent money to invest - This is a chicken and egg situation. You get to decent money only when you have invested for long, in a disciplined way. It does not matter if one has a modest amount to invest, to start with. MFs allow even investments of Rs.500 - so the entry barrier is really low. Also, there is no point in accumulating first in the bank account and then investing the same, when it builds up to a decent amount like say Rs.25,000. People like to invest round lumpsums. There is just no merit in holding more than the required amount in the bank and earning a paltry 4% on it.

F) Investors want to invest in every product that comes into the market -  Investors somehow feel that they should not miss any “opportunity” that comes their way. Hence, any shiny thing that gets advertised promptly gets their custom!

This results in a jumbo portfolio of unwanted components, when clients come to us. Investors also attribute their actions to diversifying their portfolios!

G) Humoring the uncles & friends -  Insurance is bought not on merits, but based on which uncle or which friend’s wife is cornering one “to complete their target”. Most people we meet have lots of life insurance policies, by not of the right kind. Most do not have the required cover, even though they have over a dozen policies with them. It’s better to help people directly than to get into an unholy mess with one’s insurance portfolio.

H) Tax savings at any cost -  Indians somehow have this penchant to save taxes, at any cost. They would borrow money to save tax! In their extreme overreach to save taxes, they sometimes forget the basics. The products they buy ( like insurance ) may save tax for them but may not be suitable for them in any way.

I) Wrong advisors -  Most investors are just doing what their friends & colleagues are doing or what their parents have been doing ( like investing in FDs ). This kind of investing ensures that there is no overall strategy or direction and serves no purpose at all. It is like one blind man leading another!

What worked for their parents may not be what would work today. One needs to carefully evaluate one’s needs and invest or if that is too much for them to do, they just need to go to a professional advisor, preferably a Fiduciary.

Conclusion -  Investing principles are pretty simple. One just needs to stick to the budget and invest the surplus as per plan. There is no need to keep shuffling the portfolios or keep investing in new stuff. One need not have to keep agonising on yields - the returns will come - overtime.

We have found that the ones that end up with decent amount of wealth are not the one’s with huge earnings, but the one who has been disciplined and travelled along the planned path diligently. 

Article first appeared on:

Stubbing the toe on Wealth Creation

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7