Monday, June 2, 2008

Personal Financial Advisor - Part A

Something that deters most of us from diving into the world of stock markets and investments is the lack of time to do the research and the hassles and the paperwork involved in carrying out the investments. Something that I personally think helps is having a financial planner/ financial advisor/ relationship manager.Being a wide and an important subject, I plan to spread the discussion over two posts. In this post, we will answer the questions - who is a financial advisor and what does he do?

Who is a financial advisor (FA)?
We are talking about a person working for a bank or a brokerage firm and providing general advice on investments and carrying out client’s instructions. While there are people who work as independent FAs, they are generally used by high net worth individuals and by people who know such a trustworthy person. It’s less risky to go with someone working for a bank or brokerage firm since at the end of the day the firm is responsible for the employee’s fraudulent actions.
While some of them work for a fixed fee based on the number of hours put in for a client, a majority of them work on commission basis.

What does a financial advisor do?
Well, what a FA does depends on what you want him to do. If you are among those people who have absolutely no clue what to do with your money, then a FA is really the best place to start. He would typically start by understanding your monthly capacity for saving and then provide you with the details of the minimum instruments you must be invested in such as insurance, tax saving instruments, mutual funds, etc.

Can you take this advice blindly? NO. I wouldn’t rule out the possibility of the FA recommending a product for which he receives a higher commission. The best thing would be to write all this down and ask for some more time to do your research on Google (not another FA who would be thinking on the same lines as the first one). While typically he might advise you on well-known products, it'll save you a lot of headache later.

For example, the first time I came in contact with what we today call a financial advisor was more three years back when I got my first pay check. He was a 'family friend' who was sent by my dad to take out an insurance policy for me. The product he recommended was a money back policy with a huge annual premium and pittance in terms of life cover and of course the assured periodic returns. After paying three huge premiums I had started considering life insurance policies as unnecessary considering the huge premiums and the negative returns. This was until I met my current FA who brought to light the fact the there existed other far far cheaper products (term policy) which though served the same purpose did not offer the high commission that a money back or endowment policy offered to the agent. I was duped and since getting out of the policy now would mean losing far more money, I have to choose to continue contributing to the plan and remind myself every time do my own research.

If you are among those people who like to make their own research and need an someone to just carry out your instructions, then who better than a FA. Papers and filling the same details over and over again can be tedious. A diligent FA who knows his documents, gets the required information from you, fills all the forms, collects your signature,dispatches them correctly and follows up on statements post the investment would be a real asset to you! As a word of caution, don't forget to verify all the information before you sign on the dotted line!

After being duped the first time, the only person I trust to make my financial decisions is my husband (not even my parents). Today before making an investment, we do our research, talk to people, consult our FA, sit on it for sometime and then take the plunge. The other part of the hard work is done by our FA who meticulously sorts our documents, dispatches them, promptly follows up and keeps us up-to-date.

In part B of this series, we will answer questions such as - what is your role when you have a financial advisor and how to choose a financial advisor?

PS: Wherever I have mentioned 'he' in the general sense, it implies 'he/she'. My FA happens to be a woman, so no case of gender bias there.

Disclosure: I am not a financial advisor by profession or by practice.

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